Atty. Rodolfo R. Pineda, ESQ

May 27, 1996 Atty. Rodolfo R. Pineda, ESQ Tolentino, Pineda & Associates Suite 206, Amberland Plaza Condominium Julia Vargas Street, Ortigas Center S i r : This refers to your letter dated May 7, 1996 requesting opinion as to the legality of the following provisions of the Articles of Incorporation of a proposed " commercial bank ": "...The right of first refusal shall not apply to the following transactions: a) any transfer or sale of shares by a stockholder to his or her spouse, children or direct lineal descendants, or to an affiliate company; b) any transfer or sale of shares by a foreign stockholder to another foreign national. In case a shareholder would like to exercise his right of first refusal but cannot purchase the offered shares because he is already disqualified to acquire additional shares by provision of law, such shareholder may designate other stockholders or persons not disqualified by law to acquire additional shares or own new ones to purchase or acquire the offered shares allotted disqualified stockholder." (Emphasis supplied) It is well-settled that shares of stock in a corporation are "personal property" and the owner thereof has an inherent right ,as an incident of his ownership, to transfer the same at will . This right is expressly recognized under the Corporation Code which provides: "SECTION 63. Certificate of stock and transfer of shares . ... Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner of his attorney-in-fact or other person legally authorized to make the transfer. ..." (Emphasis supplied) Therefore, the facility of transferring ownership of shares of stock must not be unduly hampered by imposing restrictions as would amount to restraint on free alienation of property. Accordingly, the first paragraph (a and b) of the above provision may be allowed inasmuch as it conforms with the general principle on the free alienability of ownership of shares of stock as the selling stockholder has a freehand to transfer his shares to the person designated therein. However, we observe that (a) and (b) of the abovequoted provision are merely exceptions and presupposes that the undisclosed preceding paragraphs thereof provide for a general provision on restriction on the transferability of shares by giving the existing stockholders the option to purchase the shares of stock of the selling stockholders before the same can be sold to third parties. In this connection, it may be worth mentioning that because of the transferable nature of ownership shares of stock, the Commission had opined on several occasions that only " reasonable restrictions " on transfers of shares may be provided in the articles of incorporation. The underlying test is, whether the transfer restriction clause is reasonably needed by the corporation to justify the same overriding the general policy against restraints or alienation of property. A provision giving the existing stockholders the right of first refusal or option to purchase the offered shares at a given reasonable period before disposing it to third parties may be considered valid and enforceable. A transfer restriction provision is not valid if it absolutely prohibits the sale or transfer the stock without the approval of the stockholders as this would violate the general law on free alienability of shares of stock as personal property. ( Ltr. to Sycip Salazar Hernandez & Gatmaitan dtd. August 28, 1995 citing previous SEC opinion) Regarding the second paragraph of the above proposed provision, the same may also be allowed provided that a reasonable period within which the designated person may purchase the same must be stated therein to comply with the foregoing opinion and if upon the expiration of said period, the designated persons fail to exercise the option to purchase the offered shares, the selling stockholder shall be allowed to transfer his shares to any third person under the same terms and conditions offered to the existing stockholders or designated persons. However, please be advised that since the proposed corporation would engage in " commercial banking ",it would be primarily governed by the General Banking Act ,a special law for banking institutions. As such, the Corporation Code ,which is a general law, would only have a suppletory effect insofar as the provisions thereof are applicable and are not inconsistent with the special law governing it. It is a well-settled jurisprudence that in case of conflict, the special law shall prevail. Accordingly, the above-cited provision of the Corporation Code and corporate principles on the right to transfer ownership of shares of stock shall only be applicable in the absence of pertinent provisions on the matter under the General Banking Act. Very truly yours, (SGD.) PERFECTO R. YASAY Acting Chairman