Mr. Gonzales M. Mallari

April 11, 1994 Mr. Gonzales M. Mallari Aseatech, Incorporated Rm. 408 Natividad Bldg. T. Pinpin St. cor. Escolta, Manila S i r : This refers to your letter of March 11, 1994 requesting opinion on the queries posed therein summarized as follows: cdll IS IT LAWFUL FOR A SUBSCRIBER TO TRANSFER OR ASSIGN HIS PAID-UP SHARES TO THE REST OF THE STOCKHOLDERS EVEN IF HIS SUBSCRIPTION IS NOT YET FULLY PAID? IF ALLOWED WHO WILL SHOULDER THE UNPAID BALANCE? The pertinent provision of the Corporation Code provides: "SECTION 64. Issuance of stock certificates . No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares),if any is due, has been paid ." The above-provision implicitly sets forth the doctrine that a subscription is one, entire and indivisible contract. It cannot be divided into portions so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full payment of his subscription together with the interest and expenses if any is due. ( SEC letter dated January 6, 1983 addressed to Bay Sunset Tours & Travel Corporation ) Accordingly, if the stockholder has not paid the full amount of his subscription, he cannot transfer part of it in view of the indivisible nature of subscription contract. It is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees. However, the entire subscription ,although not yet fully paid, may be transferred to a single transferee , who as a result of the transfer, must assume the unpaid balance. It is necessary, however, to secure the consent of the corporation since the transfer of subscription right contemplates a novation of contract which under Article 1293 of the Civil Code of the Philippines, cannot be made without the consent of the creditor. CAN PARTIALLY PAID SUBSCRIPTION BE TRANSFERRED TO THE ISSUER CORPORATION? IF ALLOWABLE IS THE CORPORATION ENTITLED TO RE-SELL THE RE-ACQUIRED SUBSCRIPTION INCLUDING THE UNPAID SHARES? Sale of issued shares to the corporation would have the effect of re-acquisition of the shares by the corporation which is subject to Section 41 of the Corporation Code, quoted hereunder: "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. cdll 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 or their shares under the provision of this Code." (Emphasis supplied) The above 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. 6A 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 only if 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) Accordingly, in the absence of the required retained earnings, the corporation cannot re-acquire its issued shares. WHAT WILL BE THE BASIS FOR THE COMPUTATION OF PRESENT "BOOK VALUE" OF SHARES? IS IT ON THE "SUBSCRIBED" CAPITAL STOCK OR "PAID-UP" CAPITAL?" The "book value" per share is the amount that would be paid on each share to retiring stockholders or in the event the company is liquidated. Where there is only one class of stock, the computation of the book value per share is: total stockholders' equity divided by the number of outstanding shares. Since unpaid subscriptions are considered part of the asset of the corporation which the board may at any time declare due and payable, the computation should be based on the outstanding capital stock including the unpaid subscriptions, not only on the paid-up capital. LexLib Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman