Redeemable Shares

SEC-EAD * OPINION REDEEMABLE SHARES A Corporation may create and issue redeemable shares of stock, usually classified as preferred shares, provided that such feature is expressly stated in the Articles of Incorporation. When the redeemable shares are issued, the terms and conditions of their redemption must be described not only in the Articles of Incorporation but also on the covering stock certificates. The issuance of redeemable shares is limited in duration. The funds collected therefrom are deemed intended for a specific period or project such that when the funds have already served their purpose, the same are returned to the stockholders in accordance with the redemption features of the issued shares. For the protection of the stockholders, the pertinent SEC rules provide that a corporation that has issued redeemable shares, shall set up and maintain a sinking fund to be deposited with a trustee bank which shall not be invested in risky and speculative ventures. A sinking fund refers to a fund set up by a corporation where cash is gradually set aside in order to accumulate the amount necessary to meet the redemption price of redeemable shares at specified dates in the future. While redeemable issued shares actually represent the owners' investments in a corporation, the issuance of the shares may be likened to temporary borrowings of the issuing corporation where, for example, bonds or debt papers are issued. Thus, the Corporation Code specifically allows the corporation to repurchase or redeem the redeemable shares issued irrespective of whether or not it has unrestricted retained earnings. However, in order not to violate the spirit of the trust fund doctrine, the SEC implementing rules made a provision where redemption of the redeemable shares shall be valid only if after the redemption, the Corporation would still have sufficient assets in its books to cover debts and liabilities inclusive of capital stock. The related SEC rules also provide that when the redeemable shares issued are redeemed pursuant to their redemption rights, the same shall be considered retired and no longer issuable. While the redeemed shares are considered retired, the said shares, however, should still be treated as treasury shares, in the books of the corporation since these are still part of the authorized capital stock of the corporation. In order to remove the redeemed shares from their treasury status, an amendment of the articles of incorporation is necessary reducing its authorized capital stock by the amount and number of shares corresponding to the shares redeemed and still in treasury. For this purpose, the related certificate of increase of capital stock pursuant to the Corporation Code should also be filed with the SEC. cdll Authored by: (SGD.) OTILIO C. SANDIEGO Director of the Examiners and Appraisers Department Footnotes * Examiners and Appraisers Department; now Company Registration and Monitoring Department