l. Transfer of Shares

Right of first refusal

The right of first refusal provides that a stockholder who may wish to sell or assign his shares must first offer the shares to the corporation or to the existing stockholders of the corporation, under terms and conditions which are reasonable; and that only when the corporation or the other stockholders do not or fail to exercise their option, is the offering stockholder at liberty to dispose of his shares to third parties.

Note:

A corporation has no power to prevent or restrain transfers of its shares, unless such power is expressly conferred in the Articles of Incorporation or the law. (Fleischer v. Botica Nolasco Co., Inc., G.R. No. 23241, 14 March 1925)¹

An unauthorized by-law restriction on share transfers cannot defeat the rights of a purchaser without notice; a by-law alone does not make such a restriction binding on third persons. (Fleischer v. Botica Nolasco Co., Inc.)

By-laws are intended merely for the protection of the corporation and prescribe relation, not restriction; they are always subject to the charter of the corporation. (Rural Bank of Salinas, Inc. v. Court of Appeals*, G.R. No. 96674, 26 June 1992)²

Requirements for valid transfer of stocks

• For certificated shares, there must be delivery of the stock certificate. Transfers of uncertificated securities may instead be effected by appropriate book entries under Section 43 of the Securities Regulation Code;
• The certificate must be endorsed by the owner, or his attorney-in-fact, or other persons legally authorized to make the transfer; and
• To be valid against third parties, the transfer must be recorded in the books of the corporation

Note: The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. (Bitong v. Court of Appeals, G.R. No. 123553, 13 July 1998)³

The delivery contemplated in Section 62 of the Revised Corporation Code (formerly Section 63 of the Corporation Code)⁴, however, pertains to the delivery of the certificate of shares by the transferor to the transferee, that is, from the original stockholder named in the certificate to the person or entity the stockholder was transferring the shares to, whether by sale or some other valid form of absolute conveyance of ownership. It does not pertain to the surrender of the stock certificate to the corporation. (Teng v. Securities and Exchange Commission, G.R. No. 184332, 17 February 2016)⁵

However: The surrender of the original certificate of stock is necessary before the issuance of a new one so that the old certificate may be cancelled. A corporation is not bound and cannot be required to issue a new certificate unless the original certificate is produced and surrendered. (Teng v. Securities and Exchange Commission)

A transfer of shares not recorded in the stock and transfer book is non- existent as far as the corporation is concerned, and consequently, a petition for mandamus filed by a transferee, compelling it to issue the corresponding certificates in the name of the transferee would be without basis. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligations on the part of the corporation to recognize such right as it is mandated by law to recognize arises (Ponce v. Alsons Cement Corporation, G.R. No. 139802, 10 December 2002)⁶.

Note: In Andaya v. Rural Bank of Cabadbaran, Inc., G.R. No. 188769, 3 August 2016⁷, the Court ruled that the registration of a transfer of shares of stock is a ministerial duty on the part of the corporation. Under Rule 65, Section 3, mandamus may compel registration when the transferee establishes a clear legal right, the corporation unlawfully refuses to perform that duty, and there is no other plain, speedy and adequate remedy. Issuance of a new certificate is a distinct matter requiring its own legal prerequisites. This remedy is available even upon the instance of a bona fide transferee who is able to establish a clear legal right to the registration of the transfer.

Derivative Suit/Intra-Corporate Suit

Transfers of Uncertificated Securities; How Made

Valid as between parties - validly made and consummated by appropriate book-entries in the securities intermediaries, or in the stock and transfer book held by the corporation or the stock transfer agent.

A transfer made pursuant to the foregoing has the effect of delivery of a security in bearer form or duly indorsed in blank representing the amount of security or right transferred, including the unrestricted negotiability of that security by reason of such delivery.

Valid as to corporation – when the transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the number of shares transferred [Sec. 43.3, Securities Regulation Code]⁸.