Chapter VIII.

Subscription contracts

In Section 175 of the Tax Code, DST is imposed on the original issue of shares of
stock. DST is a tax on documents, instruments, loan agreements, and papers
evidencing the acceptance, assignment, sale or transfer of an obligation, right or
property incident thereto. DST is actually an excise tax because it is imposed on
the transaction rather than on the document. DST is also levied on the exercise
by persons of certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution of specific
instruments

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a
subscription agreement in order for a taxpayer to be liable to pay the DST. A
subscription contract is defined as any contract for the acquisition of unissued
stocks in an existing corporation or a corporation still to be formed. A stock
subscription is a contract by which the subscriber agrees to take a certain
number of shares of the capital stock of a corporation, paying for the same or
expressly or impliedly promising to pay for the same.

Clearly, the deposit on stock subscription as reflected in respondent's Balance

Sheet as of 1998 is not a subscription agreement subject to the payment of DST.
There is no P800,000 worth of subscribed capital stock that is reflected in
respondent's GIS. The deposit on stock subscription is merely an amount of
money received by a corporation with a view of applying the same as payment
for additional issuance of shares in the future, an event which may or may not
happen. The person making a deposit on stock subscription does not have the
standing of a stockholder and he is not entitled to dividends, voting rights or
other prerogatives and attributes of a stockholder. Hence, respondent is not
liable for the payment of DST on its deposit on subscription for the reason that
there is yet no subscription that creates rights and obligations between the
subscriber and the corporation.

Therefore, the Court found that the respondent's deposit on subscription was
merely an advance made by stockholders for future subscription, with no stock
certificates issued, and thus not subject to DST. (Commissioner of Internal
Revenue vs. First Express Company)

Certificate of Stock and Transfer of Shares

The Revised Corporation Code of the Philippines, Republic Act No. 11232, covers
the Certificate of Stock and Transfer of Shares in Section 62:

Issuance: The president or vice president of a corporation signs the certificate of

stock, which is then countersigned by the secretary or assistant secretary. The
corporation's seal is also affixed to the certificate.

Transfer: The certificate of stock can be transferred by delivery to another party,

or by the owner, attorney-in-fact, or other authorized person indorsing the
certificate.

Recording: The transfer must be recorded in the corporation's books, showing

the names of the parties, the date, the certificate numbers, and the number of
shares transferred.
Unpaid claims: Shares that the corporation has an unpaid claim against cannot
be transferred.

Restrictions: Restrictions on the transfer of shares must be explicitly stated in the

corporation's articles of incorporation. The restrictions must be reasonable and
necessary to achieve the corporation's goals.

IX. Corporate Books and Records

A. Books to be kept.

 The Supreme Court upheld the validity of the special stockholders'

meeting, emphasizing compliance with Section 50 of Batas Pambansa Blg.
68 (B.P. 68) or the Corporation Code of the Philippines.
 The law requires written notice of special meetings to be sent to all
stockholders at least one week prior to the meeting unless otherwise
provided in the by-laws.
 GCI's by-laws stipulated a five-day notice period, which was met when
Gilbert sent the notice on September 2, 2004.
 The Court clarified that the law requires the notice to be sent, not
necessarily received, before the meeting.
 Gilbert, as the Vice-President and majority stockholder, was authorized to
call the meeting in the absence or disability of the President, who was
incapacitated by Alzheimer's Disease.
 Cheu was not a stockholder of record as her ownership of shares was not
registered in the stock and transfer book of GCI, thus she was not entitled
to receive notice of the meeting.
 The Court concluded that the special stockholders' meeting and the
subsequent election of directors were valid, and there was no basis for the
claim of damages by the petitioner. (Guy v. Guy)

B. Right to inspection
The inspection was deemed valid in this case. The Supreme Court
emphasized that the right to inspect corporate records is a clear and
unmistakable right of stockholders. The corporation, Philippine Associated
Smelting and Refining Corporation (PASAR), failed to present sufficient
evidence to show that the stockholders' demand for inspection was made
in bad faith or for an unlawful purpose. Therefore, the Court upheld the
stockholders' right to inspect the records, affirming that objections to this
right must be raised as a defense by the corporation. (Philippine
Associated Smelting and Refining Corp. vs. Lim)

C. Refusal on the Part of the Corporation on the Request for

Inspection
The inspection was deemed valid in this case. The Court ruled that Cecilia
Teresita Yulo was entitled to inspect the books and records of Terelay
Investment and Development Corporation, regardless of her insignificant
shareholding. The Court affirmed that all stockholders have the right to
inspect corporate records, and Terelay failed to prove that Yulo's purpose
 for inspection was improper. (Terelay Investment and Development
Corp. vs. Yulo)

X. Merger and Consolidation

A. Consolidation and merger, distinguished: Consolidation is the union

of two or more existing corporations to form a new corporation called the
consolidated corporation. It is a combination by agreement between two
or more corporations by which their rights, franchises, and property are
united and become those of a single, new corporation, composed
generally, although not necessarily, of the stockholders of the original
corporations. Merger, on the other hand, is a union whereby one
corporation absorbs one or more existing corporations, and the absorbing
corporation survives and continues the combined business.

The parties to a merger or consolidation are called constituent

corporations. In consolidation, all the constituents are dissolved and
absorbed by the new consolidated enterprise. In the merger, all
constituents, except the surviving corporation, are dissolved. In both
cases, however, there is no liquidation of the assets of the dissolved
corporations, and the surviving or consolidated corporation acquires all
their properties, rights and franchises and their stockholders usually
become its stockholders. The surviving or consolidated corporation
assumes automatically the liabilities of the dissolved corporations,
regardless of whether the creditors have consented or not to such merger
or consolidation.

B. De facto merger

In this case, the Court found that a de facto merger existed between
Traders Royal Bank (TRB) and Bank of Commerce (Bancommerce) based
on several factors. The Purchase and Sale Agreement (PSA) involved the
transfer of substantially all of TRB's assets and liabilities to Bancommerce.
The Court noted that Bancommerce referred to TRB as "now known as
Bancommerce" in its legal proceedings, indicating recognition of the
merger. Additionally, the Bangko Sentral ng Pilipinas (BSP) issued a
circular stating that the banking activities and transactions of TRB and
Bancommerce were consolidated, further supporting the existence of a de
facto merger. The Court concluded that despite the lack of formal merger
documentation, the circumstances surrounding the transaction indicated
that Bancommerce assumed TRB's liabilities and should be held liable for
TRB's debts. (Bank of Commerce vs. Radio Philippine Network)

C. Effects of merger or consolidation

The merger between ABC and GBHI had significant legal implications. As
the surviving corporation, GBHI assumed all the liabilities and obligations
of ABC, which included the contractual obligations under the software
license agreement with Surecomp. This means that GBHI was bound by
the contract as if it had entered into it directly, preventing it from denying
Surecomp's capacity to sue based on the argument that it was not the
original contracting party. Essentially, the merger treated GBHI as if it had
 incurred all liabilities of ABC, thus binding it to the contract with Surecomp
and allowing Surecomp to pursue its claims for breach of contract against
GBHI. (Global Business Holdings v. Surecomp Software)

The effect of the merger in this case is that it does not operate to dismiss
the employees of the absorbed corporation (Unocal Philippines). The
employment contracts of the employees continue to subsist unless
terminated for just cause. The merger does not entitle the employees to
separation pay, as the circumstances outlined in the CBA, which include
redundancy, retrenchment, or closure, did not occur. The surviving
corporation retains the rights and obligations of the absorbed corporation,
ensuring that employees remain part of the workforce unless they choose
to resign or are terminated for valid reasons. (Philippine Geothermal, Inc.
Employees Union vs. Unocal Philippines, Inc)

XI. Appraisal rights

The court noted that the availability or unavailability of appraisal rights is crucial
in determining whether a derivative suit is a nuisance or harassment suit. The
respondents argued that appraisal rights were not available for the acts
complained of; however, the court disagreed, stating that the property-for-shares
exchange qualified as an instance where dissenting stockholders could have
exercised their appraisal rights. The court found that the respondents caused the
unavailability of appraisal rights by filing their complaint before the stockholders
had the opportunity to vote on the intended exchange.

In this case, the issue of appraisal rights arose in the context of the property-for-
shares exchange between PRCI and JTH. The court noted that the availability or
unavailability of appraisal rights is crucial in determining whether a derivative
suit is a nuisance or harassment suit. The respondents argued that appraisal
rights were not available for the acts complained of; however, the court
disagreed, stating that the property-for-shares exchange qualified as an instance
where dissenting stockholders could have exercised their appraisal rights. The
court found that the respondents caused the unavailability of appraisal rights by
filing their complaint before the stockholders had the opportunity to vote on the
intended exchange. (Cua, Jr. vs. Tan)

XIII. Close corporation

A close corporation is one whose articles of incorporation provide that all issued
stock is held by not more than a specified number of persons (not exceeding 20)
and that there are restrictions on the transfer of shares.

The Court held that the articles of incorporation of the respondent corporation
did not contain provisions that would classify it as a close corporation, such as
restrictions on the number of stockholders or transfer of shares. The Court
emphasized that mere ownership by a small number of stockholders does not
automatically qualify a corporation as a close corporation. Additionally, since
Nenita Gruenberg was not the sole controlling stockholder, the exceptions that
might allow for bypassing board authorization did not apply. Thus, the court
concluded that the corporate veil should not be pierced, and the sale of the
property was invalid due to lack of proper authorization. (San Juan Structural
and Steel Fabricators, Inc. v. Court of Appeals)
Court held that while the sale of Teresita's shares did not strictly comply with the
written notice requirement of Paragraph 7 of the AOI, there was substantial
compliance as the respondents had actual knowledge of the sale and did not
object for 17 years.

Court also noted that Atty. Muyco, who was the counsel for both the estate and
Marsal, would have informed the respondents, who were also stockholders and
members of the Board of Directors, about the sale. Court emphasized that the
respondents' inaction for such a long period constituted a waiver of their
preemptive rights and consent to the sale. Therefore, sale was valid and could be
registered in the name of Rogelio Florete, Sr. (Florete, Sr. vs. Florete, Jr.)

Issue: Whether the sale of the property by Manuel Dulay to the Velosos valid
and binding despite the alleged lack of consent from other board members

Ruling: Yes. Under Section 101 of the Corporation Code of the Philippines,
actions by directors of a close corporation without a meeting are valid if all
directors have actual or implied knowledge and do not promptly object in writing.

The court found that Manuel Dulay had almost absolute control over the
corporation, and the other board members were aware of the sale. In a close
corporation, a board resolution authorizing the sale is not necessary to bind the
corporation for the action of its president, especially when the other directors
have actual or implied knowledge of the action and do not promptly object.
Virgilio Dulay, a board member, was aware of the transaction and did not object,
thereby ratifying the sale. (Manuel R. Dulay Enterprises, Inc. vs. Court of
Appeals)