HENRY FLEISCHER, PLAINTIFF AND APPELLEE, VS. BOTICA NOLASCO CO., INC., DEFENDANT AND APPELLANT.

This action was commenced in the Court of First Instance of the
Province of Oriental Negros on the 14th day of August, 1923, against
the board of directors of the Botica Nolasco, Inc., a corporation duly
organized and existing under the laws of the Philippine Islands. The
plaintiff prayed that said board of directors be ordered to register in
the books of the corporation five shares of its stock in the name of
Henry Fleischer, the plaintiff, and to pay him the sum of P500 for
damages sustained by him resulting from the refusal of said body to
register the shares of stock in question. The defendant filed a
demurrer on the ground that the facts alleged in the complaint did not
constitute sufficient cause of action, and that the action was not
brought against the proper party, which was the Botica Nolasco, Inc.
The demurrer was sustained, and the plaintiff was granted five days to
amend his complaint.

On November 15, 1923, the plaintiff
filed an amended complaint against the Botica Nolasco, Inc., alleging
that he became the owner of five shares of stock of said corporation,
by purchase from their original owner, one Manuel Gonzalez; that the
said shares were fully paid; and that the defendant refused to register
said shares in his name in the books of the corporation in spite of
repeated demands to that effect made by him upon said corporation,
which refusal caused him damages amounting to P500. Plaintiff prayed
for a judgment ordering the Botica Nolasco, Inc. to register in his
name in the books of the corporation the five shares of stock recorded
in said books in the name of Manuel Gonzalez, and to indemnify him in
the sum of P500 as damages, and to pay the costs. The defendant again
filed a demurrer on the ground that the amended complaint did not state
facts sufficient to constitute a cause of action, and that said amended
complaint was ambiguous, unintelligible, uncertain, which demurrer was
overruled by the court.

The defendant answered the amended
complaint denying generally and specifically each and every one of the
material allegations thereof, and, as a special defense, alleged that
the defendant, pursuant to article 12 of its by-laws, had preferential
right to buy from the plaintiff said shares at the par value of P100 a
share, plus P90 as dividends corresponding to the year 1922, and that
said offer was refused by the plaintiff. The defendant prayed for a
judgment absolving it from all liability under the complaint and
directing the plaintiff to deliver to the defendant the five shares of
stock in question, and to pay damages in the sum of P500, and the costs.

Upon the issue presented by the pleadings above stated, the cause was
brought on for trial, at the conclusion, of which, and on August 21,
1924, the Honorable N. Capistrano, judge, held that, in his opinion,
article 12 of the by-laws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in
conflict with Act No. 1459 (Corporation Law), especially with section
35 thereof; and rendered a judgment ordering the defendant corporation,
through its board of directors, to register in the books of said
corporation the said five shares of stock in the name of the plaintiff,
Henry Fleischer, as the shareholder or owner thereof, instead of the
original owner, Manuel Gonzalez, with costs against the defendant.

The defendant appealed from said judgment, and now makes several
assignments of error, all of which, in substance, raise the question
whether or not article 12 of the by-laws of the corporation is in
conflict with the provisions of the Corporation Law (Act No. 1459).

There is no controversy as to the facts of the present case. They are simple and may be stated as follows:

That
Manuel Gonzalez was the original owner of the five shares of stock in
question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that
on March 11, 1923, he assigned and delivered said five shares to the
plaintiff, Henry Fleischer, by accomplishing the form of endorsement
provided on the back thereof, together with other credits, in
consideration of a large sum of money owed by Gonzalez to Fleischer
(Exhibits A, B, B-l, B-2, B-3, B-4); that on March 13, 1923, Dr.
Eduardo Miciano, who was the secretary-treasurer of said corporation,
offered to buy from Henry Fleischer, on behalf of the corporation, said
shares of stock, at their par value of P100 a share, for P500; that by
virtue of article 12 of the by-laws of Botica Nolasco, Inc., said
corporation had the preferential right to buy from Manuel Gonzalez said
shares (Exhibit 2); that the plaintiff refused to sell them to the
defendant; that the plaintiff requested Doctor Miciano to register said
shares in his name; that Doctor Miciano refused to do so, saying that
it would be in contravention of the by-laws of the corporation.

It also appears from the record that on the 13th day of March, 1923,
two days after the assignment of the shares to the plaintiff, Manuel
Gonzalez made a written statement to the Botica Nolasco, Inc.,
requesting that the five shares of stock sold by him to Henry Fleischer
be not transferred to Fleischer’s name. He also acknowledged in said
written statement the preferential right of the corporation to buy said
five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to
the Botica Nolasco, withdrawing and cancelling his written statement of
March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on June
15, 1923, replied, declaring that his written statement was in
conformity with the by-laws of the corporation; that his letter of June
14th was of no effect, and that the shares in question had been
registered in the name of the Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is
whether or not article 12 of the by-laws of the Botica Nolasco, Inc.,
is in conflict with the provisions of the Corporation Law (Act No.
1459). Appellant invoked said article as its ground for denying the
request of the plaintiff that the shares in question be registered in
his (plaintiff’s) name, and for claiming that it (Botica Nolasco, Inc.)
had the preferential right to buy said shares from Gonzalez. Appellant
now contends that article 12 of the said by-laws is in conformity with
the provisions of Act No. 1459. Said article is as follows:

“Art.
12. Las acciones de la Corporacion pueden ser transferidas a otra
persona, pero para que estas transferencias tengan validez legal, deben
constar en los registros de la Corporacion con el debido endoso del
accionista a cuyo nombre se ha expedido la accion o acciones que se
transfieran, o un documento de transferencia. Entendiendose que, ningun accionista transferira accion alguna a otra persona sin participar antes por escrito al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de adquirir para si la accion o acciones que se traten de transferir.” (Exhibit 2.)

The above-quoted article constitutes a by-law or regulation adopted by
the Botica Nolasco, Inc., governing the transfer of shares of stock of
said corporation. The latter part of said article creates in favor of
the Botica Nolasco, Inc., a preferential right to buy, under the same
conditions, the share or shares of stock of a retiring shareholder. Has
said corporation any power, under the Corporation Law (Act. No. 1459),
to adopt such by-law?

The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:

“Sec. 13. Every corporation has the power:

* * * * * *

” (7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the number of its officers and directors within the limits prescribed by law, and for the transferring of its stock, the administration of its corporate affairs, etc.

* * * * * *

“Sec.
35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the
vice-president, countersigned by the secretary or clerk and sealed with
the seal of the corporation, shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. 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.

“No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.”

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock.
It follows from said provision, that a by-law adopted by a corporation
relating to transfer of stock should be in harmony with the law on the
subject of transfer of stock. The law on this subject is found in
section 35 of Act No. 1459 above quoted. Said section specifically
provides that the shares of stock “are personal property and may be transferred by delivery of the certificate indorsed by the owner,
etc.” Said section 35 defines the nature, character and transferability
of shares of stock. Under said section they are personal property and
may be transferred as therein provided. Said section contemplates no
restriction as to whom they may be transferred or sold. It does not
suggest that any discrimination may be created by the corporation in
favor or against a certain purchaser. The holder of shares, as owner of
personal property, is at liberty, under said section, to dispose of
them in. favor of whomsoever he pleases, without any other limitation
in this respect, than the general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer of shares of stock
should take into consideration the specific provisions of section 35 of
Act No. 1459, and said by-law should be made to harmonize with said
provisions. It should not be inconsistent therewith.

The
by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; but in adopting
said by-law the corporation has transcended the limits fixed by law in
the same section, and has not taken into consideration the provisions
of section 35 of Act No. 1459.

As a general rule, the
by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are
not contradictory to the general policy of the laws of the land.
(Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)

On the other hand, it is equally well settled that by-laws of a
corporation must be reasonable and for a corporate purpose, and always
within the charter limits. They must always be strictly subordinate to
the constitution and the general laws of the land. They must not
infringe the policy of the state, nor be hostile to public welfare. (46
Am. Rep., 332.) They must not disturb vested rights or impair the
obligation of a contract, take away or abridge the substantial rights
of stockholder or member, affect rights of property or create
obligations unknown to the law. (People’s Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)

The validity of the by-law of a corporation, is purely a question of law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)

“The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter.
Restrictions upon the traffic in stock must have their source in
legislative enactment, as the corporation itself cannot create such
impediments. By-laws are intended merely for the protection of the
corporation, and prescribe regulation and not restriction; they are
always subject to the charter of the corporation. The corporation, in
the absence of such a power, cannot ordinarily inquire into or pass
upon the legality of the transaction by which its stock passes from one
person to another, nor can it question the consideration upon which a
sale is based. A by-law cannot take away or abridge the substantial
rights of stockholder. Under a statute authorizing by-laws for the
transfer of stock, a corporation can do no more than prescribe a
general mode of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale.” (4 Thompson on Corporations, sec. 4137, p. 674.)

“The right of unrestrained transfer of shares inheres in the very nature of a corporation,
and courts will carefully scrutinize any attempt to impose restrictions
or limitations upon the right of stockholders to sell and assign their
stock. The right to impose any restraint in this respect must be
conferred upon the corporation either by the governing statute or by
the articles of the corporation. It cannot be done by a by-law without
statutory or charter authority.” (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)

“The jus disponendi,
being an incident of the ownership of property, the general rule
(subject to exceptions hereafter pointed out and discussed) is that every
owner of corporate shares has the same uncontrollable right to alien
them which attaches to the ownership of any other species of property.
A shareholder is under no obligation to refrain from selling his shares
at the sacrifice of his personal interest, in order to secure the
welfare of the corporation, or to enable another shareholder to make
gains and profits.” (10 Cyc., p. 577.)

“It follows from the foregoing that a corporation
has no power to prevent or to restrain transfers of its shares, unless
such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws
or other regulations restraining such transfers, unless derived from
authority expressly granted by the legislature would be regarded as
impositions in restraint of trade.” (10 Cyc., p. 578.)

The
foregoing authorities go farther than the stand we are taking on this
question. They hold that the power of a corporation to enact by-laws
restraining the sale and transfer of shares, should not only be in
harmony with the law or charter of the corporation, but such power
should be expressly granted in said law or charter.

The only
restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: “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.” This restriction is necessary in order that the officers
of the corporation may know who are the stockholders, which is
essential in conducting elections of officers, in. calling meetings of
stockholders, and for other purposes. 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.

And moreover, the by-law now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said
by-law between the shareholder Manuel Gonzalez and the Botica Nolasco,
Inc. Said by-law cannot operate to defeat his rights as a purchaser.

“An
unauthorized by-law forbidding a shareholder to sell his shares without
first offering them to the corporation for a period of thirty days is
not binding upon an assignee of the stock as a personal contract,
although his assignor knew of the by-law and took part in its
adoption.” (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R. I., 9.)

“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.” (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

“The
assignment of shares of stock in a corporation by one who has assented
to an unauthorized by-law has only the effect of a contract by, and
enforceable against, the assignor; the assignee is not bound by such
by-law by virtue of the assignment alone.” (Ireland vs. Globe Milling Co., 21 R. I., 9.)

“A
by-law of a corporation which provides that transfers of stock shall
not be valid unless approved by the board of directors, while it may be
enforced as a reasonable regulation for the protection of the
corporation against worthless stockholders, cannot be made available to
defeat the rights of third persons.” (Farmers’ & Merchants’ Bank of
Lineville vs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the
plaintiff does not have any right of action against the defendant
corporation, but against the president and secretary thereof, inasmuch
as the signing and registration of shares is incumbent upon said
officers pursuant to section 35 of the Corporation Law. This contention
cannot be sustained now. The question should have been raised in the
lower court. It is too late to raise it now in this appeal. Besides, as
stated above, the corporation was made defendant in this action upon
the demurrer of the attorney of the original defendant in the lower
court, who contended that the Botica Nolasco, Inc., should be made the
party defendant in this action. Accordingly, upon order of the court,
the complaint was amended and the said corporation was made the party
defendant.

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. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)

In view of all the foregoing, we are of the opinion, and so hold, that
the decision of the lower court is in accordance with law and should be
and is hereby affirmed, with costs. So ordered.

Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.