Mr. Reynaldo Mendoza

January 14, 1980 Mr. Reynaldo Mendoza Trident Stevedoring Corporation Muelle Tacoma, Port Area Manila Dear Mr. Mendoza: This has reference to your letter dated August 31, 1979 requesting opinion on the queries posed therein. prcd It appears from your letter that a stockholder of Trident Stevedoring Corporation sold by indorsement 150 shares of stock at a par value of P100.00 each to an alleged domestic corporation, the Galaxy Services, Inc. The Vice-Chairman of vendee-corporation surrendered the shares in question and requested the corporate secretary of Trident Stevedoring Corporation to issue the corresponding certificates of stock in its favor. You therefore pose the following queries: "1. Can we issue the shares of stock to the Galaxy Services, Inc. without inquiring whether it is really organized and incorporated under Philippine Laws? 2. Do we have to look into the Articles of Incorporation of the Galaxy Services, Inc. whether it has the power to buy stocks of other corporations? 3. Is there a need of a resolution approved by the Board of Directors of the Galaxy Services, Inc.,authorizing the purchase of shares of stock of the Trident Stevedoring Corporation from a stockholder thereof? 4. Is there any requirement or prerequisite that has to be complied with before the Trident Stevedoring Corporation certificate of stocks can be issued to the Galaxy Services, Inc.? At this juncture, please be informed that the pertinent provision of the Corporation Law (Act 1459, as amended) states as follows: "SECTION 35 ...Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed 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 entered and noted upon the books of the corporation so as to show the names of the parties to the transfer, the date of transfer, the number of the certificate and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferred on the books of the corporation." While Section 35 does not state any restriction as to whom the shares may be transferred, such that the same may be sold or conveyed upon proper indorsement by the holder, and the corporate secretary may not validly refuse to register transfer of shares unless the corporation holds an unpaid claim on the shares, however, we cannot deny the fact that every person dealing with a corporation is bound to take notice of the extent of its powers and the purposes of its incorporation: "...A person dealing with a corporation which is formed under general laws is bound to take notice of the documents recorded or filed upon which, as authorized and controlled by the general laws, depend the existence of the corporation, the extent of its corporate powers, and its capacity to act as a corporation ...." (19 Am. Jr. 2d, 437-438). Moreover, this Commission is cognizant of the prevailing rule that a corporation cannot subscribe for or purchase stock in another corporation. The rationale is that such a transaction is generally foreign to the objects of its creation. A corporation therefore, may take and hold stock in another corporation only whenever it is expressly authorized to do so: "If a corporation has authority to purchase shares in another corporation and does so, the other corporation cannot refuse to recognize the transfer. In such a case, the rights of the transferee are the same as if it were a natural person. But if a corporation makes an ultra vires purchase of stock in another corporation, it cannot compel the latter to transfer the stock to it on its books, so as to entitle it to vote its stock at corporate meetings. (12 Fletcher, Cyc. Corps. Sec. 1465) In view of the foregoing, we suggest that you inquire first if the vendee is a duly registered corporation or if it is authorized by its charter to invest in another corporation or if its Board of Directors is likewise authorized by the stockholders to purchase shares of stock in another corporation, pursuant to Section 17-1/2 of the Corporation Law. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Director Corporate and Legal Department