EN BANC

[G.R. No. 27872. February 25, 1928.]

THE NATIONAL EXCHANGE CO., INC. , plaintiff-appellee, vs . I. B.

DEXTER , defendant-appellant.

Ross, Lawrence & Selph and Antonio T. Canrascoso, Jr., for appellant.
Lucio Javillonar, for appellee.

SYLLABUS

1. CORPORATIONS; STOCK SUBSCRIPTIONS; SPECIAL STIPULATION. — A

special stipulation contained in a subscription to corporate stock which, if valid, would
lessen the capital of the company and relieve the subscriber from liability to be sued
upon the subscription is illegal
2. ID.; ID.; PAYMENT FOR SHARES; LEGAL PROVISIONS IN FORCE IN
PHILIPPINE ISLANDS. — In section 74 of the Organic Act of July 1, 1902, as well as in
section 28 of the Jones Law of August 29, 1916, it is declared that all franchises
granted by the Government of the Philippine Islands shall forbid the issuance of stock
except in exchange for actual cash or for property at a fair valuation equal to the par
value of the stock. Pursuant to this provision the Philippine Commission inserted in
section 16 of the Corporation Law of March 1, 1906, a provision declaring that no
corporation shall issue stock except in exchange for actual cash paid to the
corporation or for property actually received by it at a fair valuation equal to the par
value of the stock.
3. ID.; ID.; STIPULATION FOR PAYMENT OF SUBSCRIPTION FROM
DIVIDENDS. — Under the provisions above cited, a stipulation in a stock subscription to
the effect that the subscription shall be payable from the rst dividends to be paid on
the shares is unlawful in so far as it purports to relieve the subscriber from liability to
be sued; and the subscriber is liable for the par value of the stock to the same extent as
if such stipulation had not been inserted in the contract.
4. ID.; ID.; SHARES SUBSCRIBED AFTER INCORPORATION EFFECTED. — The
law in force in the Philippine Islands makes no distinction, in respect to the liability of
the subscriber, between shares subscribed before incorporation is effected and shares
subscribed thereafter. All subscribers alike are bound to pay full par value in cash or its
equivalent, and any attempt to discriminate in favor of one subscriber by relieving him
of this liability wholly or in part is forbidden.

DECISION

STREET , J : p

This action was instituted in the Court of First Instance of Manila by the National
Exchange Co., Inc., as assignee (through the Philippine National Bank) of C. S. Salmon &
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 Co., for the purpose of recovering from T. B. Dexter a balance of P15,000, the par value
of one hundred fty shares of the capital stock of C. S. Salmon & Co., with interest and
costs. Upon hearing the cause the trial judge gave judgment for the plaintiff to recover
the amount claimed, with lawful interest from January 1, 1920, and with costs. From
this judgment the defendant appealed.
It appears that on August 10, 1919, the—defendant, I. B. Dexter, signed a written
subscription to the corporate stock of C. S. Salmon & Co. in the following form:
"I hereby subscribe for three hundred (300) shares of the capital stock of C.
S. Salmon and Company, payable from the rst dividends declared on any and all
shares of said company owned by me at the time dividends are declared, until the
full amount of this subscription has been paid."
Upon this subscription the sum of P15,000 was paid in January, 1920, from a
dividend declared at about that time by the company, supplemented by money supplied
personally by the subscriber. Beyond this nothing has been paid on the shares and no
further dividend has been declared by the corporation. There is therefore a balance of
P15,000 still unpaid upon the subscription.
As the case reaches this court the sole question here presented for
consideration is one of law, namely, whether the stipulation contained in the
subscription to the effect that the subscription is payable from the rst dividends
declared on the shares has the effect of relieving the subscriber from personal liability
in an action to recover the value of the shares. The trial court held, in effect, that the
stipulation mentioned is invalid.
In discussing this problem we accept as sound law the proposition propounded
by the appellant's attorneys and taken from Fletcher's Cyclopedia as follows:
"In the absence of restrictions in its charter, a corporation, under its general
power to contract, has the power to accept subscriptions upon any special terms
not prohibited by positive law or contrary to public policy, provided they are not
such as to require the performance of acts which are beyond the powers
conferred upon the corporation by its charter, and provided they do not constitute
a fraud upon other subscribers or stockholders, or upon persons who are or may
become creditors of the corporation." (Fletcher, Cyc. Corp., sec. 602, p. 1314.)
Under the American regime corporate franchises in the Philippine Islands are
granted subject to the provisions of section 74 of the Organic Act of July 1, 1902,
which, in the part here material, is substantially reproduced in section 28 of the
Autonomy Act of August 29, 1916. In the Organic Act it is, among other things,
declared: "That all franchises, privileges, or concessions granted under this Act shall
forbid the issue of stock or bonds except in exchange for actual cash or for property at
a fair valuation equal to the par value of the stock or bonds so issued; . . ." (Act of
Congress of July 1, 1902, sec. 74.)
Pursuant to this provision we nd that the Philippine Commission inserted in the
Corporation Law, enacted March 1, 1906, the following provision: ". . . no corporation
shall issue stock or bonds except in exchange for actual cash paid to the corporation or
for property actually received by it at a fair valuation equal to the par value of the stock
or bonds so issued." (Act No. 1459, sec. 16, as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except for actual
cash to the par value of the stock or its full equivalent in property is thus enshrined in
both the organic and statutory law of the Philippine Islands; and it would seem that our
lawmakers could scarcely have chosen language more directly suited to secure
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 absolute equality among stockholders with respect to their liability upon stock
subscriptions. Now, if it is unlawful to issue stock otherwise than as stated it is self-
evident that a stipulation such as that now under consideration, in a stock subscription,
is illegal; for this stipulation obligates the subscriber to pay nothing for the shares
except as dividends may accrue upon the stock. In the contingency that dividends are
not paid, there is no liability at all. This is a discrimination in favor of the particular
subscriber, and hence the stipulation is unlawful.
The general doctrine of corporation law is in conformity with this conclusion, as
may be seen from the following proposition taken from the standard encyclopedic
treatise, Corpus Juris:
"Nor has a corporation the power to receive a subscription upon such terms
as will operate as a fraud upon the other subscribers or stockholders by
subjecting the particular subscriber to lighter burdens, or by giving him greater
rights and privileges, or as a fraud upon creditors of the corporation by
withdrawing or decreasing the capital. It is well settled therefore, as a general rule,
that an agreement between a corporation and a particular subscriber, by which
the subscription is not to be payable, or is to be payable in part only, whether it is
for the purpose of pretending that the stock is really greater than it is, or for the
purpose of preventing the predominance of certain stockholders, or for any other
purpose, is illegal and void as in fraud of other stockholders or creditors, or both,
and cannot be either enforced by the subscriber or interposed as a defense in an
action on the subscription.'' (14 C. J., p. 570)
The rule thus stated is supported by a long line of decisions from numerous
courts, with little or no diversity of opinion. As stated in the headnote to the opinion of
the Supreme Court of the United States in the case of Putnam vs. New Albany, etc.
Railroad Co. as reported in 21 Law. ed., 361, the rule is that "Conditions attached to
subscriptions, which, if valid, lessen the capital of the company, are a fraud upon the
grantor of the franchise, and upon those who may become creditors of the corporation,
and upon unconditional stockholders."
In the appellant's brief attention is called to the third headnote to Bank vs. Cook
(125 Iowa, 111), where it is stated that a collateral agreement with a subscriber to
stock that his subscription shall not be collectible except from dividends on the stock,
is valid as between the parties and a complete defense to a suit on notes given for the
amount of the subscription. A careful perusal of the decision will show that the rule
thus broadly stated in the headnote is not justi ed by anything in the reported decision;
for what the court really held was that the making of such promise by the agent of the
corporation who sold the stock is admissible in evidence in support of the defense of
fraud and failure of consideration. Moreover, even if the decision had been to the effect
supposed, the rule announced in the headnote could have no weight in a jurisdiction like
this where there is a statutory provision prohibiting such agreements.
We may add that the law in force in this jurisdiction makes no distinction, in
respect to the liability of the subscriber, between shares subscribed before
incorporation is effected and shares subscribed thereafter. All alike are bound to pay
full par value in cash or its equivalent, and any attempt to discriminate in favor of one
subscriber by relieving him of this liability wholly or in part is forbidden. In what is here
said we have reference of course primarily to subscriptions to shares that have not
been previously issued. It is conceivable that the power of the corporation to make
terms with the purchaser would be greater where the shares which are the subject of
the transaction have been acquired by the corporation in course of commerce, after
they have already been once issued. But the shares with which we are here concerned
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 are not of this sort.
The judgment appealed from must be a rmed, and it is so ordered, with costs
against the appellant.
Malcolm, Ostrand, Johns, Romualdez and Vill-Real, JJ., concur.

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