Padgett vs. Babcock & Templeton, Inc.

A “nontransferable” restriction on corporate stock certificates is null and void as an unreasonable limitation on the owner’s property right and a restraint of trade, but absent an express or implied contract or statutory provision, a corporation cannot be compelled to repurchase a stockholder’s shares at par value.

Cyrus Padgett was an employee of Babcock & Templeton, Inc. from January 1, 1923, to April 15, 1929, and became a stockholder by purchasing shares at the suggestion of the corporation’s president and by receiving bonus shares. The certificates issued to him bore the word “nontransferable,” and the Corporation Law, Act No. 1459, governed transfers of corporate stock by requiring entry and notation on the corporate books. The legal backdrop included Section 35 of Act No. 1459, which regulated transfers of shares.

Cyrus Padgett was an employee of Babcock & Templeton, Inc. and rendered services from January 1, 1923, to April 15, 1929. During that period, at the suggestion of the corporation’s president, he bought 35 shares at P100 per share. He also received 9 shares as a bonus during Christmas seasons. He thus became the owner of 44 shares, for which 12 certificates, Exhibits F to F-11, were issued in his favor. Each certificate bore the word “nontransferable.”

Before severing his connection with the corporation, Padgett proposed to the president that the corporation buy his 44 shares at par value plus interest, or that he be authorized to sell them to other persons. The corporation had bought similar shares belonging to other employees at par value. Sometime later, the president offered to buy Padgett’s shares first at P85 each and then at P80. Padgett did not agree.

The defendants admitted that the 44 shares had become Padgett’s property. They also granted that under the law Padgett had the right to have the “nontransferable” restriction on the 12 certificates eliminated. They contended, however, that no existing law or authority bound them to redeem or buy the shares at par value. Their admission was limited to the proposition that after the restriction was eliminated, Padgett could sell the shares to anybody at their market value or at any price he saw fit.

• No Duty to Repurchase at Par: Defendants-appellants Babcock & Templeton, Inc. and W.R. Babcock, as the parties seeking reversal, admitted that the 44 shares belonged to Padgett and that the “nontransferable” restriction should be eliminated, but maintained that no existing law or authority obliged them to redeem or buy the shares at par value. They argued that their only obligation was to allow Padgett, after removal of the restriction, to sell the shares to anyone at market value or at any price he chose.
• Absence of Contract: They contended that there was no express or implied contract between Padgett and them requiring repurchase at par value plus interest.

• Validity of “Nontransferable” Restriction: Whether the word “nontransferable” appearing on the 12 stock certificates issued to Padgett is a valid restriction on his right to dispose of his shares.
• Obligation to Repurchase at Par Value: Whether Babcock & Templeton, Inc. and W.R. Babcock may be compelled to buy Padgett’s 44 shares at par value plus interest in the absence of an express or implied contract or legal provision.

• Validity of “Nontransferable” Restriction: No. The restriction is null and void as an unreasonable limitation on the right of ownership and a restraint of trade; the certificates must be cancelled and replaced without restriction.
• Obligation to Repurchase at Par Value: No. No express or implied contract or legal provision obliged defendants to repurchase the shares at par value plus interest.

• Validity of “Nontransferable” Restriction: Shares of corporate stock are regarded as property, and the owner may dispose of them as he sees fit unless the corporation has been dissolved, the right to dispose has been properly restricted, or the owner’s privilege has been hampered by his own action. Any restriction on a stockholder’s right to dispose of shares must be construed strictly, and any attempt to restrain a transfer is regarded as being in restraint of trade, absent a valid lien, except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled or restrained from exercising his right to transfer by the corporation, its officers, or other stockholders, even if the sale is to a competitor, an insolvent person, or one purchaser of a controlling interest. The only statutory restraint under Section 35 of Act No. 1459 is that no transfer shall be valid, except as between the parties, until entered and noted upon the corporate books to show the names of the parties, the date of transfer, the certificate number, and the number of shares transferred; this is necessary so that officers may know who the stockholders are. In Fleischer vs. Botica Nolasco Co., a by-law restriction prohibiting a stockholder from selling shares except to the corporation was held ultra vires, violative of the property rights of shareholders, and in restraint of trade. The “nontransferable” notation is therefore illegal and should be eliminated.
• Obligation to Repurchase at Par Value: No existing law or authority supports Padgett’s claim that the defendants are obliged to buy his shares at par value plus interest. There was no express or implied contract between Padgett and the defendants. In the absence of a contractual obligation and of a legal provision applicable thereto, it would be unjust and unreasonable to compel the defendants to comply with a non-existent or imaginary obligation. The judgment originally rendered to that effect was untenable and was set aside.

• Corporate stock as property and the right of alienation — Shares of corporate stock are regarded as property; the owner may dispose of them as he sees fit unless the corporation has been dissolved, the right is properly restricted, or the owner’s privilege has been hampered by his own action. The Court applied this to hold that Padgett could not be bound by the “nontransferable” notation.
• Strict construction of restrictions on stock transfers — Any restriction on a stockholder’s right to dispose of shares must be construed strictly. Any attempt to restrain transfer is regarded as in restraint of trade absent a valid lien, except to the extent valid restrictive regulations and agreements exist and are applicable. The Court applied this to invalidate the “nontransferable” restriction.
• Restraint of trade and ultra vires restrictions — A restriction on transfer of shares, such as a by-law requiring sale only to the corporation, is ultra vires, violative of property rights, and in restraint of trade. The Court applied Fleischer vs. Botica Nolasco Co. to declare the “nontransferable” word null and void.
• No obligation to repurchase shares at par absent contract or law — A corporation cannot be compelled to redeem or buy a stockholder’s shares at par value plus interest unless there is an express or implied contract or a legal provision imposing that obligation. The Court found neither, so it reversed the judgment compelling repurchase.

• “However, the opinion seems to be unanimous that a restriction imposed upon a certificate of shares, similar to the ones under consideration, is null and void on the ground that it constitutes and unreasonable limitation of the right of ownership and is in restraint of trade.” — The Court states the general rule invalidating restrictions like “nontransferable” on stock certificates.
• “Any restriction on a stockholder's right to dispose of his shares must be construed strictly; and any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable.” — The Court articulates the strict-construction rule and restraint-of-trade principle governing stock transfer restrictions.
• “But any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.” — Quoting Fleischer vs. Botica Nolasco Co., the Court explains why restrictions beyond the statutory recording requirement are invalid.
• “In the absence of a similar contractual obligation and of a legal provision applicable thereto, it is logical to conclude that it would be unjust and unreasonable to compel the said defendants to comply with a non-existent or imaginary obligation.” — The Court refuses to compel repurchase at par value absent contract or law.

• Fleischer vs. Botica Nolasco Co., 47 Phil. 583 — The Court relied on this precedent to hold that a restriction on a stockholder’s right to sell shares except to the corporation is ultra vires, violative of property rights, and in restraint of trade; it supplied the basis for invalidating the “nontransferable” notation.

• Section 35, Act No. 1459 (Corporation Law) — The Court quoted this provision: “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, the date of the transfer, the number of the certificate, and the number of shares transferred.” It explained that this is the only statutory restraint on transfer of shares and is necessary for corporate purposes, but it does not authorize a “nontransferable” restriction; hence the restriction was invalid.

Malcolm, Villa-Real, Abad Santos, and Hull, JJ., concur.