Puno, Puno & Carlos Law Offices

October 13, 1987 Puno, Puno & Carlos Law Offices 5th Flr., Hongkong Bank Centre San Miguel Avenue, Pasig Metro Manila Gentlemen : This refers to your letter, dated October 7, 1987, requesting the opinion of this Commission on the queries posed therein. prcd The facts presented in your letter appear as follows: Your client, the Centro Escolar University is a corporation duly organized and existing under and by virtue of the laws of the Philippines. Sometime in 1940's, the CEU Sorority, a student organization formed for the purpose of undertaking various school projects, invested in shares of stock of Centro Escolar University with an original subscription of thirty (30) shares. The said CEU Sorority, however, had no legal personality as it was not registered with any government offices. Corresponding stock certificates were issued for the subscribed shares, except for two (2) shares in view of a corresponding balance in the subscription payment to the University in the amount of P150.00 which still appears outstanding as of this date. In 1973, the University declared a stock dividend equivalent to 4,800% which was used as payment for subscription to the increase of its authorized capital stock. In this connection, you alleged that CEU Sorority subscribed to 1,440 shares (4,800% x 30 shares). However, there were no stock certificates issued for the 1,440 shares. Corresponding stock certificates were however issued for subsequent stock dividends. As of this date, therefore, a total of 4,890 shares is registered in the name of the CEU Sorority. All stock certificates issued in the name of the Sorority have not been claimed by anybody and are still on file in the University. You alleged further that CEU Sorority has ceased to function a long time ago. A thorough research in the records of the University for the membership of the CEU Sorority to determine ownership of its shares yielded negative results. There was not even a record as to who placed its subscription for thirty shares. In all the annual meetings of the stockholders of the University from 1975 to date, the shareholdings of the Sorority were never represented. As of this date, the ownership of the shareholdings of the CEU Sorority in the University has not been established for lack of sufficient proofs in support of the same. Hence, your queries are: 1. In view of the fact that ownership of the shareholdings of the CEU Sorority in Centro Escolar University can no longer be determined, would it be possible to revert ownership of the same to the University? 2. If the answer to Question No. 1 is in the affirmative, what are the steps to be taken by the University to revert ownership of the aforementioned shares back to the University? 3. If the shares are reverted back to the University, what would be the classification of said shares? Would they be classified as treasury stocks or retired shares of stock? In either case, how would the reverted shares affect the paid-up capital of the University? In relation to your queries, Article 46 of the New Civil Code declares that "Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions in conformity with the laws and regulations of their organization". By implication, an association which does not have a juridical personality can neither acquire the legal attribute of possessing property, real or personal, nor incurring liabilities thereon. Article 416 of the Civil Code expressly classifies shares of stock as personal property. The relation of stockholders to corporation is governed by contract, and the general rules of contracts apply with respect to the formation of that relation by means of subscription to capital stock. (13 Am. Jur. 224). Corollary thereto, Article 1403 of the Civil Code reads thus: "ARTICLE 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers. xxx xxx xxx Another form of unenforceable contract is found in Article 1317 of the Civil Code which provides as follows: "ARTICLE 1317. No one may contract in the name of another without being authorized by the latter or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party." Unenforceable contracts cannot be sued upon or enforced unless ratified, hence, said contracts have no effect yet. (Paras, Civil Code of the Philippines, Annotated, Vol. IV, 1963 ed., p. 517). Mere lapse of time, no matter how long, cannot ratify unenforceable contracts. (Tipton v. Velasco, G.R. No. 2220. April 4, 1906, 6 Phil. 67, cited in Paras, Supra., p. 518). The subscription contract entered into by the members of the CEU Sorority is construed to fall within the context of unenforceable contract. As to the proper action available to the corporation, the following authorities are appropriate: "If certificates of stock are issued illegally . . . and circumstances are such that they are either void or voidable, the corporation may cancel them. (11 Fletcher, Cyc. Corp., 1986 Rev. Vol., sec. 5166). "Certificates may be cancelled where the stock represented was issued through a mistake of fact or pursuant to a void contract". (Fletcher, Supra., p. 336). "If the officers of a corporation fraudulently or wrongfully issue fictitious or illegal certificates of stock, the corporation . . . may maintain a suit in equity to cancel the certificates and enjoin their transfer, or the voting by the holders, or the payment of dividends on the shares". (Fletcher, sec. 5175, at 368). In view thereof, it is advised that the University may proceed to revoke the subscription contract entered with CEU Sorority. Thereafter, the University may repurchase said shares out of its unrestricted retained earnings, and thus treat them as acquired treasury shares. Considering that the identities of the members of the CEU Sorority cannot as yet be ascertained, payment to the reacquired shares may be credited to the Liability Account of the corporation. This course of action is suggested so as not to create any disturbance to the paid-up capitalization of the corporation. In this case, however, the corporation is not entitled to restitution insofar as the dividends declared on the treasury shares are concerned, for it is a well-settled rule in corporation law that treasury shares are not entitled to any dividend rights. Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman