023 - Fleischer v Botica Nolasco.doc

CORPO - 023 Fleischer v Botica Nolasco Co. Inc. A by-law of a corporation which provides that transfers of stock shall not be valid without board approval cannot defeat the rights of third persons. Facts: 1. Manuel Gonzales assigned his 5 shares of Botica Nolasco stock to Fleischer in consideration of a debt he owed to the latter. Gonzales requested Botica Nolasco to transfer the shares to Fleischer’s name. 2. The treasurer of Botica Nolasco offered to buy the shares from Fleischer for P100 each (total P500). Fleischer refused the offer. 3. Fleischer filed an action for mandamus against the board of directors of Botica Nolasco. 4. Fleischer wanted Botica Nolasco to a. Register in its books 5 shares of stock under his name b. Pay him the sum of P500 for damages 5. Botica Nolasco refused to accede to Fleischer’s demands pursuant to article 12 of its bylaws (“preferential right to buy shares from retiring stockholders”). a. According to article 12, it had the preferential right to buy the shares from Fleischer at the par value of P100 per share, with P90 as dividends, and that Fleischer refused the offer 6. The lower court ruled that article 12 was in conflict with the provisions of the Corporation Law a. Article 12 creates in favor of Botica Nolasco a preferential right to buy the shares of a retiring shareholder (in this case, Botica Nolasco has a preferential right to buy Gonzales’ shares over Fleischer.) Issue/s: 1. Is article 12 in conflict with the Corporation Law? YES Held/Ratio: 1. By-law article 12 is in conflict with the Corporation Law because it is a restraint of trade not contemplated by Sec 35 of the Corporation Law. While it was validly created under the provisions of Sec 13(7), it is not in harmony with Sec 35. 2. Moreover, Fleischer had no knowledge of article 12 when Gonzales assigned the shares to him. He was not a privy to the contract and obtained the shares in good faith and for valuable consideration. 3. According to Sec 13(7) and Sec 35 of the Corporation Law, by-laws relating to transfer of stock should be in harmony with the law on the subject of transfer of stock. a. 13(7) SEC. 13. Every corporation has the power: (7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the number of its officers and directors within the limits prescribed by law, and for the transferring of its stock, the administration of its corporate affairs, etc. b. 35

SEC. 35. The capital stock of stock corporations shall de divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. 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 transaction, that date of the transfer, the number of the certificate, and the number of shares transferred.

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No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation. Sec 35 provides no restriction as to whom shares may be transferred or sold. The shareholder, as owner of shares, which are personal property, is free to dispose of them in favor of any one. The only restraint in Sec 35 is that the transfer will only be valid if it is entered and noted upon the books of the corporation. In this case, article 12 was consistent with 13(7) but not with 35. By-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation and are not contradictory to the laws of the land. a. By-laws are subordinate to the constitution and the laws of the land. b. They should not infringe state policy or be hostile to public welfare. c. They cannot disturb vested rights or impair the obligation of a contract d. They cannot take away or abridge the rights of stockholders or members, affect property rights, or create obligations unknown to law A corporation cannot prevent or restrain transfers of its shares unless it is expressly authorized in its charter or governing statute. a. WHY? By-laws or other regulations restraining transfers are regarded as impositions in restraint of trade A by-law of a corporation which provides that transfers of stock shall not be valid without board approval cannot defeat the rights of third persons.

Digested by: Dee (A2015)