Atty. Victor Africa

November 18, 1992 Atty. Victor Africa 316 Gil J. Puyat Ave., Salcedo Village, Makati Metro Manila S i r : This refers to your letter of October 5, 1992 requesting opinion relative to transfer/assignment of shares in a "close corporation". As stated, a stockholder is sued for a sum of money or damages, whatever. He offers as dacion en pago, or as part of a compromise agreement or amicable settlement, or whatever, his shares of stock in Corporation "ABC".However, Corporation "ABC" is a "close corporation" and its Articles of Incorporation and Certificate of Stock reflect a "Right of First Refusal" provision in favor of the corporation and incumbent stockholders. Both the stockholder and his creditor present the "transfer/assignment" arrangement to the court and jointly ask the court to approve the arrangement as well as to dismiss the case. The court approves the arrangement. QUERIES: 1. Did the corporation and incumbent stockholder ipso facto lose the "right of first refusal" even if they were not parties to the case, nor to the court-approved arrangement? 2. If the "right of first refusal" is not lost, what course of action is available to the corporation and incumbent stockholders after they have been officially notified of the court-approved arrangement and how soon thereafter to protect their right? 3. If the court-approved arrangement is presented to the Corporate Secretary together with the Certificate of Stock to be cancelled but without any proof of compliance with the "right of first refusal",is the Corporate Secretary still ministerially bound to record in the Stock & Transfer Book the name of the transferee even if he knows that the "right of first refusal" provision in the Articles of Incorporation and Certificate of Stock has been violated, and that the corporation and incumbent stockholders were not allowed to avail themselves of the "right of first refusal"? 4. If the Corporate Secretary makes such a recording a notwithstanding his knowledge of the violation, is he liable in any way to the corporation and to incumbent stockholders whose "right of first refusal" was violated? 5. And if the Corporate Secretary does not make such a recording because of his knowledge of the violation, is he liable in any way to the transferee, who for example may not be allowed to vote the court-approved "transferred"/"assigned" shares because they are not yet registered stockholders? LexLib The pertinent provisions of the Corporation Code provide: "SECTION 99. Issuance or transfer of stock of a close corporation in breach of qualifying conditions. xxx xxx xxx (3) If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction ,if such acquisition violates the restriction. (4) Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (i) that he is a person not eligible to be a holder of stock of the corporation, or (ii) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (iii) that the transfer of stock is in violation of a restriction on transfer of stock ,the corporation may, at its option, refuse to register the transfer of the stock in the name of the transferee. ....(Emphasis supplied) Thus, pursuant to the foregoing statutory provisions, the Corporate Secretary may refuse to record the above-mentioned transfer in the corporate books despite the Court approval and he can not be held liable for such refusal if there is a clear breach of transfer qualifying conditions. As to the remedy on the part of the transferee in the event the Corporate Secretary refuses to register the transfer, Section 99 of the Corporation Code further provides: (7) The provisions of this section do not in any way impair any right of a transferee regarding any right to rescind the transaction or to recover under any applicable warranty, express or implied ." (Emphasis supplied) Should the Corporate Secretary allow the recording of the transfer, any of the stockholders may question the same by filing a formal complaint with the Securities Investigation and Clearing Department of this Commission pursuant to P.D. 902-A as amended. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman