Mr. Romeo Badilla

April 13, 1982 Mr. Romeo Badilla Monterey Farms Corporation 2/F Cash and Carry Building Cosmopolitan Commercial Center Filmore St.,Makati Metro Manila, 3116 Dear Mr. Badilla: This refers to your letter-query dated October 2, 1981 and follow up letter of November 10, 1981 requesting opinion relative to the legality of the proposed amendment to the by-laws of the Philippine Association of Hog Raisers, Inc. (a stock corporation) which reads as follows: (b) ...no stockholder who has any unpaid call on subscription, or any unliquidated fees for services rendered directly or indirectly by the corporation; or unpaid assessment or charge imposed by the Board ...may vote or qualify in the election for members of the board of directors ... Unpaid dues /assessments, service fees and any other unliquidated charge of account by any stockholder in favor of the corporation shall constitute a lien upon his share of stock and the same, after proper notice and final demand may be disposed of by the Board of Directors in liquidation thereof. The Board is hereby empowered to take such other action or sanction against any erring stockholder that it may deem proper in the premises." You advanced the view that the aforequoted proposed amendment is invalid per se as the same is confiscatory considering that "the unpaid dues, assessments, service fees and any other unliquidated charge could not and should not constitute a lien upon the shares of stock, as the latter is separate and distinct from any other dues that may be owing to the association." The records of subject corporation disclose however, that the Board of Directors and the stockholders representing a majority of the outstanding capital stock adopted and approved the said amendments on July 22, 1981 in an Amended By-Laws which was filed with this Commission on January 27, 1982. In answer to your query, please be informed that the pertinent provision of law states that: "SECTION 63. Certificate of stock and transfer of shares . ... No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (Corporation Code of the Philippines, Batas Pambansa Blg. 68). Our courts had occasion to interpret a similar provision of the Corporation Law (Sec. 35, Act No. 1459, as amended) in the case of "Bank of the Philippine Islands vs. Caridad Estates of Cavite, Inc." (40 OG 413 Supp. 277) whereby it enunciated the general rule that a stock corporation has no lien on shares of stock for the unpaid debts, liabilities or assessments of a stockholder to the corporation although it provided for the exceptions thereto: Section 35 of the Corporation Law in part provide: . . . cdll No shares of stock against wherein the corporation holds any unpaid claim shall be transferable on the books of the corporation. It may readily be noted that this section, unlike those of many states of the Union, makes stock against which a corporation holds any unpaid claim answerable for such a claim. It does not speak of debt or liability of stockholder. It is a further proof of the legislative intent that such unpaid claims for which the stock is answerable are no other than unpaid subscriptions due and payable. Being in derogation of the common law rule, the terms of a statute creating the lien must be clear and unequivocal. It is well settled that, in the absence of an express charter or statutory provision, or a valid by-law, or an agreement, a corporation has no lien upon the shares of stock for debts which may be due to it from the stockholders ;and a bona fide transfer of shares is therefore valid as against the corporation, where there is no provision or agreement for a lien, notwithstanding any claim it may have against the transferor, whether the claim is for a balance due on the stock, or for a loan or other indebtedness. This is true even when the transfer is to an officer of the corporation, if it is made in good faith, and the officer is guilty of no breach of trust. "The reason of the rule is that the common law will not tolerate secret trusts." (Fletcher, Cyc Corporation, Vol. XI, Sec. 5261, pp. 649-651) A lien upon stock in favor of corporations for debt or liability of stockholders other than unpaid subscriptions due and payable would be an obstacle to the trading of shares upon which many people depend for their credit. Before accepting a transfer of corporate shares, a prospective transferee would have to inquire into unregistered claims, equities or liens upon said shares in favor of the corporation. Such a situation should not be created if it could be avoided. Said decision only follows the general rule in American jurisprudence denying a corporation the right to dispose of shares of stock for delinquent assessments, unless there is an express grant to do so, either by the statute itself or by the charter of a corporation, to wit: The power to forfeit or sell the shares of stocks of a subscriber for delinquent assessment is NOT inherent in the corporation. The power cannot be implied from general provisions, nor is it included to the general powers of a corporation, but as a rule must come from a particular grant .(18 Am jur 2ed 880). LexLib Stockholders who have paid in full for their shares must not be called upon to pay an additional assessment unless the statute or the corporate charter authorizes an assessment upon fully paid stock. (Schutch v Fermers Union Milling & Grain Co 116 Neb 14). Assessments upon fully paid stock may be made and enforced if authority therefor is conferred either by the statute or by the terms of the stockholders contract with the corporation as set forth in the certificate of stock, provided of course the prescribed conditions exist and the assessment is levied in accordance with the terms of the statute or contract (22 CRA (NS) 1015). Although a company has under its charter power to assess fully paid up shares ,it can duly do so at a corporate meeting duly notified for the purpose. The general rule is well settled that an act of such importance cannot be done at a special corporate meeting unless the stockholders are duly notified of the purpose of the meeting so that they can attend and vote on the matter. (13 Am Jur 394-395) In the light of the foregoing, the Commission is constrained not to approve the Amended By-Laws unless subject corporation first amends its Articles of Incorporation under Section 16 of the Corporation Code of the Philippines to incorporate the amendments in question. The provision creating a lien upon shares of stock for the unpaid debts, liabilities, or assessments of stockholders to the corporation should be embodied in the charter itself, and not merely in the By-Laws, because the law prescribes that the shares of stock of a corporation may have such rights, preferences or restrictions as may be stated in the articles of incorporation. (Cf. Sec. 6). Evidently, the creation of lien is a restriction upon shares of stock and the same must therefore be stated in the articles of incorporation. Please be guided accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner