Case Summary (G.R. No. 23241)
Factual Background
Manuel Gonzalez was the original owner of five shares of Botica Nolasco, Inc., certificates Nos. 16–20. On March 11, 1923, Gonzalez assigned and delivered those five shares to Henry Fleischer by endorsing the certificates, in consideration of a large sum owed by Gonzalez to Fleischer. On March 13, 1923, Dr. Eduardo Miciano, secretary-treasurer of the corporation, offered on behalf of the corporation to buy the shares at their par value of P100 per share. Article 12 of the by-laws purported to give the corporation a preferential right to acquire shares offered for transfer. Fleischer refused the corporation's offer and requested that the corporation register the shares in his name; Miciano refused, invoking the by-law. On March 13, 1923, Gonzalez delivered a written statement to the corporation requesting that the five shares sold by him not be transferred to Fleischer and acknowledging the corporation's preferential right. On June 14, 1923, Gonzalez attempted to withdraw that written statement, but the corporation replied June 15 that the original statement conformed with the by-laws and that the shares had been registered in the name of the Botica Nolasco, Inc.
Procedural History
The action was instituted August 14, 1923, initially against the board of directors to compel registration of the five shares in Fleischer's name and to recover P500 in damages. A demurrer alleging improper party was sustained, and the plaintiff was permitted to amend. On November 15, 1923, the amended complaint named Botica Nolasco Co., Inc. as defendant and repeated the prayer for registration and P500 damages. The defendant demurred on grounds of insufficiency and ambiguity; the demurrer was overruled and the defendant answered, denying the allegations and asserting as a special defense that Article 12 of the by-laws granted the corporation a preferential right to buy the shares at par plus P90 dividends for 1922, which offer Fleischer refused. The trial court heard the case and, on August 21, 1924, held Article 12 to be in conflict with Act No. 1459, especially Sec. 35, and ordered the corporation to register the shares in Fleischer's name with costs against the defendant. The defendant appealed.
Issue Presented
Whether Article 12 of the by-laws of Botica Nolasco Co., Inc., purporting to give the corporation a preferential right to purchase shares offered by a shareholder, was valid under Act No. 1459, particularly Sec. 13, par. 7 and Sec. 35, and whether the corporation could refuse to register a bona fide transfer to a purchaser for value.
Parties' Contentions
The appellant contended that Article 12 conformed to Act No. 1459 and thereby justified the corporation's refusal to register the transfer; the corporation also argued incidentally that the proper defendants were the president and secretary, who signed and countersigned certificates under Sec. 35. The appellee maintained that he acquired the shares in good faith for valuable consideration, that the by-law was ultra vires as contrary to the Corporation Law, and that the corporation could not defeat his rights as a purchaser who had no notice of any lawful restriction.
Trial Court Ruling
The Court of First Instance, through Judge N. Capistrano, held that Article 12 conflicted with Act No. 1459, especially Sec. 35, and ordered the corporation to register the five shares in the name of Henry Fleischer, with costs assessed against the defendant.
Supreme Court's Legal Reasoning
The Supreme Court analyzed the express powers conferred by Sec. 13, par. 7 to make by-laws "not inconsistent with any existing law" for the transferring of stock, and the definitional and procedural provisions of Sec. 35, which declared that shares "are personal property and may be transferred by delivery of the certificate indorsed by the owner" and that no transfer is valid, except as between the parties, until entered upon the corporate books. The Court observed that Sec. 35 contemplates shares as personal property freely transferable and does not authorize discrimination as to whom they may be sold. The Court concluded that a by-law governing transfers must harmonize with the statutory regimen and must not impose restrictions inconsistent with Sec. 35. The by-law in question created a preferential right in the corporation to acquire shares under the same conditions and thereby imposed a restraint on the alienation of shares that transcended the statutory limits. The Court treated such a restriction as ultra vires, violative of property rights, and a restraint of trade. The Court further held that an unauthorized by-law cannot defeat the rights of a purchaser for value who had no notice of the by-law, citing authorities that an assignee is not bound by such by-law merely by virtue of the assignment and that contractual restrictions unknown to the purchaser do not affect his title. The Supreme Court also rejected the defendant's belated contention that the action should have be
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Case Syllabus (G.R. No. 23241)
Parties and Procedural Posture
- HENRY FLEISCHER, PLAINTIFF AND APPELLEE filed suit in the Court of First Instance of Oriental Negros to compel registration of five shares and to recover P500 as damages.
- BOTICA NOLASCO CO., INC., DEFENDANT AND APPELLANT was originally sued through its board of directors and was later made party defendant upon amendment.
- The trial court sustained a demurrer in part, later permitted amendment, tried the case, and on August 21, 1924 rendered judgment ordering registration of the shares in favor of the plaintiff with costs.
- The defendant appealed from the judgment to the Supreme Court, which affirmed the lower court decision with costs.
- The trial judge was Honorable N. Capistrano, and the Supreme Court opinion recorded concurrence by Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ.
Key Factual Allegations
- Manuel Gonzalez was the original owner of share certificates Nos. 16, 17, 18, 19, and 20 of Botica Nolasco, Inc.
- On March 11, 1923, Gonzalez endorsed and delivered the five certificates to Henry Fleischer in consideration of a debt due to Fleischer.
- On March 13, 1923, Dr. Eduardo Miciano, secretary-treasurer of the corporation, offered to buy the shares on behalf of the corporation at par value of P100 per share, or P500 in total.
- By virtue of article 12 of the by-laws, the corporation asserted a preferential right to acquire the shares, and the plaintiff refused the corporation's offer.
- The plaintiff demanded registration of the shares in his name and the secretary-treasurer refused to register them on the ground that registration would contravene article 12 of the by-laws.
- On March 13, 1923, Gonzalez wrote the corporation asking that the shares sold by him not be transferred to Fleischer and acknowledged the corporation's preferential right.
- On June 14, 1923, Gonzalez purported to withdraw his March 13 statement, but the corporation replied on June 15 that the March 13 statement conformed to the by-laws and that the shares had been registered in the corporation's name.
Statutory Framework
- Act No. 1459 (Corporation Law) governed the rights and powers of corporations in the Philippines as applied by the Court.
- Sec. 13, paragraph 7, Act No. 1459 granted corporations the power to make by-laws, not inconsistent with any existing law, for the transferring of its stock.
- Sec. 35, Act No. 1459 provided that shares are personal property and may be transferred by delivery of the certificate indorsed by the owner and that no transfer is valid, except as between the parties, until entered and noted upon the books of the corporation.
- Sec. 35, Act No. 1459 further provided that no share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.
Article 12 By-law
- Article 12 required transfers to be recorded on corporate books with endorsement or transfer document and required prior written notice to the secretary-treasurer by the transferor.
- The closing clause of article 12 granted the corporation, on equal terms, the right to acquire the shares proposed to be transferred.
- Article 12 therefore created a corporate preferential right to buy shares before transfer to third persons.
Issues Presented
- Whether article 12 of the by-laws