Atty. Venustiano Roxas

February 10, 1982 Atty. Venustiano Roxas Philippine Raisers Marketing, Inc. Pandi, Bulacan Dear Atty. Roxas: This is in connection with your letter-query dated July 28, 1981 requesting opinion on whether or not it is legally feasible for the Philippine Raisers Marketing, Inc. to issue additional fully-paid shares of stock worth P110,000.00 to one of its directors/stockholders who will not pay in cash but only in kind by mortgaging his real estate situated in the province of Laguna worth about P3,000,000.00 more or less as collateral for a contemplated loan of the corporation in the amount of P2,500,000.00. LibLex You are also asking whether such "accommodation" or "service" in procuring a loan for it may lawfully be considered as valid consideration for the issuance of shares of stock, considering that it is the only way by which the corporation can possibly achieve its plans to fully operate the business and no stockholders would object to such an arrangement because they are also aware of the sacrifice and risks that said director will assume for allowing the use of one of his properties as collateral for the loan of the corporation. The pertinent provision of the Corporation Code provides the following considerations for the issuance of stocks: "SECTION 62. Consideration for stocks . Stocks shall not be issued for a consideration for less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness by the corporation. 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversation. It is very clear that the new Corporation Code allows a corporation to receive as payment for its stocks not only money and property but also labor or services provided the transaction is in good faith and no fraud is perpetuated upon other stockholders or creditors (Cf, Sterling Varnish Co. vs. Svenson Co., 241 Miss 810; 133 So 2d 624). Moreover, "a corporation finding it necessary to borrow money for the purposes of its business may issue stocks in payment for services in procuring a loan for it." (Town and Tractor Sales, Inc. vs. Goodwin, 233 Ark 317; 344 SW 2d 338).There is therefore no legal impediment for your corporation to lawfully and validity consider the "service" or "accommodation" by your director similar to a guarantee fee charged by banks as valid consideration for the issuance of shares of stock worth P110,000.00. In other words, your director or officer may deal with your corporation, specially since the said contract is highly advantageous for the corporation and all your stockholders are inclined to accept aforesaid arrangement since it is the only way by which they can possibly achieve their plans to fully operate the business. "At times, the directors may be the only persons who can be counted upon to give financial assistance of which the corporation is in extreme need." (Stevens, p. 679, cited in Agbayani, Commercial Laws of the Philippines, 1. 1523).However, to be fair to your director-guarantor, we believe that he should be appointed or voted treasurer or co-signer of documents of indebtedness of your corporation in order to safeguard the multimillion funds for which he and his property are legally liable. The first step to be taken must be the verification of his title in the Land Registration Commission to insure that there are no conflicting claims nor lien or encumbrances over the land described in the title, considering the amount of money involved. Immediately thereafter, your corporation must submit the following documents to this Commission: 1. Board resolution authorizing the issuance of shares from the unissued portion of the capital stock. 2. List of stockholders of records as of the date of the meeting of the Board of Directors approving the issuance. 3. Certificate of waiver of pre-emptive rights of non-subscribing stockholders. 4. Letter requesting the exemption from the registration requirements of the Securities Act the issuance of shares of stock out of the unissued capital stating the name of the stockholders, the issued value and the nature of payment, which is labor performed or services actually rendered to the corporation. 5. Description of the services rendered. The services rendered in exchange of the stocks must be fairly and adequately valued in relation to the par value of the stock issued. 6. Proof that the loan was granted to your corporation. 7. Proof that the real estate property of the aforesaid director was really used as a collateral for the loan of your corporation. 8. Computation of proportionate allocation guaranteed by the real estate properties used as collateral for the loan, if real estate properties other than the property of the director were likewise used as collateral to secure the loan of your corporation. For your guidance and information, the Development Bank of the Philippines charges the following guarantee fees; (a) 1.5% on amount guaranteed upon issuance of the letter of guarantee. (b) 1.54% per annum commitment charges for amount not availed of after date of issuance of the letter of guarantee. (c) 3% of the amount availed of payable quarterly from the date of availment. (d) 3% per annum of the unpaid balance of the amount availed of. LexLib Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner