Imelda P. Maiquez

January 14, 1993 Imelda P. Maiquez CEPALCO Eighth Floor, Strata 100 Bldg. Emerald Avenue, Ortigas Complex Pasig, Metro Manila M a d a m: This refers to your letter of December 29, 1992 inquiring whether the issuance of "treasury shares" to employees as stock bonus is subject to pre-emptive rights of stockholders and whether the same should be treated as new issues. The Corporation Code defines treasury shares as follows: "SECTION 9. Treasury shares . Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means, Such shares may again be disposed of for a reasonable price fixed by the board of directors." (Emphasis supplied) Treasury shares is distinguished from the authorized but unissued shares in several respect: their "acquisition" does not reduce the number of issued shares or the amount of stated capital and their "sale" does not increase the number of issued shares or the amount of stated capital. (11 Fletcher Cyclopedia Corporation, Chapter 58 sec. 5088) To settle doubts on the status of treasury shares, Section III (2) of the "SEC Rules Governing Redeemable and Treasury Shares" provides thus: "2. Treasury shares do not revert to the unissued shares of the corporation but are regarded as property acquired by the corporation which may be reissued or sold by the corporation at a price to be fixed by the Board of Directors; ..." (Emphasis supplied) xxx xxx xxx" Since treasury shares do not revert back to the unissued shares of the corporation, they do not lose their status as "issued shares". Accordingly, the same cannot be treated as "new issues" once they are disposed of or re-issued pursuant to Section 9 of the Corporation Code. However, such transaction is subject to the provisions of the Revised Securities Act considering that the re-issuance thereof may constitute distribution of securities to the public, and consequently, new or additional stockholders may come in. Under Section 4 of the Revised Securities Act, no securities (which include shares of stocks), except that of a class exempt under any of the provisions of Section five thereof or unless sold in any transaction exempt under any of the provisions of Section six thereof, shall be sold or offered for sale or distributed to the public unless such securities shall have been registered and permitted to be sold or distributed. However, while the re-issuance of treasury shares is not exempt per se under Sections 5 and 6 of said Act, the same may be exempted from registration requirements considering that said transaction is of limited character as the corporation does not normally acquire its own shares of stocks and the number of shares to be disposed of is usually minimal. However, exemption thereof is not automatic. The corporation is still required to secure exemption from the Commission prior to such re-issuance pursuant to Section 6(b) of the Revised Securities Act, quoted hereunder: "SECTION 6. ... (b) The Commission may, from time to time and subject to such terms and conditions as it may prescribe, exempt transactions other than those provided in the preceding paragraph, if it finds that the enforcement of the requirements of registration under this Act with respect to such transactions is not necessary in the public interest and for the protection of the investors by reason of the small amount involved or the limited character of the public offering. cdll As to whether the issuance is subject to the pre-emptive rights of existing stockholders, the Commission previously opined that the pre-emptive right of stockholders does not extend to the sale of treasury shares. ( SEC letter to Benguet Exploration Inc. dated April 26, 1960 , citing Maynard v. Doc Rum Leal Co., 265 S.W. 94; 11 Fletcher, Sec. 5136.2) However, this opinion which was issued under the old Corporation Law which is silent on the matter of pre-emptive right, no longer holds true under the present law on corporations, the Corporation Code. Section 39 thereof now provides: "SECTION 39. Power to deny pre-emptive right . All stockholders of stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholding, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt." (Emphasis supplied) The broad phrase "all issues or disposition of shares of any class" in the above provision is construed to include not only new shares issued in pursuance of an increase of capital stock or from the unissued shares which form part of the authorized capital stock, but also covers "treasury shares".Treasury shares would come under the term "disposition".Likewise, considering that it is not included among the exceptions enumerated therein where pre-emptive right shall not extend, the intention is to include it in its application. Moreover, it is worth mentioning that the funds which are used in reacquiring the treasury share which come from the surplus profits of the corporation belong to all the stockholders in proportion to their participation. Said funds could have been declared as dividends instead of using it to acquire the treasury shares. Thus, also from this viewpoint, aside from the above statutory requirement, it is also a desirable policy to recognize the right of pre-emptive right of stockholders over treasury shares to give all the stockholders the opportunity to get what is supposed to be received by them had the funds used to reacquire such shares been distributed as dividends. In the light of the foregoing, the pre-emptive right granted to stockholders under Section 39 of the Corporation Code applies also to the disposition or re-issuance of treasury stocks by the corporation. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman