Fleischer v. Botica Nolasco
REITERATIONFacts
The Antecedents: Henry Fleischer (plaintiff) purchased five shares of stock from Manuel Gonzalez, the original owner, of Botica Nolasco, Inc. (defendant corporation). The shares were fully paid. Fleischer demanded that the corporation register the shares in his name, but the corporation refused. Procedural History: Fleischer filed a complaint praying for the registration of the shares and damages. The initial complaint against the board of directors was demurred to and dismissed, with leave to amend. An amended complaint was filed against Botica Nolasco, Inc. The corporation demurred again, arguing the complaint stated no cause of action and was ambiguous. This demurrer was overruled. The corporation answered, denying the allegations and asserting a special defense based on Article 12 of its by-laws, which granted the corporation a preferential right to buy the shares at par value plus dividends. The corporation claimed Fleischer refused this offer. The trial court ruled that Article 12 of the by-laws conflicted with Act No. 1459 (Corporation Law), specifically Section 35, and ordered the corporation to register the shares in Fleischer's name. The Petition: The defendant corporation appealed the decision, arguing that Article 12 of its by-laws was consistent with the Corporation Law.
Issue(s)
Whether Article 12 of the by-laws of Botica Nolasco, Inc., which grants the corporation a preferential right to buy its shares from a retiring shareholder, is in conflict with the provisions of the Corporation Law (Act No. 1459), particularly Section 35 thereof. Whether the by-law granting a preferential right of acquisition is binding upon a purchaser (appellee) who had no knowledge of it when the shares were assigned to him. Whether mandamus is the proper legal remedy to compel a corporation to transfer and register shares of stock on its books.
Ruling
The Supreme Court affirmed the decision of the lower court, ordering the defendant corporation to register the five shares of stock in the name of the plaintiff, Henry Fleischer. The Court held that Article 12 of the by-laws of Botica Nolasco, Inc., is invalid and ultra vires.
Ratio Decidendi
On Issue 1: Whether Article 12 of the by-laws of Botica Nolasco, Inc., which grants the corporation a preferential right to buy its shares from a retiring shareholder, is in conflict with the provisions of the Corporation Law (Act No. 1459), particularly Section 35 thereof. The Supreme Court held that Article 12 of the by-laws is ultra vires, violative of property rights, and in restraint of trade, as it conflicts with Section 35 of Act No. 1459. Section 13, paragraph 7, of Act No. 1459 empowers a corporation to make by-laws, but strictly mandates that they must "not inconsistent with any existing law." Section 35 specifically provides that shares of stock "are personal property and may be transferred by delivery of the certificate indorsed by the owner." This provision defines the nature and transferability of shares, contemplating no restriction as to whom they may be transferred or sold, nor suggesting that a corporation may create discrimination against a certain purchaser. The holder of shares, as owner of personal property, possesses an uncontrollable right to dispose of them, with no other limitation than the general provisions of law. Therefore, any by-law adopted by a corporation that restricts this fundamental right, such as by granting a preferential right of acquisition, goes beyond the limits fixed by law. The power to enact by-laws restraining the sale and transfer of stock must be explicitly conferred by the governing statute or the corporate charter, and without such express grant, a corporation cannot create such impediments. Such restrictions, unless derived from express legislative authority, are regarded as impositions in restraint of trade. On Issue 2: Whether the by-law granting a preferential right of acquisition is binding upon a purchaser (appellee) who had no knowledge of it when the shares were assigned to him. The Supreme Court ruled that the by-law in question cannot affect the appellee, Henry Fleischer, because he had no knowledge of such a by-law when the shares were assigned to him. Fleischer obtained the shares in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the original shareholder, Manuel Gonzalez, and Botica Nolasco, Inc. The Court emphasized that an unauthorized by-law, such as one forbidding a shareholder to sell shares without first offering them to the corporation for a specified period, is not binding upon an assignee of the stock as a personal contract, even if the assignor knew of the by-law and participated in its adoption. When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice. The assignment of shares of stock by one who assented to an unauthorized by-law only has the effect of a contract enforceable against the assignor; the assignee is not bound by such by-law solely by virtue of the assignment. On Issue 3: Whether mandamus is the proper legal remedy to compel a corporation to transfer and register shares of stock on its books. The Supreme Court confirmed that whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock upon the books of the corporation. This procedural remedy is well-established in jurisprudence, as supported by cases such as Hager v. Bryan, 19 Phil., 138. The defendant's incidental argument that the action should have been against the president and secretary rather than the corporation itself was dismissed by the Court. This particular contention was deemed belated, as it should have been raised in the lower court, and moreover, the corporation was made the defendant upon the original defendant's own demurrer in the lower court, which the Court ordered to be amended accordingly. The Court thus implicitly recognized that the corporation, through its appropriate officers, could be compelled by mandamus to perform the ministerial duty of registering a valid stock transfer.
Main Doctrine
A by-law of a corporation that grants the corporation a preferential right to buy its shares from a retiring shareholder, under the same conditions as a proposed sale to a third party, is invalid if such power is not expressly conferred by the governing statute or the corporation's charter. Such a by-law is considered ultra vires, violative of property rights, and in restraint of trade, unless statutory authority exists.