Salido vs. Aramaywan Metals Development Corporation

A corporation cannot validly reduce a stockholder's fully paid shares or convert them into treasury shares without unrestricted retained earnings sufficient to cover the reacquisition, and such reduction cannot be effected merely by board resolution or stockholder agreement without complying with the statutory formalities for capital stock reduction under Section 38 of the Corporation Code and the procedural requirements for delinquency sales under Sections 67 and 68.

The case arose from an Agreement to Incorporate between Cerlito San Juan (financier), Ernesto Mangune (technical officer), and Agapito Salido, Jr. and his faction (mining site operators) to form Aramaywan Metals Development Corporation and Narra Mining Corporation. Under the Agreement, San Juan advanced P2.5 million for paid-up subscriptions in exchange for 55% ownership of Aramaywan, while the Salido faction secured mining permits. After incorporation, disputes arose regarding San Juan's compliance with funding obligations, leading to a factional split between the San Juan and Salido groups over corporate control and the validity of board resolutions affecting share classification and corporate governance.

• The Agreement to Incorporate stipulated that San Juan would advance P2,500,000.00 for Aramaywan's paid-up subscription and assure payment for Narra Mining Corporation, entitling him to 55% of Aramaywan shares (13,750 shares) divided among himself, his wife Corazon, and daughter Cristina Marie.
• Aramaywan was incorporated with nine directors: the San Juan faction (San Juan as Chairman/Treasurer, Corazon, and Cristina Marie) holding 55% collectively, versus the Salido faction (Salido as President, Mangune as Corporate Secretary, and others) holding 35%.
• San Juan deposited P2,500,000.00 in Standard Chartered Bank in his name as treasurer-in-trust for Aramaywan, evidenced by a bank certificate stating the deposit was free from restriction and could be withdrawn upon proof of incorporation.
• The Articles of Incorporation reflected P2,500,000.00 as paid-up capital, and the SEC issued a certificate of incorporation on September 9, 2005.
• During a November 25-26, 2005 meeting, the Salido faction claimed San Juan only delivered P932,209.16 and proposed reducing his shares to 15%; the minutes reflected disagreement on whether San Juan consented to this reduction.
• On February 5, 2006, the Salido faction held a special meeting (through Atty. Roland Pay as claimed corporate secretary) passing Resolution No. 01-2006 reducing San Juan's shares to 15%, Resolution No. 03-2006 cancelling shares of Corazon and Cristina Marie, Resolution No. 02-2006 changing the corporate address from Taguig to Palawan, and other resolutions regarding Narra Mining and corporate officers.
• Both factions submitted conflicting General Information Sheets to the SEC, leading to the institutionalization of the intra-corporate dispute.
• The RTC ruled in favor of the Salido faction, validating the share reduction as a conversion to treasury shares supported by consideration (termination of San Juan's alleged unpaid obligations amounting to P1,567,790.84 and his failure to incorporate Narra Mining).
• The CA initially affirmed but reversed in an Amended Decision dated January 31, 2017, holding the reduction invalid due to lack of unrestricted retained earnings and absence of consideration.

• Salido argued that San Juan voluntarily agreed to the reduction of his shares during the November 25-26, 2005 meeting, rendering the reduction valid and binding as a corporate act.
• He contended that the reduction was supported by adequate consideration, namely the termination of San Juan's obligation to pay the remaining balance of P1,567,790.84 allegedly still owed to the corporation and his failure to incorporate Narra Mining Corporation.
• He asserted that the reduced shares were validly converted into treasury shares under Section 9 of the Corporation Code, citing Alfonso S. Tan v. SEC as precedent for the validity of such conversions.
• He maintained that the RTC correctly found that San Juan's shares were converted to treasury shares in exchange for releasing him from his funding obligations, constituting a lawful reacquisition.

• The San Juan faction argued that San Juan never consented to the reduction of his shares, and the minutes of the meeting did not reflect such agreement but rather showed continued disagreement.
• They contended that San Juan had fully paid his subscription of P2,500,000.00 as evidenced by the bank certificate and the Articles of Incorporation, leaving no unpaid balance that could serve as consideration for reduction.
• They argued that the purported conversion to treasury shares violated Section 41 of the Corporation Code because Aramaywan had no unrestricted retained earnings to purchase the shares, and the Trust Fund Doctrine prohibited the reduction of capital without statutory formalities.
• They invoked the separation of legal title and equitable ownership in trust relationships, asserting that the deposit in San Juan's name was held in trust for the corporation, making the funds corporate property from inception.

• Procedural Issues:
  • Whether a petition for review under Rule 45 may raise questions of fact regarding whether San Juan consented to the reduction of his shares.
• Substantive Issues:
  • Whether the reduction of San Juan's shares from 55% to 15% was valid absent compliance with Section 38 of the Corporation Code regarding reduction of capital stock.
  • Whether the conversion of the reduced shares into treasury shares was valid under Sections 9 and 41 of the Corporation Code without unrestricted retained earnings.
  • Whether the board resolutions passed during the February 5, 2006 special meeting were validly adopted, particularly regarding the change of corporate address.

• Procedural:
  • The Court held that under Rule 45, only questions of law may be raised, and the petition should have been dismissed because Salido raised questions of fact regarding San Juan's consent to the reduction and failed to attach material portions of the record supporting his allegations. However, in the interest of substantial justice, the Court proceeded to resolve the substantive issues.
• Substantive:
  • The reduction of San Juan's shares was invalid. The Court held that San Juan had fully paid his subscription of P2,500,000.00, as evidenced by the bank deposit held in trust for the corporation and the Articles of Incorporation. A corporation cannot reduce fully paid shares without returning the investment or having unrestricted retained earnings to purchase them.
  • The conversion to treasury shares was invalid. Under Section 9 of the Corporation Code, treasury shares must be "issued and fully paid for, but subsequently reacquired." Section 41 requires unrestricted retained earnings to cover shares to be purchased. Aramaywan, being newly incorporated and without mining operations, had no unrestricted retained earnings. The Trust Fund Doctrine prohibits the reduction of capital stock without statutory formalities, as capital constitutes a trust fund for creditors.
  • The agreement to reduce shares lacked consideration. Since San Juan had no unpaid subscription obligation to Aramaywan (having fully advanced the P2.5 million), and his obligation regarding Narra Mining was separate and not yet demanded, there was no valid consideration to support the reduction contract under Article 1352 of the Civil Code.
  • Resolution No. 02-2006 (transfer of principal place of business) was invalid because changing the corporate address requires amendment of the Articles of Incorporation under Section 16, requiring approval by 2/3 of outstanding capital stock and SEC approval, which was not obtained from San Juan who remained a majority stockholder.
  • Resolutions Nos. 04-2006, 06-2006, and 07-2006 were valid as they involved ordinary business affairs requiring only a majority of the quorum (5 of 9 directors present, approved by majority), and the by-laws allowed special meetings called by the majority of directors.

• Trust Fund Doctrine — The capital stock, property, and assets of a corporation are regarded as a trust fund for the payment of corporate creditors. No part of the subscribed capital may be returned or released to stockholders (except in the redemption of redeemable shares) without violating this principle. The doctrine prohibits the condonation of subscription commitments or the purchase of own shares using subscribed capital as consideration, ensuring that creditors may look to the capital stock for satisfaction of claims.
• Classification of Shares: Treasury Shares — Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or other lawful means. A corporation may only acquire its own shares if it has unrestricted retained earnings sufficient to cover the purchase, and in cases of unpaid subscriptions, only through the delinquency sale procedure under Sections 67 and 68 of the Corporation Code. Shares cannot be classified as treasury shares if they were never validly reacquired through lawful means supported by sufficient retained earnings.
• Consideration in Corporate Contracts — Under Article 1352 of the Civil Code, contracts without cause or consideration produce no effect. A purported agreement to reduce shares lacks validity if the stockholder has no outstanding obligation to the corporation that could serve as consideration for the reduction.

• "The 'Trust Fund' doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle."
• "A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation."
• "Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means."
• "The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares."

• Philippine Trust Co. v. Rivera, 44 Phil. 469 (1923) — Cited for the principle that a corporation has no power to release subscribers from payment obligations without valuable consideration and statutory compliance, and that capital constitutes a fund for creditor satisfaction.
• NTC v. Court of Appeals, G.R. No. 127937, July 28, 1999 — Cited for the definition of capital as a trust fund and the prohibition against returning subscribed capital to stockholders without compliance with statutory requirements.
• Turner v. Lorenzo Shipping Corp., 650 Phil. 372 (2010) — Cited for the application of the Trust Fund Doctrine and the requirement that no distribution of assets may impair subscribed capital.
• Alfonso S. Tan v. Securities and Exchange Commission, G.R. No. 95696, March 3, 1992 — Distinguished by the RTC; the Supreme Court noted that this case involved an exchange of shares for stocks-in-trade (valid consideration), unlike the present case where San Juan had no unpaid obligation to serve as consideration.
• Cañezo v. Rojas, 563 Phil. 551 (2007) — Cited for the definition of trust relations and the separation of legal title (trustee) and equitable ownership (beneficiary) regarding the bank deposit held by San Juan in trust for Aramaywan.

• Section 9 of the Corporation Code (Batas Pambansa Blg. 68) — Defines treasury shares as shares issued and fully paid for but subsequently reacquired by the corporation through lawful means.
• Section 41 of the Corporation Code — Requires corporations to have unrestricted retained earnings to cover shares to be purchased or acquired, and limits acquisition to specific purposes including delinquency sales.
• Section 38 of the Corporation Code — Governs the reduction of capital stock, requiring majority board vote, written assent of 2/3 of outstanding capital stock, and SEC approval.
• Section 25 of the Corporation Code — Defines quorum for board meetings as majority of the number of directors fixed in the articles, and validates decisions by majority of directors present at a meeting with quorum.
• Section 16 of the Corporation Code — Requires majority board vote and written assent of stockholders representing at least 2/3 of outstanding capital stock for amendments to articles of incorporation.
• Sections 67 and 68 of the Corporation Code — Govern the procedure for demanding payment of unpaid subscriptions and the delinquency sale process for reacquiring shares.
• Article 1352 of the Civil Code — Provides that contracts without cause or consideration produce no effect.