Corporate Law Case Digest: Ong Yong v. Tiu (2003)

G.R. No. 144476            April 8, 2003
Lessons Applicable: Pre-incorporation Subscription (Corporate Law)

FACTS:
  • 1994: construction of the Masagana Citimall in Pasay City was threatened with stoppage, when its owner, the First Landlink Asia Development Corporation (FLADC), owned by the Tius, became heavily indebted to the Philippine National Bank (PNB) for P190M
  • To save the 2 lots where the mall was being built from foreclosure, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. 
  • Pre-Subscription Agreement: Ongs and the Tius agreed to maintain equal shareholdings in FLADC
    • Ongs: subscribe to 1,000,000 shares 
    • Tius: subscribe to an additional 549,800 shares in addition to their already existing subscription of 450,200 shares
  • Tius: nominate the Vice-President and the Treasurer plus 5 directors 
  • Ongs nominate the President, the Secretary and 6 directors (including the chairman) to the board of directors of FLADC and right to manage and operate the mall.
  • Tius: contribute to FLADC a 4-storey building P20M (for 200K shares)and 2 parcels of land P30M (for 300K shares) and P49.8M (for 49,800 shares) 
  • Ongs: paid P190M to settle the mortgage indebtedness of FLADC to PNB (P100M in cash for their subscription to 1M shares)
  • February 23, 1996: Tius rescinded the Pre-Subscription Agreement
  • February 27, 1996: Tius filed at the Securities and Exchange Commission (SEC) seeking confirmation of their rescission of the Pre-Subscription Agreement 
  • SEC: confirmed recission of Tius
  • Ongs filed reconsideration that their P70M was not a premium on capital stock but an advance loan
  •  SEC en banc: affirmed it was a premium on capital stock
  • CA: Ongs and the Tius were in pari delicto (which would not have legally entitled them to rescission) but, "for practical considerations," that is, their inability to work together, it was best to separate the two groups by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and awarding practically everything else to the Tius.
ISSUE: W/N Specific performance and NOT recission is the remedy

HELD: YES.  Ongs granted.
  • did not justify the rescission of the contract
  • providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their obligations under the Pre-Subscription Agreement since the obligation pertained to FLADC itself 
  • failure of the Ongs to credit shares of stock in favor of the Tius for their property contributions also pertained to the corporation and not to the Ongs
  • the principal objective of both parties in entering into the Pre-Subscription Agreement in 1994 was to raise the P190 million 
  • law requires that the breach of contract should be so "substantial or fundamental" as to defeat the primary objective of the parties in making the agreement
  • since the cash and other contributions now sought to be returned already belong to FLADC, an innocent third party, said remedy may no longer be availed of under the law.
  • Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract
  • allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock,24 (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings,25 and (3) dissolution and eventual liquidation of the corporation.
  • They want this Court to make a corporate decision for FLADC. 
  • The Ongs' shortcomings were far from serious and certainly less than substantial; they were in fact remediable and correctable under the law. It would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.