Mere evidence

In corporate by-laws, there is usually a provision that if a stockholder decides to sell his stock, he must first offer it to the corporation which has a preemptive right to buy it before offering it to others. But if the stock certificate has not yet been issued, can a stockholder already offer his share for sale to the corporation so that it can exercise its preemptive right? This is one of the questions resolved in this case.

The case involved the membership shares of one of the high class sports club in the country (MSCI). On October 20, 1994, its Board of Directors adopted a resolution authorizing the sale of 19 unissued shares at a floor price of P400,000 and P450,000 per share for Class A and B respectively.

On July 7, 1995, Mr. Harold wrote MSCI membership committee expressing his interest to buy a class “A” share and requested that his name be included in the waiting list. Nothing was heard from the membership committee about its action on this letter. It only appeared that Miriam who was the head of the MSCI membership section informed Cely its Treasurer about Mr. Harold’s intention to buy a share and that Cely asked for Mr. Harold’s telephone number. Cely on the other hand admitted that she indeed called the wife of Mr. Harold sometime in October 1995 and assured her that that there was already an available share for P2.8 million.

At about this time or in November 1995, McF, another interested buyer also expressed its interest in acquiring a share of MSCI and was negotiating for its purchase at P1.8 million. While the sale between McF and MSCI was still under negotiation, Mr. Harold was likewise negotiating with McF to purchase the MSCI share to be acquired by McF. He offered to buy said share for a price of P2.8 million. In fact on November 24, 1995, Mr. Harold already made a down payment of P1.4 million to McF.

Hence on November 28, 1995 McF already paid MSCI P1.8 million for one class A share. Then on December 5, 1995, the Deed of Absolute Sale was executed by MSCI and McF. Subsequently on December 27, 1995, Mr. Harold completed the payment of P2.8 million to McF by paying the balance of P1.4 million. On the same date, McF in turn sent a letter to MSCI offering to resell its share for P2.8 million for the latter to exercise its preemptive right pursuant to the by-laws.

In the meantime, on January 5, 1996, Stock Certificate A 2243 was already issued in the name of McF for one MSCI share pursuant to the Deed of Sale dated December 5, 1995. Then on January 29, 1996, or 32 days after MSCI was notified by McF to exercise its pre-emptive right, and MSCI had not exercised it, McF and Mr. Harold already executed a Deed of Absolute Sale of said share of stock. Thereafter on February 7, 1996, MSCI was advised of said sale so a new Certificate was issued to Mr. Harold.

After investigating the transaction, and finding that fraud was committed by Cely and McF who allegedly confabulated with one another, MSCI sued Cely and McF to recover P1 million representing the amount allegedly defrauded, with interest and damages. MSCI contended among others that the notice given by McF on December 27, 1995 for it to exercise its preemptive right was premature since the stock certificate was issued only on January 5, 1996. Was MSCI correct?

No. When McF offered to resell one class “A” share of stock to MSCI for the price of P2.8 million so that the latter can exercise its pre-emptive right as required by its by-laws, McF legally had the right to do so since it was already an owner of a Class “A” share by virtue of the payment on November 28, 1995 and the Deed of Absolute Sale dated December 15, 1995 notwithstanding the fact that the stock certificate was issued only on January 5, 1996. A certificate of stock is merely evidence of the holder’s interest and status in the corporation representing his ownership of the share. It is not equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but not essential to the existence of a share of stock or the nature of the relation of the stockholder to the corporation.

Therefore McF properly complied with the requirement of the by-laws on MSCI’s pre-emptive rights. Without doubt MSCI failed to repurchase McF’s Class “A” share within 30 days pre-emptive period. It was only on January 29, 1996 when McF and Mr. Harold executed the Deed of Sale, or 32 days after McF notified MSCI to exercise its pre-emptive rights. While Mr. Harold had the right to demand immediate execution of the Deed upon full payment of the price, he did not do so precisely because he wanted McF to first comply with the pre-emptive requirement as set forth in the By-laws (Makati Sports Club vs. Cheng et. al., G.R. 178523, June 16, 2010)

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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