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On Failure to Deliver Stock Certificate and Rescission Under Article 1191 | FEGDI v. Vertex

Failure to deliver the stock certificates within a reasonable time from the point the shares should have been delivered is a substantial breach of contract that gives the purchaser the right to rescind the sale under Article 1191 of the Civil Code.

Fil-Estate Golf and Development, Inc. and Fil-Estate Land, Inc., Petitioners, vs.  Vertex Sales and Trading, Inc., Respondent | G.R. No. 202079


Fil-Estate Golf and Development, Inc. (FEGDI) is a stock corporation whose primary business is the development of golf courses. Fil-Estate Land, Inc. (FELI) is also a stock corporation, but is engaged in real estate development. FEGDI was the developer of the Forest Hills Golf and Country Club (Forest Hills) and, in consideration for its financing support and construction efforts, was issued several shares of stock of Forest Hills.

Sometime in August 1997, FEGDI sold, on installment, to RS Asuncion Construction Corporation (RSACC) one Class “C” Common Share of Forest Hills. Prior to the full payment of the purchase price, RSACC sold, on February 11, 1999, the Class “C” Common Share to respondent Vertex Sales and Trading, Inc. (Vertex). RSACC advised FEGDI of the sale to Vertex and FEGDI, in turn, instructed Forest Hills to recognize Vertex as a shareholder. For this reason, Vertex enjoyed membership privileges in Forest Hills.

Despite Vertex’s full payment, the share remained in the name of FEGDI. Seventeen (17) months after the sale (or on July 28, 2000), Vertex wrote FEDGI a letter demanding the issuance of a stock certificate in its name. FELI replied, initially requested Vertex to first pay the necessary fees for the transfer. Although Vertex complied with the request, no certificate was issued. This prompted Vertex to make a final demand on March 17, 2001. As the demand went unheeded, Vertex filed on January 7, 2002 a Complaint for Rescission with Damages and Attachment against FEGDI, FELI and Forest Hills. It averred that the petitioners defaulted in their obligation as sellers when they failed and refused to issue the stock certificate covering the subject share despite repeated demands. On the basis of its rights under Article 1191 of the Civil Code, Vertex prayed for the rescission of the sale and demanded the reimbursement of the amount it paid, plus interest. During the pendency of the rescission action (or on January 23, 2002), a certificate of stock was issued in Vertex’s name, but Vertex refused to accept it.


Whether or not the failure of FEGDI to deliver  the stock certificate gave Vertex  the right to rescind the sale under Article 1191 of the Civil Code.



Physical delivery of the stock certificate required for consummation of sale of shares of stock

The factual backdrop of this case is similar to that of Raquel-Santos v. Court of Appeals, where the Court held that in “a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for the transfer of ownership of the stocks purchased.

Sec. 63 of the Corporation Code provides:

SEC. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, 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 or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer.1âwphi1 No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

In this case, Vertex fully paid the purchase price by February 11, 1999 but the stock certificate was only delivered on January 23, 2002 after Vertex filed an action for rescission against FEGDI.

Failure to deliver the stock certificate within reasonable time is a substantial breach of contract

Under these facts, considered in relation to the governing law, FEGDI clearly failed to deliver the stock certificates, representing the shares of stock purchased by Vertex, within a reasonable time from the point the shares should have been delivered. This was a substantial breach of their contract that entitles Vertex the right to rescind the sale under Article 1191 of the Civil Code.

Rescission - Breach of Contract

Exercise of stockholder’s rights does not amount to consummation of sale

It is not entirely correct to say that a sale had already been consummated as Vertex already enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by its express terms, requires a specific form to transfer ownership.