Mr. Lauris L. dela Peña

October 12, 1992 Mr. Lauris L. dela Pea Tax Division 6760 Ayala Avenue, Makati Metro Manila S i r : This refers to your letter of October 3, 1992 requesting information on the pertinent laws, rules and regulations of the Commission relative to withdrawal of investments as mentioned in the SEC Opinion dated September 1, 1982 which states that "investments made in corporations in exchange for shares of stocks and which form part of the substantial assets of said corporation can only be withdrawn upon approval by the Board of Directors and Stockholders, respectively, provided that no creditors are prejudiced by said withdrawal and provided further that all laws, rules and regulations pertinent to said withdrawal are duly observed and complied with ". Withdrawal of investments would have the effect of acquisition by the corporation of the shares of the withdrawing investor, hence, the same is subject to Section 41 of the Corporation Code which 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 provision of this Code." (Emphasis supplied) The above-quoted provision authorizes corporations to purchase or acquire their own shares out of unrestricted retained earnings for a legitimate corporate purpose or purposes. The underlying reason for limiting share purchases 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 "trust fund doctrine".The right of a corporation to re-acquire or purchase its own stock is always 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 previously ruled that a corporation may re-acquire or 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) There is intended and there results no 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 unrestricted retained earnings to acquire the same. (SEC Opinions dated December 15, 1982 and September 11, 1985) Please be guided accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman