Why is a stock certificate not negotiable?
Because the holder thereof takes it without prejudice to such rights or defenses as the registered owners or transferor’s creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. (De los Santos v. Republic, G.R. No. L-4818, Feb. 28, 1955)
What are the requirements for a valid transfer of stock?
1. The certificate of stock must be duly endorsed by the transferor or his legal representative.
2. There must be delivery of the stock certificate.
3. To be valid against third parties, the transfer must be recorded in the books of the corporation. (G.R. No. 124535, September 28, 2001)
How are shares of stock transferred?
1. If represented by a certificate, the following must be strictly complied with:
a. Indorsement by the owner and his agent
b. Delivery of the certificate
c. To be valid to third parties, the transfer must be recorded in the books of the corporation. (Rural Bank of Lipa v. CA, G.R. No. 124535, Sept 28, 2001).
2. If not represented by a certificate (such as when the certificate has not yet been issued or where for some reason is not in the possession of the stockholder).
a. By means of deed of assignment: and
b. Such is duly recorded in the books of the corporation.
What effect does the civil code provision on succession have in the corporation with respect to the shares of stock registered under the name of the decedent? Is there any exception?
Article 777 of the Civil Code declares that he successional rights are transferred from the moment of death of the decedent. Accordingly, upon the decedent’s death, the heirs acquired legal right to his estate (which includes his shareholdings with the corporation), and they are, prior to the estate’s partition, deemed to be co- owners thereof. This status as co-owners, however, does not immediately and necessarily make them stockholders of the corporation. Unless and until there is compliance with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders of the corporation. Section 63 provides:“x x x No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates, and the number of shares transferred. x x x”
Simply stated, the transfer of title by means of succession, though effective and valid between the parties involves (i.e., between the decedent’s estate and his heirs), does not bind the corporation and third parties. The transfer must be registered in the books of the corporation to make the transferee-heirs a stockholder entitled to recognition as such by both the corporation and by third parties. It is noted, that in relation with the above statement, that in Abejo vs. Dela Cruz and TCL Sales Corporation vs. Court of Appeals, it did not require the registration of the transfer before considering the transferee a stockholder of the corporation. A marked difference, however, exists between these cases and the present one.
In Abjeo and TCL Sales, the transferee held definite and uncontested titles to a specific number of shares of the corporation; after the transferee has established prima facie ownership over the shares of stocks in question, registration became a mere formality in confirming their status as stockholders. In the present case, each of the decedent’s heirs holds only an undivided interest in the shares. This interest, at this point, is still inchoate and subject to the outcome of a settlement proceeding; the right of the heirs to specific, distributive shares of inheritance will not be determined until all the debts of the estate of the decedent are paid. In short, the heirs are only entitled to what remains after payment of the decedent’s debts; whether there will be residue remains to be seen.
Justice Jurado aptly puts it as follows: “No succession shall be declared unless and until a liquidation of the assets and debts left by the decedent shall have been made and all his creditors are fully paid. Until a final liquidation is made and all the debts are paid, the right of the heirs to inherit remains inchoate. This is so because under our rules of procedure, liquidation is necessary in order to determine whether or not the decedent has left any liquid assets which may be transmitted to the heirs.” An heir must, therefore, hurdle two obstacles before he can be considered a stockholder of the corporation with respect to the shareholdings originally belonging to the decedent. First, he must prove that there are shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of the decedent’s estate. Second, he must register the transfer of the share allotted to him to make it binding against the corporation. He cannot demand that this be done unless and until he has established his specific allotment (and prima facie ownership) of the shares.
Without the settlement of the decedent’s estate, there can be no definite partition and distribution of the estate to the heirs. Without the partition and distribution, there can be no registration of the transfer. And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the existence of an intra- corporate relationship as premise for an intracorporate controversy within the jurisdiction of a special commercial court. (Reyes vs. Zenith Insurance Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])
2nd Feb 2015
Philippine law treats shares of stock in a corporation as personal property. Similar to other personalty, the owner of the property can sell, assign, transfer or convey his property to another as he wishes. This is an attribute and principle of ownership which cannot be taken away. However, being in the nature of intangible personal property, the law regulates such kinds of properties, including the manner in which they can be conveyed or transferred.
Section 63 of the Corporation Codeaffirms that the owner of a share of stock in a corporation has the right to transfer his shares. It is the provision that outlines the fundamental requirements which must be complied with if a stockholder in a corporation wishes to transfer his shares to another. Section 63 reads:
“Sec. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws.Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.“
Being intangible personalty, the Corporation Code requires that, before a share of capital stock is validly sold, transferred, assigned or in any manner conveyed, it must be covered by a stock certificate. This requirement is borne out of practical considerations. It is a fundamental principle of contract law (be it of sale, assignment or any other conveyance) in the Philippines and probably in any jurisdiction, that the parties to any contract must be aware of the subject matter – what is being sold, transferred or otherwise conveyed. On the other hand, shares of stock in a corporation do not have physical form, unlike ordinary chattel such as goods or vehicles, where a person has a clear notion of what is being sold or conveyed.
The stock certificate is evidence of the personalty owned by the stockholder. It defines the nature and extent of his ownership over the share/s of stock. It also outlines the regulations and limitations of ownership, which must be considered and made known to the parties prior to any conveyance. Obviously, without the stock certificate, these matters would be unknown to a prospective buyer or transferee of shares of stock. Simply stated, the subject matter of the conveyance will not be clear. Therefore, only shares of stock covered by a stock certificate can be subject of a legally demandable and binding sale or disposition.
There may be instances where shares of stock are sold or transferred prior to the issuance of stock certificates. At best, these transactions are only binding between the parties, and will not bind the corporation. As a matter of fact, the corporation can legally refuse to recognize such transfers, especially if the shares which were sold have not yet been fully paid. The last paragraph of Section 63 states that no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. This means that the corporation can altogether refuse to recognize the validity of a sale or transfer of a share of capital stock that has not been fully paid, or which the corporation has a lien. In this case, the purchaser’s only remedy lies with the stockholder.
In the case of De los Santos, et al. vs. MacGrath, et al., G.R. No. L-4818, 28 February 1955, the Supreme Court interpreted the provisions of Section 63 of the Corporation Code. The Supreme Court held that any voluntary transfer of shares of stock in a corporation that is represented by a certificate of stock must strictly comply with the following conditions:
a. There must be delivery of the certificate;
b. The share must be indorsed by the owner or his agent; and
c. To be valid to the corporation and third parties, the transfer must be recorded in the books of the corporation.
One of the requirements to effect a valid transfer of shares of stock is that the certificate of stock must be endorsed by the owner or his agent. Mere delivery or handing over of the stock certificate is insufficient, and does not produce the effects of a transfer or conveyance to another. Endorsement of the stock certificate is one of the operative acts which validates the transfer. Without the act of endorsement by the stockholder, the sale or disposition will not be binding upon the corporation. Of course, there are remedies under the law to compel the owner to endorse the stock certificate which he or she has already conveyed to another. But before endorsement of the stock certificate, the corporation can refuse recognize the transferee stockholder.
Moreover, as between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. Thus, as between the “real” owner of a stock certificate and the registered owner or the person actually registered in the Stock and Transfer Book of a corporation, it is the person registered in the Stock and Transfer Book who must sign or endorse the certificate of stock to allow its sale or transfer.
Further, the Supreme Court in the case of Padgett vs. Babcock & Templeton, Inc., G.R. No. 38684, 21 December 1933, held that shares of corporate stock are regarded as personal property and may be disposed by the owner as he sees fit, unless the corporation is dissolved, or unless the right to do so is properly restricted or the owner’s privilege is hampered by his actions. A corporation cannot impose undue restrictions upon the owner’s right to sell, transfer or otherwise convey his shares of stock.
According to the Supreme Court, a restriction imposed upon a stock certificate, which unduly prohibits the owner from conveying his property, is null and void on the ground that it constitutes and unreasonable limitation of the right of ownership and is in restraint of trade. It was also held that any restriction on a stockholder’s right to dispose of his shares must be construed strictly; and any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other stockholders, even though the sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is sold to one purchaser.
However, recognizing the right of the corporation to regulate the transfer of shares of stock in a corporation, the Supreme Court stated that there can be restrictive regulations or agreements which can be entered into between the corporation and the stockholder, to regulate ownership of the shares of stock. These regulations or agreements pertain to those indicated in the certificates of stock, and also those that may be found in the By-Laws of the corporation. The Supreme Court emphasized that these regulations are construed strictly against the corporation, and in favor of the ownership rights of the stockholder. An absolute prohibition from selling shares of stock was held as null and void on the ground that it constitutes and unreasonable limitation of the right of ownership and is in restraint of trade.
An example of a invalid restriction upon the right of a stockholder to dispose of a share of stock in a corporation is found in the case of in the case of Fleischer vs. Botica Nolasco Co., 47 Phil 583. In this case, the Supreme Court discussed the validity of a clause in the by-laws of a corporation which prohibited the owner of a stock certificate from selling his shares to any person other than the corporation. The by-laws mandated that the owner of a share of stock could not sell it to another person except to the corporation.
In deciding the legality and validity of said restriction, the Supreme Court ruled that the only restraint imposed by the Corporation Law upon transfer of shares is that no transfer of shares of stock shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. According to the Supreme Court, this restriction is necessary in order that the officers of the corporation may know who its stockholders are, which is essential in conducting elections of officers, in calling meetings of stockholders, and for other purposes.
The Supreme Court declared that any restriction in the by-laws which exceeds what is provided in the Corporation Code is ultra vires, violative of the property rights of shareholders, and in restraint of trade. This is because the by-laws of a corporation cannot contradict the general policy of the laws of the land, and must always be strictly subordinate to Philippine laws.
In Rural Bank of Salinas vs. Court of Appeals, G.R. No. 96674, 26 June 1992, the Supreme Court held that a corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers. The Corporation Code contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred, which was not present in the case.
This is how to transfer shares of stock in the Philippines.
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