G.R. No. 27872 , February 25, 1928
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. I. B. DEXTER, defendant-appellant.

DOCTRINE:
A stipulation in a stock subscription agreement that the subscription price is payable only from future dividends is illegal and void. Such an agreement contravenes the statutory prohibition against issuing stock except for actual cash or property at a fair valuation equal to the par value of the stock, as it constitutes a fraud against other stockholders and creditors by creating an unequal liability among subscribers and potentially decreasing the corporation’s capital.

FACTS

On August 10, 1919, I.B. Dexter signed a written subscription for 300 shares of capital stock in C.S. Salmon & Co. The subscription contained a unique stipulation: it was “payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid.” The par value of the shares was P100 each, for a total subscription price of P30,000. In January 1920, P15,000 was paid on this subscription, sourced from a dividend declared by the company and supplemented by Dexter’s personal funds. No further dividends were declared, and the remaining balance of P15,000 remained unpaid. The National Exchange Co., Inc., as assignee of the subscription claim, sued Dexter to recover this balance. The trial court ruled in favor of the plaintiff. Dexter appealed, arguing that the special terms of his subscription relieved him of personal liability for the unpaid balance.

ISSUE

Is the stipulation in the stock subscription agreementthat payment is to be made only from declared dividendsvalid and enforceable, thereby relieving the subscriber from personal liability for the unpaid balance of the subscription price?

RULING

No. The Supreme Court affirmed the trial court’s judgment, ordering Dexter to pay the balance of P15,000 with interest.

The Court held the stipulation was illegal and void. The ruling was based on two primary grounds:
1. Statutory Prohibition: Both the Philippine Organic Act (Act of Congress of July 1, 1902, Sec. 74) and the Corporation Law ( Act No. 1459 , Sec. 16, as amended) expressly forbid corporations from issuing stock “except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock.” A subscription payable only from dividends means the corporation receives nothing of present value equal to the par value of the shares at the time of issuance. This violates the clear mandate of the law.
2. Fraud on Other Stockholders and Creditors: Such a stipulation is a fraud against other subscribers and creditors. It grants one subscriber a preferential status by subjecting him to a lighter burden (payment only if dividends are declared), thereby creating an inequality in liability among stockholders. It also potentially decreases the company’s capital stock, to the detriment of creditors who rely on the capital as a fund for the payment of corporate debts. The Court cited established American jurisprudence (e.g., *Putnam v. New Albany Railroad Co.*) and Corpus Juris, which uniformly declare such agreements illegal as they defraud other stakeholders.

The Court rejected Dexter’s reliance on an Iowa case (*Bank v. Cook*) which suggested such agreements might be valid, noting that the cited headnote was an overstatement of the actual holding and, in any event, was inapplicable in a jurisdiction like the Philippines with an express statutory prohibition.

CONCLUSION: The appealed judgment was affirmed. Dexter remained personally liable for the full unpaid balance of his stock subscription, as the conditional payment clause was declared invalid.