Reacquiring Shares of Stocks Transferred to BIR

June 15, 1992 Mr. Florentino S. Jumaquio United Pulp & Paper Company, Inc. 5th Floor, Phinma Bldg., 166 Salcedo Street, Legaspi Village, Makati, Metro Manila S i r : This refers to your letter dated June 5, 1992 requesting opinion on the queries posed therein: As stated, the BIR in March, 1991 issued a warrant of garnishment against the stocks of one of the company's stockholders. The subject of the garnishment is 1,385,179 common shares with a par value of P10.00 per share. By virtue of the warrant of garnishment the company transferred and issued the shares in the name of the "Bureau of Internal Revenue", for the account of the stockholders. Lately, the BIR has informally communicated to you its plan to dispose the shares of stocks in order to satisfy the tax liabilities of said stockholder. The company is interested to re-acquire said shares and plan to dispose the same to interested parties. Your queries are: cdlex 1. Is the company eligible to re-acquire said shares of stock from the BIR? 2. Assuming the company re-acquired the shares of stock, are said stocks considered treasury shares? 3. Can the company dispose the same at the price higher than its acquisition cost? Relative to your first query, the pertinent provision of the Corporation Code provides: "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. The above-quoted provision authorizes corporations to purchase or acquire its own shares out of unrestricted retained earnings for a legitimate corporate purpose or purposes. The underlying reason for limiting shares purchase springs from the necessity of imposing safeguards against the depletion by a corporation of its assets and the impairment of its capital needed for the protection of creditors. This is sometimes expressed in terms of the trust fund doctrine. (SEC opinion dated July 25, 1983 citing Ballantine on Corporation p. 605). It is to be noted further that "even in those jurisdiction in which it is held that a corporation may purchase its own stock, the rule is subject to the condition that the purchase shall be made in good faith and without prejudice to the rights of other stockholders or creditors. It is unauthorized and invalid if made for the purpose of defrauding or injuring; other stockholders or creditors of the corporation, or if it does in fact defraud or prejudice creditors, though made in the most perfect good faith. (Fletcher Cyclopedia Corporations, Vol. 6 A Ch 33 Sec. 2854, 1950 Revised Edition pp. 397-398). Thus, the Commission, in a previous opinion, has ruled that a corporation may make use of its surplus earnings to purchase its own stock provided that the following conditions are complied with. a) Its capital is not thereby impaired; b) A legitimate and proper corporate objective is advanced; c) The condition of corporate affairs warrants it; d) The transaction is designed and carried out in good faith; e) It would not result to undue advantage to a few favored stockholders at the expense of the remainder; f) The rights of creditors are not jeopardized; g) There must be surplus (unrestricted retained earnings to acquire the same) (SEC Opinion dated December 15, 1982) Anent your second and third queries, under the Corporation Code, reacquired shares shall be treated as " treasury shares " and may be disposed of at reasonable price obtainable . The Code provides thus: "SECTION 9. Treasury shares . Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors ." (Emphasis supplied) To settle doubts on the status of treasury shares, Section III (2) of the "SEC Rules Governing Redeemable and Treasury shares", which implements Section 9 of the Corporation Code, provides: " Treasury shares do not revert to the unissued shares of the Corporation but are regarded as property acquired by the corporation which may be reissued or sold by the corporation at a price to be fixed by the Board of Directors ; . . ." (Emphasis supplied) On the matter of attachment, the following information is imparted: "In order that a creditor may acquire a lien by virtue of his attachment, it is not alone sufficient that a writ of attachment has been regularly issued by a competent authority, or even placed in the hands of an officer, but there must be actual and valid levy on the property of the debtor, and until, such valid levy has been made, the attachment creditor has no right in his debtor's property." (Moran, Comments on the rules of Court, vol. 3, 1980 ed., p. 11.) (Emphasis supplied) llcd Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman