Quasha Asperilla Ancheta Valmonte Peña & Marcos Law Office

October 15, 1984 Quasha Asperilla Ancheta Valmonte Pea & Marcos Law Office Don Pablo Building, 114 Amorsolo St. Makati, Metro Manila Attention : Atty . Felisa B . Baguilat Gentlemen: This refers to your letter dated August 3, 1984, requesting the opinion of this Commission on the queries posed therein. It appears therein that your client issued a call for payment of subscription and later on decided to go through delinquency proceedings pursuant to Sec. 68 of the Corporation Code. On the published date of the sale, some stockholders opted to pay for their unpaid subscriptions but none bidded on the other shares. The corporation having no surplus profit could not bid on the shares. For financial reasons, the corporation does not intend to pursue the alternative remedy of a court action to recover unpaid subscription as provided for in Section 70 of the Code. Hence, the following queries: 1. Since the corporation has followed strictly the delinquency proceedings set forth in Section 68 of the Code, can it now consider the paid-up portion of the delinquent subscription, as forming part of treasury by operation of law and thereafter may the corporation reissue the treasury shares to raise additional funds for the corporation? 2. Can the corporation decrease its authorized capital stock by the amount of the delinquent unpaid subscription, if the paid-up portion is to be treated as treasury? Anent your first query, Section 41 of the Corporation Code provides: " Power to acquire own share . 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: xxx xxx xxx 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. xxx xxx xxx" The above-quoted provision is explicit that a corporation should have unrestricted retained earnings in its books to cover the shares to be purchased or acquired. "The danger incident to the recognition of the right of a corporation to purchase its own stock have led to the enactment of statutory provisions restricting the funds a corporation may use to purchase its own assets, and it is safe to say that where a statute restricts the power to buy, the restriction must be obeyed." (6A Fletcher, Cyc. Corps.,1968 Rev. Vol, sec. 2849 at 368). Inasmuch as the corporation has no unrestricted retained earnings, it cannot acquire any portion of the delinquent subscription as forming part of treasury. To opine otherwise would amount to a forfeiture of stock. LexLib Generally, the power to forfeit the shares of delinquent stockholders is expressly conferred upon a corporation by its charter or general law. (4 Fletcher, Cyc. Corps.,sec. 1857, at 667).A forfeiture in pursuance of a mere resolution of the board of directors is invalid. (Fletcher, Supra.,sec. 1858, citing Budd v. Multnomah St. R Co.,15 Arc 413, 15 p 659 3 Am St. Rep 169). Furthermore, Section 64 of the Corporation Code sets forth the doctrine that a subscription is one, entire and indivisible whole contract. It cannot be divided into portions, so that the stockholder shall not be entitled to a certificate of stock until he has paid for the full amount of his subscription together with interest and expenses, if any is due. (SEC Opinion, dated June 26, 1984, March 16, 1983 and January 6, 1983). In the light of the foregoing, our answer to your first query is in the negative. The second query becomes moot and academic in view of our reply to the first query. LibLex Very truly yours, (SGD.) MANUEL G. ABELLO Chairman