PROPRIETARY RIGHTS

PROPRIETARY RIGHTS.

a, Right to dividends - All stockholders are entitled to dividends, which shall be payable in cash, property, or in stock, on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall be first be applied to the unpaid balance on the subscription plus costs and expenses, while stock holders until their unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose..

Right to be paid accrues as soon as the declaration is made in accordance with section 42 of the RCCP. From that time, stockholders can already demand payment. Neither the board nor successors can afterwards reconsider the board’s action and revoke the declaration. HOWEVER, there is authority for the view that when it comes to stock dividends, the same rule does not apply. Declaration of stock dividends can be revoked before the issuance of the dividend declaration. In case of cash dividend, stockholders are not entitled to any preference over the general creditors. Right to dividend accrues even without SEC approval. HOWEVER, declaration of dividend whether cash or stock shall be reported to the SEC within 15 days..

RELATED JURISPRUDENCE:. Under the old Corporation Law in force at the time the contract between the petitioner and the private respondents was entered into, it was provided that "no corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution." Similarly, the present Corporation Code 13 provides that the board of directors of a stock corporation may declare dividends only out of unrestricted.

retained earnings. The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase "unrestricted retained earnings," which may be a more precise term, in place of "surplus profits arising from its business" in the former law. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared..

Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only..

Republic Planters Bank vs. Agana et. al, G.R. No. 51765, March 3, 1997.

RPB vs. Agana, 269 SCRA 1. b. Right to inspect - Stockholders can inspect books of the corporation. This right is part of their right to information. It can be granted upon demand by a shareholder. Even shareholders who hold 0.001% of the shareholdings are entitled to exercise such right..

Requisites: 1. Exercised at a reasonable hours on business days; 2. Director, trustees or member has not improperly used any information he secured; 3. Demand in good faith; 4. Inspecting or reproducing party must respect and is bound by confidentiality; 5. Requesting party who is not a stockholder or member of record shall have no right to inspect or demand. The same covers all books of the corporation including journal, ledger, financial statements, ITR, vouchers, receipts etc..

Stockholders can also make copies but CANNOT demand that he be allowed to take corporate books out of the principal office of the corporation. There are matters not covered by this right – eg. secret formula of manufacturing goods. Stockholder or member is also entitled to the financial statements of the corporation. Such shall be audited by an independent CPA..

Liability of Directors. If refusal to allow inspection is pursuant to a resolution, liability shall be imposed upon the directors who voted for such refusal. Defenses 1. Person demanding improperly used the information secured; 2. Person was not acting in good faith 3. Person demanding is a competitor Nota bene: A requesting party who is not a stockholder or member of record, or is a competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor shall have NO RIGHT to inspect or demand reproduction of corporate records..

RELATED JURISPRUDENCE:. A criminal action based on the violation of Section 74(2) & (4), can only be maintained against corporate officers or such other persons that are acting on behalf of the corporation. Violations of Section 74(2) & (4), contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders to inspect the records, minutes and the stock and transfer book of such corporation..

Here, the petitioner’s complaint failed to establish that respondents were acting on behalf of STRADEC. Instead, it was revealed that respondents are merely outgoing officers of STRADEC who, for some reason, withheld and refused to turn-over the company records of STRADEC; that it is the petitioners who are actually acting on behalf of STRADEC; and that STRADEC is actually merely trying to recover custody of the withheld records..

Thus, petitioners are not actually invoking their right to inspect the records and the stock and transfer book of STRADEC under Section 74. What they seek to enforce is the proprietary right of STRADEC to be in possession of such records and book. Such right, though certainly legally enforceable by other means, cannot be enforced by a criminal prosecution based on a violation of Section 74(2) & (4)..

Yuico v. Quiambao, GR 180416 (2014). Corporate officers and directors have no legal authority to close the office doors against shareholders for whom they are only agents, and withhold from them the right to inspect the books which furnishes the most effective method of gaining information which the law has provided and the right of inspection can not be denied on mere doubt or suspicion as to the motives of the shareholder. The burden is not upon the stockholder to show the propriety of his examination or that the refusal by the officers or directors was wrongful, except under statutory provisions..

Terelay Investment and Development Corporation vs Cecilia Teresita Yulo, GR. 160924, 5 August 2015.

Insigne vs Abra Valley Colleges Inc. G.R. 204089, 29 July 2015.

Roque vs People of the Philippines, GR. 211108, 7 June 2017.

Alfredo L. Chua vs People Of The Philippines, G.R. 216146, 24 August 2016..

BAR QUESTIONS. 1. Petitioner who is a stockholder of Bilmoko Corporation wanted to examine the books and records of a foreign subsidiary wholly owned by Bilmoko Corporation. The books and records of the foreign subsidiary were in the possession of Bilmoko Corporation. The latter’s board of directors refused to allow the petitioner to examine said books and records, contending that the foreign subsidiary is a separate and distinct corporation domiciled in another country; hence, the petitioner was not within the class of persons having an interest in the operations of the foreign subsidiary..

a. Decide the case. b. What are the limitations on a stockholder’s rights to inspect corporation books and records? (1989 BAR) a. The statutory right of a stockholder to inspect the books and records of a corporation extends—in consonance with equity, good faith and fair dealing—to a foreign subsidiary wholly owned by the corporation. b. The right of inspection does not allow the stockholder to improperly use any information that is secured thereby. The stockholder must exercise the right in good faith and for a legitimate purpose only..

c. Pre-emptive right - The right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their shareholdings. It is the right granted to the holders to have the first option to subscribe to any issuance or disposition of shares from the capital stock in proportion to the stock holdings of the shareholders..

Under Section 38 of the RCCP, pre-emptive right is granted to all stockholders of a stock corporation in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment, provided that such preemptive right shall not extend to shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock in exchange for property needed for corporate purposes or in payment of previously contracted debt..

BAR QUESTIONS. 1. Explain the concept of pre-emptive right under the Corporation Code. (2019 BAR).

Answer: Pre-emptive right is the right of the stockholders to subscribe to any and all issuance or disposition of shares of any class by the corporation in proportion to their shareholding in the corporation. This means that except in the cases provided by law, shares of stock the corporation should first be offered to the stockholders prior to any offer to non-stockholders. This rule is intended to prevent the dilution of stockholder’s equity stake in the corporation. (Section 39, Corporation Code; Section 38 of the Revised Corporation Code).

2. In June 2018, DEF Corp. sent notices to its stockholders informing them of the corporation's issuance of new shares of stock. The notice included a reminder that, pursuant to DEF Corp.' s Articles of Incorporation, any stockholder who fails to exercise his or her pre-emptive right within three (3) weeks from receipt of notice would be considered to have waived the same..

Ms. Z, a stockholder of DEF Corp., failed to exercise her pre-emptive right within the said period. However, she claimed that she did not validly waive her right to do so because a waiver must be expressed in writing. Is Ms. Z's contention correct? Explain. (2019 BAR).

Answer: Z’s contention is not correct. Pre-emptive right is not absolute. It may be waived expressly or impliedly. Failure of the stockholder to exercise his right within the period set forth by the corporation amounts to a waiver of preemptive right..

3. ABC Corporation has an authorized capital stock of P1M divided into 50,000 common shares and 50,000 preferred shares. At its inception, the Corporation offered for subscription all the common shares. However, only 40,000 shares were subscribed. Recently, the directors thought of raising additional capital and decided to offer to the public all the authorized shares of the Corporation at their market value..

a. Would Mr. X, a stockholder holding 4,000 shares, have pre-emptive rights to the remaining 10,000 shares? b. Would Mr. X have pre-emptive rights to the 50,000 preferred shares? c. Assuming that the existing stockholders are entitled to pre-emptive rights, at what price will the shares be offered? Explain your answers. (1999 BAR).

a. YES Mr. X, a stockholder holding 4,000 shares, has pre-emptive right to the remaining 10,000 shares. All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The ruling in Benito v. Datu and Tan v. SEC to the effect that preemptive right applies only to issuance of shares in connection with an increase in capital is no longer a valid rule under the Corporation Code. The facts in those cases happened during the regime of the old Corporation Law..

b. The shares will be offered to existing stockholders, who are entitled to pre-emptive right, at a price fixed by the Board of Directors, which shall not be less than the par value of such shares..

4. Suppose that “X” Corporation has already issued the 1000 originally authorized shares of the corporation so that its Board of Directors and stockholders wish to increase “X’s” authorized capital stock. After complying with the requirements of the law on increase of capital stock, “X” issued an additional 1000 shares of the same value..

a. Assume that the stockholder “A” presently holds 200 out of the 1000 original shares. Would “A” have a preemptive right to 200 of the new issue of 1000 shares? Why? b. When should stockholder “A” exercise the preemptive right? (2001 BAR).

a. YES, “A” would have a preemptive right to 200 of the new issue of 1000 shares. “A” is a stockholder of record holding 200 shares in “X” Corporation. According to the Corporation Code, each stockholder has the preemptive right to all issues of shares made by the corporation in proportion to the number of share he holds on record in the corporation. b. Preemptive right must be exercised in accordance with the Articles of Incorporation or the By-Law. When the Articles of Incorporation and By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right..

5. The Board of Directors of ABC, Inc., a domestic corporation, passed a resolution authorizing additional issuance of shares of stocks without notice nor approval of the stockholders. DX, a stockholder, objected to the issuance, contending that it violated his right of pre-emption to the unissued shares. Is his contention tenable? Explain briefly. (2004 BAR).

Answer: YES. DX/s contention is tenable. Under Section 39 of the Corporation Code, all stockholders of ABC, Inc. enjoy preemptive right to subscribe to all issues of shares of any class, including the reissuance of treasury shares in proportion to their respective shareholdings..

d. Right of first refusal - Articles of Incorporation or by laws may provide for a right of refusal to stockholders as a limitation on transfer. This right may also be based purely on contract. Unlike pre-emptive right which does not require a statutory enabling provision, the right of first refusal, if not provided by law or by AOI, does not exist at all..