Tan vs. Securities and Exchange Commission

A stock certificate is not essential to stockholder status, and endorsement of a cancelled certificate is unnecessary where the transfer has been recorded in the corporate stock and transfer book and the transferee has exercised stockholder rights; the conversion of shares into treasury stock pursuant to a valid exchange is valid and lawful. The SEC is not empowered to award damages, other than fine and imprisonment under Section 56 of the Corporation Code.

Visayan Educational Supply Corporation was registered on October 1, 1979. Alfonso S. Tan was an incorporator holding 400 shares at P100.00 par value under Stock Certificate No. 2, and he served as president until 1982 and as director until April 19, 1983. The dispute implicated Section 63 of the Corporation Code (Batas Pambansa Blg. 68), which governs certificates of stock and transfer of shares, and the SEC's jurisdiction over intracorporate controversies. The other incorporators included Antonia Y. Young and Teresita Y. Ong, whose later withdrawal from the corporation formed part of the corporate restructuring.

Visayan Educational Supply Corporation was registered on October 1, 1979. Alfonso S. Tan was an incorporator with 400 shares at P100.00 par value, evidenced by Stock Certificate No. 2. He was elected president and reelected, serving until 1982, but remained a director until April 19, 1983.

On January 31, 1981, while Alfonso was president, incorporators Antonia Y. Young and Teresita Y. Ong assigned to the corporation their shares under Stock Certificates Nos. 4 and 5, and were paid the corresponding 40% corporate stock-in-trade. Alfonso's Stock Certificate No. 2 was cancelled by the corporate secretary and respondent Patricia Aguilar pursuant to Resolution No. 1981(b), which was passed while Alfonso was still a director. To complete the five-member board after the withdrawals, Alfonso sold 50 of his 400 shares to his brother Angel S. Tan, and incorporator Alfredo B. Uy sold 50 of his 400 shares to Teodora S. Tan. The new stockholders attended a special meeting; Angel Tan was elected director, and the minutes were filed with the SEC on March 27, 1981. These facts were unchallenged.

As a result of the sale of 50 shares to Angel S. Tan, Stock Certificate No. 2 was cancelled and replaced by Stock Certificate No. 6 for 50 shares in Angel's name and Stock Certificate No. 8 for the remaining 350 shares in Alfonso's name. The replacement certificates were signed by Angel S. Tan as vice-president upon Alfonso's instruction. Mr. Buzon later alleged in an affidavit that, after taking a 33 1/3 interest, he was asked by Tan Su Ching to request Alfonso to endorse the cancelled Stock Certificate No. 2 and Stock Certificate No. 8; Alfonso did not endorse, kept the cancelled 1981 Stock Certificate No. 2, and returned only Stock Certificate No. 8, which Buzon delivered to Tan Su Ching. Buzon also stated that Alfonso knew of the cancellation in 1981 and that Stock Certificate No. 8 was delivered in March 1983 for endorsement and cancellation. Atty. Ramirez prepared a Memorandum of Agreement covering the 50-share transaction, but Alfonso did not return it.

On January 29, 1983, at the annual meeting, Tan Su Ching was elected president and Alfonso was elected vice-president; Alfonso did not sign the minutes, which were submitted to the SEC on March 30, 1983. After being dislodged as president, Alfonso withdrew from the corporation on February 27, 1983, on condition that he be paid stocks-in-trade equivalent to 33.3% in lieu of the stock value of his shares in the amount of P35,000.00. After the stocks were withdrawn, the board met on April 19, 1983 and effected the cancellation of Stock Certificate Nos. 2 and 8 in the corporate stock and transfer book; the minutes were submitted to the SEC on May 18, 1983. Five years and nine months after the transfer of 50 shares to Angel S. Tan, and three years and seven months after the transfer of Stock Certificate Nos. 2 and 8 was recorded in the stock and transfer book, Alfonso filed SEC Case No. C-0096 on December 3, 1983, questioning for the first time the cancellation of Stock Certificates Nos. 2 and 8.

The Court found that Stock Certificate No. 2 was delivered to the corporation before its replacement. The problem arose when the cancelled certificate was returned to Alfonso for endorsement and he withheld it. The split was evidenced by Alfonso's surrender of Stock Certificate No. 8 in exchange for P2,000,000.00 worth of stocks-in-trade, approved by board resolution on April 19, 1983, even though the shares had a par value of only P35,000.00. Alfonso operated his own enterprise in the same business and padlocked the corporation's warehouse after withdrawing the 33 1/3% stocks. The remaining inventory was valued at P7,454,189.05, of which 66 2/3% belonged to private respondents. The Court found Alfonso devised a scheme to withhold the cancelled certificate and skim corporate assets, and used it to renege on a P1,000,000.00 indebtedness to Tan Su Ching. Alfonso claimed he was responsible for the corporation's growth, citing incomes from 1980 to 1984, and asserted he was ousted because he tried to establish fiscal controls and demand an accounting of funds allegedly diverted to private respondents' personal accounts.

• Due Process and Mandatory Nature of Section 63: Petitioner maintained that deprivation of his shares despite non-endorsement or surrender of Stock Certificate Nos. 2 and 8 was without due process and contrary to Section 63 of the Corporation Code, which requires that no transfer be valid, except between the parties, until recorded in the corporate books. He argued that Section 63 is mandatory, so without actual delivery and endorsement of the certificate, no transfer could occur or any transfer was null and void.
• Unlawful Cancellation and Transfer: Petitioner claimed that the cancellation and transfer of his shares and Stock Certificate No. 2, as well as the issuance and cancellation of Stock Certificate No. 8, were patently and palpably unlawful, null and void, invalid, and fraudulent.
• Mode of Transfer: Citing Nava vs. Peers Marketing Corporation, petitioner argued that shares are personal property transferable by delivery of the certificate indorsed by the owner or authorized attorney-in-fact, and that the mode of transfer prescribed by law must be complied with.
• Corporate Growth and Ouster: Petitioner asserted that he was responsible for the corporation's growth and prosperity, citing audited financial statements and gross incomes from 1980 to 1984, and that he was ousted because he sought to establish fiscal controls and demand an accounting of corporate funds allegedly transferred and diverted to private respondents' personal accounts and misapplied, misappropriated, and converted for their benefit.

• Validity of Cancellation and Split: Whether the board resolution cancelling Stock Certificate No. 2 and splitting it into Stock Certificate No. 6 for Angel S. Tan and Stock Certificate No. 8 for Alfonso S. Tan was valid.
• Necessity of Endorsement: Whether the transfer and cancellation were invalid because Alfonso did not endorse or surrender the cancelled Stock Certificate No. 2.
• Validity of Conversion of 350 Shares: Whether the sale/exchange of the 350 shares represented by Stock Certificate No. 8 and their conversion into treasury shares was valid and lawful, or whether the in pari delicto doctrine required their nullification.
• Reinstatement of Original 400 Shares: Whether the hearing officer's order reinstating Alfonso's original 400 shares should be upheld.
• SEC Power to Award Damages: Whether the SEC may award damages claimed by petitioner.
• Mandatory Nature of Section 63: Whether Section 63 of the Corporation Code is mandatory such that non-endorsement of the stock certificate renders the transfer null and void.

• Validity of Cancellation and Split: Yes. The cancellation of Stock Certificate No. 2 and its split into Stock Certificates Nos. 6 and 8 were valid, the transfer having been recorded in the corporate stock and transfer book and the transferee having exercised stockholder rights.
• Necessity of Endorsement: No. Endorsement of the cancelled Stock Certificate No. 2 was unnecessary because it had already been cancelled and the cancellation reported to the SEC; a stock certificate is not essential to stockholder status.
• Validity of Conversion of 350 Shares: Yes. The conversion of the 350 shares into treasury stocks after petitioner exchanged them for P2,000,000.00 worth of stocks-in-trade was valid and lawful; the SEC's in pari delicto ruling was not accepted.
• Reinstatement of Original 400 Shares: No. The hearing officer's order reinstating the original 400 shares was revoked; the sale of 50 shares under Stock Certificate No. 6 was valid and the conversion of the 350 shares under Stock Certificate No. 8 was lawful.
• SEC Power to Award Damages: No. The SEC is not empowered to award damages, other than the imposition of fine and imprisonment under Section 56 of the Corporation Code.
• Mandatory Nature of Section 63: No. The word "may" in Section 63 is permissive, not mandatory; non-endorsement of the cancelled certificate did not invalidate the transfer.

• Validity of Cancellation and Split: Section 63 provides that shares of stock are personal property and may be transferred by delivery of the certificate indorsed by the owner or authorized person, and that no transfer is valid, except between the parties, until recorded in the corporate books. The Court found that Stock Certificate No. 2 was delivered to the corporation before its replacement. The transfer was recorded in the corporate stock and transfer book, and Angel S. Tan, as transferee of 50 shares, exercised stockholder rights and was elected director with Alfonso's knowledge and acquiescence. A certificate of stock is not necessary to render one a stockholder; it is merely evidence of the holder's interest and is not the equivalent of ownership. The corporation was protected from other parties because the transfer was registered. Thus, the board resolution cancelling No. 2 and issuing Nos. 6 and 8 was valid.
• Necessity of Endorsement: The problem arose when the cancelled Stock Certificate No. 2 was returned to Alfonso for endorsement and he withheld it. Since the certificate had already been cancelled and the cancellation reported to the SEC, there was no necessity for endorsement. The word "may" in Section 63 is permissive, not mandatory, as held in Shauf vs. Court of Appeals, Legaspi vs. Estrella, and Chua vs. Samahang Magsasaka. To accept petitioner's argument would impose restrictions on the transfer of stock in violation of the corporation law. The power to regulate under Section 47(s) is not the power to prohibit or impose unreasonable restrictions, as held in Fleisher vs. Botica Nolasco Co., Inc.
• Validity of Conversion of 350 Shares: The Court rejected the SEC's application of the in pari delicto doctrine to nullify the sale of the 350 shares. The conversion of the 350 shares with a par value of P35,000.00 at P100.00 per share into treasury stocks, after petitioner exchanged them for P2,000,000.00 worth of stocks-in-trade, was valid and lawful. Petitioner had surrendered Stock Certificate No. 8 in exchange for the goods, operated a competing enterprise, and padlocked the corporation's warehouse; the exchange was approved by board resolution. The Court found petitioner devised a scheme to withhold the cancelled certificate and skim corporate assets. Thus, the sale/exchange and conversion were upheld.
• Reinstatement of Original 400 Shares: The hearing officer's order to reinstate the original 400 shares was revoked. The sale of 50 shares represented by Stock Certificate No. 6 was valid, and the sale of 350 shares represented by Stock Certificate No. 8 was not nullified under in pari delicto because the conversion into treasury stocks was valid and lawful. Therefore, reinstatement of the original 400 shares was not warranted.
• SEC Power to Award Damages: The respondent Commission is not empowered to award damages claimed by petitioner, other than the imposition of fine and imprisonment under Section 56 of the Corporation Code, as amended. The Court affirmed the SEC order on this point.
• Mandatory Nature of Section 63: The term "may" as used in Section 63 is permissive and not mandatory. The provision does not require endorsement of a cancelled certificate as a condition for the validity of an already recorded transfer. The Court cited Shauf vs. Court of Appeals, Legaspi vs. Estrella, and Chua vs. Samahang Magsasaka. Thus, petitioner's mandatory interpretation was rejected.

• Stock Certificate as Evidence, Not Ownership — A certificate of stock is not necessary to render one a stockholder; it is the paper representative or tangible evidence of the stock and the holder's interest, but is not in law the equivalent of ownership. It expresses the contract between the corporation and stockholder but is not essential to the existence of a share or the shareholder relation. Applied: Angel S. Tan's status as transferee and director was upheld despite non-endorsement of the cancelled mother certificate.
• Transfer of Shares Under Section 63 — Shares of stock are personal property and may be transferred by delivery of the certificate indorsed by the owner or authorized person; no transfer is valid, except between the parties, until recorded in the corporate stock and transfer book. Applied: delivery of Stock Certificate No. 2 and recording of the transfer validated the cancellation and split; endorsement of the cancelled certificate was unnecessary.
• Permissive "May" — The word "may" is permissive, not mandatory. Applied: Section 63's use of "may" did not require actual endorsement of the cancelled certificate for the transfer to be valid.
• Power to Regulate Is Not Power to Prohibit — A corporation's authority under Section 47(s) to determine in its by-laws the manner of issuing certificates does not include the power to prohibit or impose unreasonable restrictions on the stockholder's right to transfer shares. Applied: petitioner's interpretation would have imposed an invalid restriction.
• In Pari Delicto — The SEC invoked the in pari delicto doctrine and Article 1412(1) of the Civil Code to order that neither party may recover. The Supreme Court did not accept that ruling and instead held the conversion of the 350 shares into treasury stocks valid and lawful.
• SEC's Limited Power to Award Damages — The SEC is not empowered to award damages other than the imposition of fine and imprisonment under Section 56 of the Corporation Code. Applied: petitioner's damages claim could not be granted by the SEC.
• Stock Certificates Are Non-Negotiable — Although sometimes regarded as quasi-negotiable because transferable by endorsement and delivery, a stock certificate is non-negotiable; the holder takes it subject to rights or defenses of the registered owner or transferor's creditors, except under estoppel principles. Applied: supports that the certificate is not equivalent to ownership.

• "A certificate of stock is not necessary to render one a stockholder in corporation." — This states the ratio that stockholder status does not depend on possession or endorsement of the certificate, supporting the validity of the transfer despite petitioner's withholding of the cancelled certificate.
• "For all intents and purposes, however, since this was already cancelled which cancellation was also reported to the respondent Commission, there was no necessity for the same certificate to be endorsed by the petitioner." — This is the decisive holding on non-endorsement: because the certificate was cancelled and reported, no endorsement was required.
• "The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership." — This defines the nature of a stock certificate and is central to the Court's rejection of petitioner's claim that non-endorsement invalidated the transfer.
• "The court holds that the conversion of the 350 shares with a par value of only P35,000.00 at P100.00 per share into treasury stocks after petitioner exchanged them with P2,000,000.00 worth of stocks-in-trade of the corporation, is valid and lawful." — This is the dispositive modification, upholding the conversion and rejecting the SEC's in pari delicto nullification.

• Nava vs. Peers Marketing Corporation, 74 SCRA 65 — Cited by petitioner for the mode of transfer of stock certificates; the Court did not adopt petitioner's reliance on it to invalidate the transfer.
• Shauf vs. Court of Appeals, 191 SCRA 713 (1990) — Cited by the Court for the rule that remedial law statutes are construed liberally and that "may" is permissive, not mandatory.
• Legaspi vs. Estrella, 189 SCRA 58 (1990) — Cited for the meaning of "may" as an auxiliary verb showing opportunity or possibility, supporting the permissive interpretation of Section 63.
• Chua vs. Samahang Magsasaka, 62 Phil. 472 — Cited for the rule that the word "may" indicates that transfer may be effected in a manner different from that provided by law.
• Tuazon vs. La Provisora Filipina, 67 Phil. 36 — Cited for the rule that delivery of the certificate is not essential where the persons sought to be held as stockholders are officers of the corporation and have custody of the stock book.
• De los Santos vs. McGrath, 96 Phil. 577 — Cited for the rule that a certificate of stock is not a negotiable instrument, although sometimes regarded as quasi-negotiable.
• Fleisher vs. Botica Nolasco Co., Inc., 47 Phil. 583 — Cited for the rule that a by-law prohibiting transfer of stock without consent or approval of all stockholders, president, or board is illegal as an undue limitation on ownership and restraint of trade.
• C. N. Hodges vs. Lezama, 14 SCRA 1032 — Cited by petitioner but distinguished; the Court explained that the unendorsed certificate there was declared null and void because the parties intended Hodges to remain the owner until full payment, a circumstance absent here.

• Section 63, Corporation Code (Batas Pambansa Blg. 68) — Provides that shares of stock are personal property and may be transferred by delivery of the certificate indorsed by the owner or authorized person; no transfer is valid, except between the parties, until recorded in the corporate books. Applied to validate the transfer and cancellation despite non-endorsement of the cancelled certificate.
• Article 1412(1), Civil Code — The in pari delicto provision invoked by the SEC to bar recovery; the Court did not accept its application to nullify the sale of the 350 shares.
• Section 56, Corporation Code — Limits the SEC's power to impose fine and imprisonment; it does not empower the SEC to award damages. Applied to deny petitioner's damages claim.
• Section 47(s), Corporation Code — Grants stock corporations authority to determine in their by-laws the manner of issuing certificates of stock; the Court held this power to regulate is not the power to prohibit or impose unreasonable restrictions on transfer. Applied against petitioner's mandatory interpretation.

Melencio-Herrera, Padilla, Regalado, and Nocon, JJ., concurred.