MY CASE DIGEST UPDATED CASES IN CORPORATION LAW Atty. Gaviola AY 2016 - 2017 by: glargo
Halley v. Printwell, Inc., G.R. No. 157549, [May 30, 2011], 664 PHIL 361-389 Stockholders of a corporation are liable for the debts of the corporation up to the extent of their unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield from liability, because the veil may be lifted to avoid defrauding corporate creditors. The petitioner was an incorporator and original director of Business Media Philippines, Inc. (BMPI). Printwell engaged in commercial and industrial printing. BMPI commissioned Printwell for the printing of the magazine Philippines, Inc. BMPI placed with Printwell several orders on credit. Considering that BMPI paid only P25,000.00, Printwell sued BMPI for the collection of the unpaid balance of P291,342.76 in the RTC. Printwell amended the complaint in order to implead as defendants all the original stockholders and incorporators to recover on their unpaid subscriptions. ISSUE: WON the petitioner is liable to Printwell from its unpaid subscription? RULING: YES. The petitioner was liable pursuant to the trust fund doctrine for the corporate obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as BMPI's creditor, had a right to reach her unpaid subscription in satisfaction of its claim. In Philippine Trust Co. v. Rivera, where this Court declared that: It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. ANALYSIS: TRUST FUND DOCTRINE 1 of 26
CONCEPT: Trust fund doctrine enunciates a —. . . rule that the property of a corporation is a trust fund for the payment of creditors, but such property can be called a trust fund 'only by way of analogy or metaphor.' As between the corporation itself and its creditors it is a simple debtor, and as between its creditors and stockholders its assets are in equity a fund for the payment of its debts. SCOPE: Trust fund doctrine is not limited to reaching the stockholder's unpaid subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. All assets and property belonging to the corporation held in trust for the beneUit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim. RELEASE OF LIABILITY: Also, under the trust fund doctrine, a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its debt. To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the stockholders have not in good faith paid the par value of the stocks of the corporation. Teng v. Securities and Exchange Commission, G.R. No. 184332, [February 17, 2016] Herein respondent Ting Ping purchased:
- 480 shares of TCL Sales Corporation (TCL) - 1,400 shares from his brother Teng Ching Lay (Teng Ching), who was also the president and operations manager of TCL; and
- 1,440 shares from Ismaelita Maluto. Upon Teng Ching's death, to protect his shareholdings with TCL, Ting Ping requested TCL's Corporate Secretary, herein petitioner Teng, to enter the transfer in the Stock and Transfer Book of TCL for the proper recording of his acquisition. He also demanded the issuance of new certiaicates of stock in his favor. TCL and Teng, however, refused despite repeated demands. Because of their refusal, Ting Ping Uiled a petition for mandamus. ISSUE: Whether the surrender of the certiUicates of stock is a requisite before registration of the transfer may be made in the corporate books AND for the issuance of new certiUicates in its stead. 2 of 26
RULING: For Registration, NO; For Issuance, YES On registration: Teng's position — that Ting Ping must airst surrender Chiu's and Maluto's respective certiaicates of stock before the transfer to Ting Ping may be registered in the books of the corporation — does not have legal basis. The delivery or surrender adverted to by Teng, i.e., from Ting Ping to TCL, is not a requisite before the conveyance may be recorded in its books. To compel Ting Ping to deliver to the corporation the certiUicates as a condition for the registration of the transfer would amount to a restriction on the right of Ting Ping to have the stocks transferred to his name, which is not sanctioned by law. The only limitation imposed by Section 63 is when the corporation holds any unpaid claim against the shares intended to be transferred. The Court stressed that a corporation, either by its board, its by-laws, or the act of its ofaicers, CANNOT create restrictions in stock transfers. In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the question of ownership. On issuance of new certi7icates: In Bitong v. CA, the Court outlined the procedure for the issuance of new certiUicates of stock in the name of a transferee: First, the certiUicates must be signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. . . . Second, delivery of the certiUicate is an essential element of its issuance. . . . Third, the par value, as to par value shares, or the full subscription as to no par value shares, must Uirst be fully paid. Fourth, the original certiaicate must be surrendered where the person requesting the issuance of a certiaicate is a transferee from a stockholder. The surrender of the original certiaicate of stock is necessary before the issuance of a new one so that the old certiUicate may be cancelled. A corporation is not bound and cannot be required to issue a new certiUicate unless the original certiUicate is produced and surrendered. Surrender and cancellation of the old certiUicates serve to protect not only the corporation but the legitimate shareholder and the public as well, as it ensures that there is only one document covering a particular share of stock. ANALYSIS: Reasons why registration of the transfer is necessary: 1. To enable the transferee to exercise all the rights of a stockholder; 3 of 26
2. To inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder; and 3. To avoid Uictitious or fraudulent transfers, among others. F & S Velasco Co., Inc. v. Madrid, G.R. No. 208844, [November 10, 2015]) All transfers of shares of stock must be registered in the corporate books in order to be binding on the corporation. F & S Velasco Co., Inc. was duly organized and registered as a corporation with Francisco O. Velasco (Francisco), Simona J. Velasco (Simona), Angela V. Madrid (Angela), herein respondent Dr. Rommel L. Madrid (Madrid), and petitioner Saturnino O. Velasco (Saturnino) as its incorporators. When Sps. Simona and Francisco died on June 12, 1998 and June 22, 1999, respectively, their daughter, Angela, inherited their shares, thereby giving her control of 70.82% of FSVCI's total shares of stock. On September 20, 2009 and during her tenure as Chairman of the Board of Directors of FSVCI (the other members of the Board of Directors being Madrid, Scribner, Seva, and Sunico), Angela died intestate and without issue. On October 8, 2009, MADRID, as Angela's spouse, executed an Afaidavit of Self-Adjudication covering the latter's estate which includes her 70.82% ownership of FSVCI's shares of stock. Believing that he is already the controlling stockholder of FSVCI by virtue of such selfadjudication, Madrid called for a Special Stockholders' and Re-Organizational Meeting to be held on November 18, 2009. On November 10, 2009 and in preparation for said meeting, Madrid executed separate deeds of assignment transferring one share each to Vitaliano B. Ricafort and to respondents Peter Paul L. Danao (Danao), Maureen R. Labalan (Labalan), and Manuel L. Arimado (Arimado; collectively, MADRID GROUP). Meanwhile, another meeting was held on November 6, 2009 which was attended by Saturnino, Seva, and Sunico (November 6, 2009 Meeting), during which, Saturnino was recognized as a member of the FSVCI Board of Directors and thereafter, as FSVCI President, while Scribner was elected FSVCI Vice-President (SATURNINO GROUP). In view of the November 18, 2009 Meeting, the Saturnino Group Uiled a petition for Declaration of Nullity of Corporate Election against the Madrid Group before the RTC. ISSUES: (a) WON November 18, 2009 Meeting organized by Madrid is legal and valid; and
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(b) WON a Management Committee should be appointed or constituted to take over the corporate and business affairs of FSVCI. RULING: (a) NO. At the time Madrid called for the November 18, 2009 Meeting, as well as the actual conduct thereof, he was already the owner of 74.98% shares of stock of FSVCI as a result of his inheritance of Angela's 70.82% ownership thereof. However, records are bereft of any showing that the transfer of Angela's shares of stock to Madrid had been registered in FSVCI's Stock and Transfer Book when he made such call and when the November 18, 2009 Meeting was held. The Court is constrained to view that Madrid is indeed Angela's sole heir and her death caused the immediate transfer of her properties, including her 70.82% ownership of FSVCI's shares of stock, to Madrid. Be that as it may, it must be clariUied that Madrid's inheritance of Angela's shares of stock does not ipso facto afford him the rights accorded to such majority ownership of FSVCI's shares of stock. Section 63 of the Corporation Code xxx 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 certiaicate or certiaicates and the number of shares transferred. Verily, all transfers of shares of stock must be registered in the corporate books in order to be binding on the corporation. (b) NO Absent any actual evidence from the records showing such imminent danger, the CA's Uindings have no legal or factual basis to support the appointment/constitution of a Management Committee for FSVCI. The creation and appointment of a management committee . . . is an extraordinary and drastic remedy to be exercised with care and caution; and only when the requirements under the Interim Rules [of Procedure Governing Intra-Corporate Controversies] are shown. It is a drastic course for the beneUit of the minority stockholders, the parties-litigants or the general public [and is] allowed only under pressing circumstances and when there is inadequacy, ineffectual or exhaustion of legal or other remedies. Requisites: (1) Dissipation, loss, wastage or destruction of assets or other properties; and (2) Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, parties-litigants or the general public. 5 of 26
PRINCIPLES/ANALYSIS: On General Information Sheet: While it may be true that petitioners were named as shareholders in the General Information Sheet submitted to the SEC, that document alone does not conclusively prove that they are shareholders of PFSC. The information in the document will still have to be correlated with the corporate books of PFSC. As between the General Information Sheet and the corporate books, it is the latter that is controlling. Mere inclusion in the General Information Sheets as stockholders and ofUicers does not make one a stockholder of a corporation, for this may have come to pass by mistake, expediency or negligence. As professed by respondent-appellee, this was done merely to comply with the reportorial requirements with the SEC. Y-I Leisure Phils., Inc. v. Yu G.R. No. 207161 , [September 8, 2015] Business-Enterprise Transfer: Given that the transferee corporation acquired not only the assets but also the business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the former. FACTS: Respondent Yu bought several golf and country club shares from MADCI. Regrettably, the latter did not develop the supposed project. Yu then demanded the return of his payment, but MADCI could not return it anymore because all its assets had been transferred. Through the acts of YIL, MADCI sold all its lands to YILPI and, subsequently to YICRI. Thus, Yu now claims that the petitioners inherited the obligations of MADCI. On the other hand, the petitioners counter that they did not assume such liabilities because the transfer of assets was not committed in fraud of the MADCI's creditors.
ISSUE: A. Whether fraud must exist in the transfer of all the corporate assets in order for the transferee to assume the liabilities of the transferor. B. Whether the petitioners indeed became a continuation of MADCI's business. C. Whether the petitioners must also be held solidarily liable to Yu. 6 of 26
D. WON MOA, which contains a provision that Sangil undertook to redeem MADCI proprietary shares sold to third persons or settle in full all their claims for refund of payments, valid? RULING: a. NO, fraud is not required in Business-Transfer Enterprise. The exception of the Nell doctrine(see discussion below), which Uinds its legal basis under Section 40, provides that the transferee corporation assumes the debts and liabilities of the transferor corporation because it is merely a continuation of the latter's business. A cursory reading of the exception shows that it does not require the existence of fraud against the creditors before it takes full force and effect. Indeed, under the Nell Doctrine, the transferee corporation may inherit the liabilities of the transferor despite the lack of fraud due to the continuity of the latter's business. In Caltex Philippines, Inc. v. PNOC Shipping and Transport Corporation(2006): The Court emphasizes in the said case, even without the agreement, PSTC was still liable to Caltex, Inc. under Section 40, due to the transfer of all or substantially all of the corporate assets. At best, transfers of all or substantially all of the assets to a transferee corporation without the consent of the transferor corporation's creditor gives rise to a presumption of fraud against the said creditors. The transfer of all its business, properties and assets without the consent of its creditors must certainly include the liabilities; or else, the assignment will place the assignor's assets beyond the reach of its creditors. I b. YES The business-enterprise transfer rule applies when two requisites concur: (a) the transferor corporation sells all or substantially all of its assets to another entity; and (b) the transferee corporation continues the business of the transferor corporation. Both requisites are present in this case. MADCI had an entire asset consisting of 120 hectares of land, and that its sale to the petitioners rendered it incapable of continuing its intended golf and country club business. Because of its alleged violation of the MOA, however, MADCI was made to transfer all its assets to the petitioners. No evidence existed that MADCI subsequently acquired other lands for its development projects. Thus, MADCI, as a real estate development corporation, was left without any property to develop eventually rendering it incapable of continuing the business or accomplishing the purpose for which it was incorporated. 7 of 26
c. YES While the Corporation Code allows the transfer of all or substantially all of the assets of a corporation, the transfer should not prejudice the creditors of the assignor corporation. Under the business-enterprise transfer, the petitioners have consequently inherited the liabilities of MADCI because they acquired all the assets of the latter corporation. The continuity of MADCI's land developments is now in the hands of the petitioners, with all its assets and liabilities. There is absolutely no certainty that Yu can still claim its refund from MADCI with the latter losing all its assets. To allow an assignor to transfer all its business, properties and assets without the consent of its creditors will place the assignor's assets beyond the reach of its creditors. Thus, the only way for Yu to recover his money would be to assert his claim against the petitioners as transferees of the assets. d. No, it cannot prejudice the respondent Yu The CA correctly ruled that such provision constituted novation under Article 1293 of the Civil Code.When there is a substitution of debtors, the creditor must consent to the same; otherwise, it shall not in any way affect the creditor. In this case, it was established that Yu's consent was not secured in the execution of the MOA. Thus, insofar as the respondent was concerned, the debtor remained to be MADCI. And given that the assets and business of MADCI have been transferred to the petitioners, then the latter shall be liable. ANALYSIS: Nell Doctrine: In the 1965 case of Nell v. PaciUic Farms, Inc., the Court Uirst pronounced the rule regarding the transfer of all the assets of one corporation to another (hereafter referred to as the Nell Doctrine) as follows: GENERAL RULE: where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is NOT liable for the debts and liabilities of the transferor, EXCEPT: 1. Where the purchaser expressly or impliedly agrees to assume such debts; 2. Where the transaction amounts to a consolidation or merger of the corporations; 3. Where the purchasing corporation is merely a continuation of the selling corporation (business-enterprise transfer); and 4. Where the transaction is entered into fraudulently in order to escape liability for such debts. 8 of 26
The general rule expressed by the doctrine reUlects the Principle of Relativity under Article 1311 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are valid and binding only between the contracting parties and their successors-in-interest. Thus, despite the sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in privity with the contracts between the transferor corporation and its creditors. On the last exception: “the purchasing corporation is merely a continuation of the selling corporation” otherwise known as, Business-Enterprise Transfer: The legal basis of this is challenging to determine. In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that this exception contemplates the "business-enterprise transfer." In such transfer, the transferee corporation's interest goes beyond the assets of the transferor's assets and its desires to acquire the latter's business enterprise, including its goodwill. In this last exception, the transferee purchases not only the assets of the transferor, but also its business. As a result of the sale, the transferor is merely left with its juridical existence, devoid of its industry and earning capacity. Section 40 of the Corporation Code refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill. The sale under this provision does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its business or its corporate purpose. Given that the transferee corporation acquired not only the assets but also the business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the former. EXCEPTION TO THE EXCEPTION: however, that not every transfer of the entire corporate assets would qualify under Section 40. It does not apply (1) if the sale of the entire property and assets is necessary in the usual and regular course of business of corporation(note: realty engaged in selling real properties), or (2) if the proceeds of the sale or other disposition of such property and assets will be appropriated for the conduct of its remaining business. Thus, the LITMUS TEST to determine the applicability of Section 40 would be the capacity of the corporation to continue its business after the sale of all or substantially all its assets. Purpose of Business-Enterprise Transfer: The purpose of the business-enterprise transfer is to protect the creditors of the business by allowing them a remedy against the new owner of the assets and business enterprise. Otherwise, creditors would be left "holding the bag," because they may not be able to recover from the transferor who has "disappeared with the loot," or against the transferee who can claim that he is a purchaser in good faith and for value. 9 of 26
Free and Harmless Clause: The transferor and the transferee may enter into a contractual stipulation stating that the transferee shall not be liable for any or all debts arising from the business which were contracted prior to the time of transfer. Such stipulations are valid, but only as to the transferor and the transferee. These stipulations, though, are not binding on the creditors of the business enterprise who can still go after the transferee for the enforcement of the liabilities. While this free and harmless clause cannot affect respondent as a creditor, the petitioners may resort to this provision to recover damages in a third-party complaint. Whether the petitioners would act against Sangil(President of transferor corporation) under this provision is their own option. Securities and Exchange Commission v. Baguio Country Club Corp. G.R. Nos. 165146 & 165209 , [August 12, 2015] On December 17, 1998, the Securities and Exchange Commission (SEC) approved the amended by-laws submitted by the Baguio Country Club Corporation (BCCC). On September 27, 2002, the Ilusorios requested the SEC, via a letter-complaint, to compel BCCC to hold the annual election of the board of directors for 2002 in view of the nullity of the above-quoted provision in the amended by-laws. He informed the SEC that sometime in 2001, a stockholder of BCCC requested for the opinion of the SEC on the validity of the amendment, particularly the two (2) year term of the board of directors; The SEC opined that the amendment increasing the term of ofUice to two (2) years is contrary to law, particularly Section 23 of the Corporation Code which limits the term of ofaice to only one (1) year. Also, SEC ordered BCCC to conduct the annual election of members of the board. ISSUE: Whether or not the SEC can call a stockholders' meeting for the purpose of conducting an election of the BCCC board of directors. RULING: MOOT The petitions have been rendered moot by the 2005 amendment of the by-laws. The validity of the two (2) year term provision and the calling of meeting for the election of members of the board of directors to replace those holding a two (2) year term should no longer be in issue. The Ilusorios merely invoked the SEC to exercise what it perceived to be the latter's power to compel BCCC to comply with the law pertaining to the term limits of the board of directors. With the amendment restoring the term of the board to one (1) year, there is no more illegal provision to speak of. 10 of 26
Any discussion by the Court of the SEC's power to call for an election of the board in case of a void term prescribed by the by-laws, as well as on the nature of the controversy, and the other issues which are mere offshoots of the void provision of the by-laws would be merely academic, opinions that would neither adjudicate the rights of the parties, nor grant them reliefs. Terelay Investment and Development Corp. v. Yulo G.R. No. 160924, [August 5, 2015]) The Corporation Code has granted to ALL stockholders the right to inspect the corporate books and records, and in so doing has not required any speciAic amount of interest for the exercise of the right to inspect. Asserting her right as a stockholder, Cecilia Teresita Yulo requested Terelay Investment and Development Corporation (TERELAY) that she be allowed to examine its books and records however, TERELAY denied the request for inspection and instead demanded that she show proof that she was a bona Uide stockholder. ISSUE: WON the respondent stockholder is entitled to inspect its books and records, and allowing her to inspect its corporate records despite her shareholding being a measly .001% interest; RULING: YES The Corporation Code has granted to ALL stockholders the right to inspect the corporate books and records, and in so doing has not required any speciUic amount of interest for the exercise of the right to inspect. Under Section 74, third paragraph, of the Corporation Code, the only time when the demand to examine and copy the corporation's records and minutes could be refused is when the corporation puts up as a defense to any action that "the person demanding" had • "improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or • was not acting in good faith or for a legitimate purpose in making his demand.” The right of the shareholder to inspect the books and records of the petitioner should not be made subject to the condition of a showing of any particular dispute or of proving any mismanagement or other occasion rendering an examination proper, but if the right is to be denied, the burden of proof is upon the corporation to show that the purpose of the shareholder is improper, by way of defense. ANALYSIS:
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In general, however, ofUicers and directors have no legal authority to close the ofUice doors against shareholders for whom they are only agents, and withhold from them the right to inspect the books which furnishes the most effective method of gaining information which the law has provided, on mere doubt or suspicion as to the motives of the shareholder. While there is some conUlict of authority, when an inspection by a shareholder is contested, the burden is usually held to be upon the corporation to establish a probability that the applicant is attempting to gain inspection for a purpose not connected with his interests as a shareholder, or that his purpose is otherwise improper. Yujuico v. Quiambao G.R. No. 180416, [June 2, 2014]) A criminal action based on the violation of the second or fourth paragraphs of Section 74 can only be maintained against corporate ofAicers or such other persons that are acting on behalf of the corporation. During the annual stockholder's meeting of STRADEC, petitioner Aderito Z. Yujuico (Yujuico) was elected as president and chairman of the company. Yujuico replaced respondent Cezar T. Quiambao (Quiambao), who had been the president and chairman of STRADEC since 1994. As newly elected president and chairman of STRADEC, Yujuico demanded Quiambao for the turnover of the corporate records of the company, but the latter refused prompting petitioners to Uile a criminal complaint against respondents. Criminal Case No. 89724 covers the offense of refusing access to, and examination of, the corporate records and the stock and transfer book of STRADEC at its principal ofUice. The RTC dismissed the case because it is not punishable as an offense under the Corporation Code. ISSUE: A. WON RTC is correct that the act is not a punishable offense under the Corporation Code. B. Are the respondents liable? RULING: A. NO Such refusal, when done in violation of Section 74 (4) of the Corporation Code, properly falls within the purview of Section 144 of the same code and thus may be penalized as an offense. It must be emphasized that Section 144 already purports to penalize "[v]iolations" of “ANY provision" of the Corporation Code "not otherwise speciaically penalized therein." Hence, 12 of 26
we Uind inconsequential the fact that that Section 74 expressly mentions the application of Section 144 only to a speciUic act, but not with respect to the other possible violations of the former section. Certainly, all the rights guaranteed to corporators under Section 74 of the Corporation Code are mandatory for the corporation to respect. All such rights are just the same underpinned by the same policy consideration of keeping public conUidence in the corporate vehicle thru an assurance of transparency in the corporation's operations. B. NO, only be maintained against corporate ofUicers or any other persons acting on behalf of such corporation. Petitioners are not actually invoking their right to inspect the records and the stock and transfer book of STRADEC under the second and fourth paragraphs of Section 74. What they seek to enforce is the proprietary right of STRADEC to be in possession of such records and book. Such right, though certainly legally enforceable BY OTHER MEANS, cannot be enforced by a criminal prosecution based on a violation of the second and fourth paragraphs of Section 74. The respondents are merely outgoing ofaicers of STRADEC who, for some reason, withheld and refused to turn-over the company records of STRADEC; that it is the petitioners who are actually acting on behalf of STRADEC; and that STRADEC is actually merely trying to recover custody of the withheld records. Violations of the second and fourth paragraphs of Section 74 contemplates a situation wherein a corporation, acting thru one of its ofaicers or agents, denies the right of any of its stockholders to inspect the records, minutes and the stock and transfer book of such corporation. Insigne, et al v. Abra Valley Colleges, Inc. G.R. No. 204089, [July 29, 2015] A stock certiAicate is prima facie evidence that the holder is a shareholder of the corporation, but the possession of the certiAicate is not the sole determining factor of one's stock ownership. Petitioners are siblings of the full blood. Respondent Francis s their older half-blood brother. In his lifetime, Pedro was the founder, president and majority stockholder of respondent Abra Valley Colleges, Inc. (Abra Valley), a stock corporation. After Pedro's death, Francis succeeded him as the president of Abra Valley. On March 26, 2002, the petitioners Uiled a complaint in the RTC to direct Abra Valley to allow them to inspect its corporate books and records, and the minutes of meetings, and to provide them with its Uinancial statements.
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At the hearing set on March 8, 2010, the RTC ordered the petitioners to present the stock certiaicates issued by Abra Valley under their names. On June 28, 2010, the RTC dismissed the case because the plaintiffs failed to comply with the order of the Court. ISSUE: Is the presentation of a stock certiUicate a condition sine qua non for proving one's shareholding in a corporation? RULING: NO. The dismissal of Special Civil Action Case No. 2070 by virtue of Section 3, Rule 17 of the Rules of Court should be undone because the petitioners' production of the stock certiUicates was rendered superUluous by their submission of other competent means of establishing their shareholdings in Abra Valley. To establish their stock ownership, the petitioners actually turned over various documents showing their ownership of Abra Valley's shares, speciUically: • the ofUicial receipts of their payments for their subscriptions of the shares of Abra Valley; • and the copies duly certiUied by the Securities and Exchange Commission (SEC) stating that Abra Valley had issued shares in favor of the petitioners, such as the issuance of part of authorized and unissued capital stock; • the letter dated June 17, 1987; the secretary's certiUicate dated June 17, 1987; and • the general information sheet. ANALYSIS: A stock certiUicate is prima facie evidence that the holder is a shareholder of the corporation, but the possession of the certiaicate is not the sole determining factor of one's stock ownership. A certiaicate of stock is merely: — . . . the paper representative or tangible evidence of the stock itself and of the various interests therein. The certiaicate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership. In Lanuza v. Court of Appeals, the Court has underscored that the (Stock and Transfer Book)STB is not the exclusive evidence of the matters and things that ordinarily are or should be written therein, for parol evidence may be admitted to supply omissions from the records, or to explain ambiguities, or to contradict such records: However, a stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things 14 of 26
which ordinarily are or should be written therein. In fact, it is generally held that the records and minutes of a corporation are not conclusive even against the corporation but are prima facie evidence only, and may be impeached or even contradicted by other competent evidence. Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to contradict such records. Bernas, et al vs. Cinco, et al. G.R. Nos. 163356-57. July 1, 2015. Where there is an ofAicer authorized to call a meeting and that ofAicer refuses, fails, or neglects to call a meeting, the SEC can assume jurisdiction and issue an order to the petitioning stockholder to call a meeting pursuant to its regulatory and administrative powers to implement the Corporation Code. BERNAS GROUP were among the Members of the Board of Directors and Ofaicers of the Makati Sports Club corporation whose terms were to expire either in 1998 or 1999. CINCO GROUP are the members and stockholders of the corporation who were elected Members of the Board of Directors and Ofaicers of the club during the 17 December 1997 Special Stockholders Meeting. Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight Committee (MSCOC), composed of the past presidents of the club, demanded from the Bernas Group to resign from their respective positions to pave the way for the election of new set of ofUicers. MSCOC called a Special Stockholders' Meeting where in that meeting proceeded wherein the Bernas Group were removed from ofUice and, in their place and stead, Cinco Group were elected. Subsequently, the removal was ratiUied during the Annual Stockholder’s Meeting. ISSUE: WHETHER OR NOT THE 17 DECEMBER 1997 SPECIAL STOCKHOLDERS' MEETING AS RATIFIED BY THE ANNUL STOCKHOLDERS’ MEETING IS VALID RULING: NO, invalid On authority of MSCOC: The removal of the Bernas Group, as well as the election of the Cinco Group, effected by the assembly in that improperly called meeting is void. The MSCOC is neither empowered by law nor the MSC by-laws to call a meeting and the subsequent ratiUication made by the stockholders did not cure the substantive inUirmity, the defect having set in at the time the void act was done. The defect goes into the very authority of the persons who made the call for the meeting. 15 of 26
Being void, it cannot be validated through ratiaication. The power to call a special meeting, solely vested by law and the MSC by-laws on the President or the Board of Directors. Sec. 28. Removal of directors or trustees. xxx A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president OR on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, xxx Remedy in case of refusal The remedy of the stockholders would have been to aile a petition to the SEC to direct him to call a meeting by giving proper notice required under the Code. Where there is an ofUicer authorized to call a meeting and that ofUicer refuses, fails, or neglects to call a meeting, the SEC can assume jurisdiction and issue an order to the petitioning stockholder to call a meeting pursuant to its regulatory and administrative powers to implement the Corporation Code. Sec. 50. Regular and special meetings of stockholders or members. xxx Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member, and on a showing of good cause therefore, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation. xxx In Philippine National Construction Corporation v. Pabion, where the Court validated the order of the SEC to compel the corporation to conduct a stockholders' meeting in the exercise of its regulatory and administrative powers to implement the Corporation Code: ANALYSIS: Illegal Acts vs Ultra Vires Illegal Acts
Ultra Vires
an act which are contrary to law, morals or public not illegal or void ab initio policy or public duty cannot acquire validity by performance, ratification or estoppel
may become binding and enforceable when ratified by the stockholders.
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Illegal Acts
Ultra Vires
void
voidable
SIMNY G. GUY vs. GILBERT G. GUY G.R. No. 184068, April 19, 2016 Sending/mailing is different from Ailing or service under the Rules of Court. Had the lawmakers intended to include the stockholder's receipt of the notice, they would have clearly reAlected such requirement in the law. Absent that requirement, the word "send" should be understood in its plain meaning. Petitioner Simny G. Guy (Simny) is a stockholder of record and member of the board of directors of the Goodland Company, Inc. (GCI). Respondents are also GCI stockholders of record who were allegedly elected as NEW directors by virtue of the assailed stockholders' meeting held on 7 September 2004. On 30 September 2004, petitioner and Grace Guy Cheu (Cheu), Uiled a Complaint for the "Nulliaication of Stockholders' Meeting and Election of Directors, Nulliaication of Acts and Resolutions, Injunction and Damages with Prayer for Temporary Restraining Order and/or Writ of Preliminary Injunction." Petitioner assailed the election held on 7 September 2004 on the following grounds: (1) there was no or proper previous notice to petitioner and Cheu when although the notice was sent by registered mail on 2 September 2004, the registry return card shows that he received it only on 22 September 2004 or Uifteen (15) days after ; (2) the meeting was not called by the proper person when it was not issued by the corporate secretary of GCI pursuant to its by-laws;; and (3) lack of due notice to Grace Cheu, allegedly a stockholder of record of GCI as having in possession stock certiUicates ISSUE: a. WON notice of the stockholders’ meeting was properly sent? b. WON the meeting was called by the proper person? c. WON Grace Cheu is entitled to notice of the meeting? RULING: a.
YES
Date of Sending: September 2 Date of Meeting: September 7 or 5 days after Date of Receipt: September 22
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The provisions only require the sending/mailing of the notice of a stockholders' meeting to the stockholders of the corporation. Sending/mailing is different from ailing or service under the Rules of Court. Had the lawmakers intended to include the stockholder's receipt of the notice, they would have clearly reUlected such requirement in the law. Absent that requirement, the word "send" should be understood in its plain meaning. For a stockholders' special meeting to be valid, certain requirements must be met with respect to notice, quorum and place. In relation to the above provision of B.P. 68, one of the requirements is a previous written notice sent to all stockholders at least one (1) week prior to the scheduled meeting, unless otherwise provided in the by laws. Under the by-laws of GCI, the notice of meeting shall be mailed not less than aive (5) days prior to the date set for the special meeting. b. YES under Section 3, Article IV of the By-laws of Goodland, respondent Gilbert G. Guy as VicePresident of the corporation is qualiaied to act as president. Section 3 which provides that "the Vice President, if qualiUied, shall exercise all of the functions and perform all the duties of the President, in the absence or disability, for any cause, of the latter." As correctly pointed out by defendants [respondents], the applicable provisions of the by-laws of Goodland are Article II, Sec. 2 which provides that the "special meeting of the stockholders may be called . . . by order of the President and must be called upon the written request of stockholders registered as the owners of one-third (1/3). Defendant Gilbert [respondent Guy] is the owner of more than one-third (1/3) of the outstanding stock of Goodland. In fact, it is around 79.99%. Thus, pursuant to Art. II, Sec. 2 of the By-laws of Goodland, defendant Gilbert [respondent Guy] may validly call such special stockholders' meeting. C. NO Cheu was not a stockholder of record of GCI and was therefore not entitled to any notice of meeting. Section 63 of the Corporation Code provides: xxxNo transfer, however, shall be valid, except as between the parties, until the transfer is recorded in 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 certiUicate or certiUicates and the number of shares transferred.
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The evidence presented by Cheu to prove that she was a stockholder of record — valid, existing and uncancelled Goodland Stock Certicate does not satisfy the requirements imposed by the Corporation Code and the by-laws of GCI. A "stockholder of record" is deUined as follows: A person who desires to be recognized as stockholder for the purpose of exercising stockholders' right must secure standing by having his ownership of share recorded on the stock and transfer book. Thus, only those whose ownership of shares are duly registered in the stock and transfer book are considered stockholders of record and are entitled to all rights of a stockholder. ANALYSIS: "Send" means to deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and in the case of an instrument to an address speciUied thereon or otherwise agreed, or if there be none, to any address reasonable under the circumstances. The receipt of any writing or notice within the time at which it would have arrived if properly sent has the effect of a proper sending. PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION (PHILCOMSAT) vs. SANDIGANBAYAN. G.R. No. 203023. June 17, 2015 PHILCOMSAT Holdings Corporation (PHC) (formerly Liberty Mines, Inc. (LMI)) is a domestic corporation engaged in the discovery, exploitation, development and exploration of oils. LMI and PHILCOMSAT, signed a Memorandum of Agreement for the latter to gain controlling interest in LMI through an increase in its authorized capital stock. Sometime in 1997, LMI changed its name to PHC. It declassiUied its shares and amended its primary purpose to become a holding company. Pending the PSE's Uinal approval of PHC's application for listing of the shares, the PCGG made a written request to suspend the listing of the increase in PHC's capital stock due to conUlicting claims of the two sets of board of directors of the Philippine Overseas Telecommunication Corporation (POTC) and PHILCOMSAT. In November 2007, then President Gloria Macapagal-Arroyo appointed new government nominees to the POTC and PHILCOMSAT boards. POTC owns 100% of PHILCOMSAT. On 7 May 2008, the PCGG issued a resolution recognizing the validity of the POTC's and PHILCOMSAT's respective stockholders' meetings and elections.
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PHILCOMSAT sent a Uinal demand letter reiterating its demand for PCGG to withdraw its objection to the listing of the increase in PHC's capital stock. On 1 February 2012, PHILCOMSAT ailed a complaint before the Sandiganbayan against PCGG to compel the latter to withdraw its opposition to the listing of the increase in PHC's capital stock. The Sandiganbayan dismissed the complaint for lack of jurisdiction. Petitioners insist that the PCGG is not a stockholder, partner, member or ofUicer of the corporation. ISSUE: WON Sandiganbayan lack of jurisdiction on the ground that the action allegedly involves an intracorporate controversy?
RULING: YES, Sandiganbayan has no jurisdiction but on regular courts as this involved a intra-corporate dispute. The PCGG, acting as representative of the Republic, was exercising a duty of a stockholder to ensure the proper and lawful exercise of corporate acts. On Relationship Test As it stands today, the Republic of the Philippines owns 34.9% of POTC, which wholly owns PHILCOMSAT, which in turn owns 81% of PHC. The Republic, then, has an interest in the proper operations of the PHC, however indirect this interest may seem to be. On the nature of the Controversy Test The act of Chairman Sabio in asking the SEC to suspend the listing of PHC's shares was done in pursuit of protecting the interest of the Republic of the Philippines, a legitimate stockholder in PHC's controlling parent company, POTC. Any shareholder, harboring any apprehensions or concerns, could have done the same or posed the same objection. It was an act that had no relation to any proceeding or question of ill-gotten wealth or sequestration. ANALYSIS: To determine if a case involves an intra-corporate controversy, the courts have applied two tests: 1. the relationship test and 2. the nature of the controversy test.
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Under the RELATIONSHIP TEST, the existence of any of the following relationships makes the conUlict intra-corporate: (1) between the corporation, partnership or association and the public; (2) between the corporation, partnership or association and the State insofar as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its stockholders, partners, members or ofUicers; and (4) among the stockholders, partners or associates themselves. On the other hand, the NATURE OF THE CONTROVERSY TEST dictates that “the controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation.” A combined application of the relationship test and the nature of the controversy test has become the norm in determining whether a case is an intra-corporate controversy, to be "heard and decided by the [b]ranches of the RTC speciUically designated by the Court to try and decide such cases.” Alabang Development Corp. v. Alabang Hills Village Association G.R. No. 187456, [June 2, 2014]) Trustee of a corporation may continue to prosecute a case commenced by the corporation within three years from its dissolution until rendition of the Ainal judgment, even if such judgment is rendered beyond the three-year period allowed by Section 122 of the Corporation Code. However, there is nothing in the said cases which allows an already defunct corporation to initiate a suit after the lapse of the said three-year period. Complaint for Injunction and Damages Uiled [with the Regional Trial Court (RTC) of Muntinlupa City] on October 19, 2006 by [herein petitioner,] ADC against [herein respondents, Alabang Hills Village Association, Inc.] AHVAI. Sometime in September [2006], Alabang Development Corporation (ADC) learned that AHVAI started the construction of a multi-purpose hall and a swimming pool on one of the parcels of land still owned by ADC without the latter's consent and approval. ADC thus prayed that an injunction be issued enjoining defendants from constructing the multipurpose hall and the swimming pool at the Alabang Hills Village. Revocation of corporate registration: May 26, 2003. Expiry date to prosecute claims: May 26, 2006. Filing of complaint: October 19, 2006, more than three years after such revocation. RTC Decision: (afUirmed by CA) 21 of 26
Dismissed because the petitioner has no personality to aile the same, that the subject property "is a reserved area for the beneUicial use of the homeowners, as mandated by law" ISSUE: WON petitioner's capacity to sue as a corporation RULING: NO Petitioner lacks capacity to sue because it no longer possesses juridical personality by reason of its dissolution and lapse of the three-year grace period provided under Section 122 of the Corporation Code. Petitioner Uiled its complaint not only after its corporate existence was terminated but also beyond the three-year period allowed by Section 122 of the Corporation Code. During which the corporation, through its own ofUicers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but there is no time limit within which the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78 [now Sec. 122]) that the conveyance to the trustees must be made within the three-year period. ANALYSIS: Lack of legal capacity to sue means that the plaintiff is not in the exercise of his civil rights, or does not have the necessary qualiaication to appear in the case, or does not have the character or representation he claims[;] 'lack of capacity to sue' refers to a plaintiff's general disability to sue, such as on account of minority, insanity, incompetence, lack of juridical personality or any other general disqualiUications of a party. . . .”
Turner v. Lorenzo Shipping Corp. G.R. No. 157479, [November 24, 2010], 650 PHIL 372-392) An action commenced before the cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause of action accrues after the action is commenced and while the case is pending is of no moment. The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of incorporation to remove the stockholders' pre-emptive rights to newly issued shares of stock.
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Feeling that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the amendment and demanded payment of their shares at the rate of P2.276/share based on the book value of the shares, or a total of P2,298,760.00. The respondent found the fair value of the shares demanded by the petitioners unacceptable. Upon the respondent's refusal to pay, the petitioners sued the respondent for collection and damages despite the corporation has no unretained restricted earnings in the RTC in Makati City on January 22, 2001. RTC decided the case in favor of the petitioner. Subsequently, on November 28, 2002, the RTC issued a writ of execution. On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners Uiled a motion for immediate execution and a motion to strike out motion for reconsideration upon knowing that the corporation has now unrestricted retained earnings which granted the petitioners' motion for immediate execution. CA reversed. ISSUE: WON the petitioners are entitled to exercise their appraisal right? RULING: NO, still premature. That the respondent had indisputably no unrestricted retained earnings in its books at the time the petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent's legal obligation to pay the value of the petitioners' shares did not yet arise. Neither did the subsequent existence of unrestricted retained earnings after the ailing of the complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners' right of action could only spring from an existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be cured by an amended or supplemental pleading alleging the existence or accrual of a cause of action during the pendency of the action. Verily, a premature invocation of the court's intervention renders the complaint without a cause of action and dismissible on such ground. The motion for partial summary judgment, being a mere application for relief other than by a pleading, was not the same as the complaint in Civil Case No. 01-086. Thereby, the petitioners did not meet the requirement of the Rules of Court that a cause of action must exist at the commencement of an action, which is "commenced by the Uiling of the original complaint in court.” An action prematurely brought is a groundless suit. Unless the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured 23 of 26
or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is not permissible. ANALYSIS: Right of Appraisal: Stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code. Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting stockholder to have his interests purchased and to retire from the corporation. Now, however, a corporation can purchase its own shares, provided payment is made out of surplus proaits and the acquisition is for a legitimate corporate purpose. In the Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit: Section 41.Power to acquire own shares. — A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.| Trust Fund Doctrine: The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets. 24 of 26
The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without Uirst paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void. Iglesia Evangelica Metodista en las Islas Filipinas v. Lazaro G.R. No. 184088, [July 6, 2010], 638 PHIL 220-236) In 1909, Bishop Nicolas Zamora established the petitioner Iglesia Evangelica Metodista En Las Islas Filipinas, Inc. (IEMELIF) as a corporation sole with Bishop Zamora acting as its "General Superintendent." Thirty-nine years later in 1948, the IEMELIF enacted and registered a by-laws that established a Supreme Consistory of Elders (the Consistory), made up of church ministers, who were to serve for four years. During its 1973 General Conference, the general membership voted to put things right by changing IEMELIF's organizational structure from a corporation sole to a corporation aggregate. The SEC said that the IEMELIF needed to amend its articles of incorporation for that purpose. Acting on this advice, the Consistory resolved to convert the IEMELIF to a corporation aggregate. Petitioners Reverend Nestor Pineda, et al. • Since the Corporation Code does not have any provision that allows a corporation sole to convert into a corporation aggregate by mere amendment of its articles of incorporation, the conversion can take place only by airst dissolving IEMELIF, the corporation sole, and afterwards by creating a new corporation in its place. ISSUE: Whether or not a corporation may change its character as a corporation sole into a corporation aggregate by mere amendment of its articles of incorporation without Uirst going through the process of dissolution. RULING: YES. True, the Corporation Code provides no speciaic mechanism for amending the articles of incorporation of a corporation sole. But, as the RTC correctly held, Section 109 of the Corporation Code allows the application to religious corporations of the general provisions governing non-stock corporations. 25 of 26
For non-stock corporations, the power to amend its articles of incorporation lies in its members. The code requires two-thirds of their votes for the approval of such an amendment. No point to dissolving the corporation sole of one member to enable the corporation aggregate to emerge from it. Whether it is a non-stock corporation or a corporation sole, the corporate being remains distinct from its members, whatever be their number. How will this requirement apply to a corporation sole that has technically but one member (the head of the religious organization) who holds in his hands its broad corporate powers over the properties, rights, and interests of his religious organization?
The one member, with the concurrence of two-thirds of the membership of the organization for whom he acts as trustee, can self-will the amendment. He can, with membership concurrence, increase the technical number of the members of the corporation from "sole" or one to the greater number authorized by its amended articles. If such approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of two-thirds of its membership. The one member, here the General Superintendent, is but a trustee, according to Section 110 of the Corporation Code, of its membership.| ANALYSIS: A corporation sole is "one formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a religious denomination, sect, or church, for the purpose of administering or managing, as trustee, the affairs, properties and temporalities of such religious denomination, sect or church." A corporation aggregate formed for the same purpose, on the other hand, consists of two or more persons. The amendment of the articles of incorporation, as correctly put by the CA, requires merely that a) the amendment is not contrary to any provision or requirement under the Corporation Code, and that b) it is for a legitimate purpose.
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