Attys. Bienvenido I. Somera, Jr.

July 4, 1995 Attys. Bienvenido I. Somera, Jr. and Cynthia D. Nuval-Ambrosio Villaraza & Cruz Law Offices 5th Flr. LTA Bldg.,118 Perea St., Legaspi Village 1229 City of Makati S i r : This refers to your letter of June 26, 1995 requesting opinion on the following queries: 1. Does the SEC permit an ordinary corporation which is not a close corporation to impose a consent restriction on the transfer of its shares of stock? 2. May a corporation impose a requirement in its articles of incorporation prohibiting a stockholder from pledging, mortgaging or in any manner encumbering his shares of stock without the consent of the Board of Directors and/or stockholders? 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 sell and transfer the same at will, except insofar as the right may be restricted by the charter of the corporation, or the general law, or by a valid by-law or by a valid agreement between him and the corporation, provided the transfer is in good faith, and to a person capable of assuming the obligations of a stockholder. ( SEC Opinion dated July 22, 1965 citing 12 Fletcher's Cyc. of Corps. and reiterated in subsequent SEC Opinions) The transferable nature of ownership of shares of stock is expressly recognized under the Corporation Code of the Philippines 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) llcd As such, the facility of transferring them must not be unduly hampered by imposing restrictions as would amount to restraint on free alienation of property. The Commission, however, as a matter of policy, allows restrictions on transfer of shares in the articles of incorporation if the same is necessary and convenient to the attainment of the objective for which the company was incorporated, unless palpably unreasonable under the circumstances. ( SEC Ltr. to Atty. Merly P. Cunanan dated February 20, 1995 ) A provision in the articles of incorporation requiring stockholders desiring to sell their stocks to offer it to the corporation or to the existing stockholders at a given reasonable period before disposing of it to third parties may be considered valid and enforceable ( SEC Ltr. to Atty. Vicente G. Villamil dated February 15, 1993 ).Restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. Reasonable option period may range from 30 to 60 days or even more, depending on the circumstances surrounding the case. After the option period has expired the stockholder is free to sell his shares of stock to anyone. A restriction clause is not valid and enforceable if it absolutely prohibits the sale or transfer of stock without the consent of the Board of Directors and/or stockholders, as this would violate the general law on free alienability of shares of stock as personal property. ( SEC letter addressed to Atty. Helen C. De Leon-Manzano dated June 8, 1995 ) Relative to your second query, the Corporation Code provides: "SECTION 55. Right to vote of pledgors, mortgagors, and administrators . In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given such right in writing which is recorded on the appropriate corporate books by the pledgor or mortgagor. xxx xxx xxx." (Emphasis supplied) The above provision recognizes the right of the stockholders to pledge or mortgage their shares of stock. Hence, an absolute restriction prohibiting the stockholders from pledging or mortgaging their shares of stock without the consent of the Board of Directors and/or stockholders would be violative of said right. In. the light of the foregoing, we answer your queries in the negative. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner