Ms. Concepcion C. Madarang

June 3, 1994 Ms. Concepcion C. Madarang Saint-Port Machinery and Drilling Corp. Rm. 3B Rubille Bldg.,748 EDSA, Quezon City M a d a m : This refers to your letter of May 23, 1994 inquiring whether or not, on the basis of the facts presented therein, a close corporation is legally bound to accept a transferee of shares of stock which form part of the transferor's partially paid shareholdings in the absence of a board resolution approving the Deed of Absolute Sale and in the light of the preemptive rights of the stockholders. Please be advised that the Commission does not, as a matter of settled policy, render opinions on queries or transactions based on allegations involving justiciable issues which may eventually be litigated in the future or which could only be clarified and determined in a proper proceeding, such as those presented in your letter. The opinion which may be rendered thereon would not be binding upon private parties who would in all probability, if the opinion happens to be adverse to their interest, take issue therewith and contest it before the Court. The Commission, therefore, refrains from giving categorical answer to your query so that it will not be estopped to resolve any controversy pertaining thereto if brought before it in a proper proceeding. However, for purposes of information only, the following may be imparted. The pertinent provision of the Corporation Code provides: "SECTION 64. Issuance of stock certificates . No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares),if any is due, has been paid ." The above-provision implicitly sets forth the doctrine that a subscription is one, entire and indivisible contract. It cannot be divided into portions so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full payment of his subscription together with the interest and expenses if any is due. ( SEC letter dated January 6, 1983 addressed to Bay Sunset Tours & Travel Corporation ) Accordingly, the Commission had previously opined that if the stockholder has not paid the full amount of his subscription, he cannot transfer part of it in view of the indivisible nature of a subscription contract. It is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees. However, the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer, must assume the unpaid balance. It is necessary, however, to secure the consent of the corporation since the transfer of subscription right contemplates a novation of contract which under Article 1293 of the Civil Code of the Philippines, cannot be made without the consent of the creditor. ( Ltr. to Atty. Luciano S. Borja dated September 17, 1990 ) In order to be valid and enforceable, any restrictions on the transfer of shares, such as requiring the transferor to first offer the same to the existing stockholders before selling it to third parties, must be explicitly provided for in the articles of incorporation, by-laws and stock certificates. The Corporation Code provides thus: "SECTION 98. Validity of restrictions on transfer of shares . Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock ;otherwise, the same shall not be binding on any purchaser thereof in good faith. Said 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. If upon the expiration of said period, the existing stockholders in the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person." (Emphasis supplied) Finally, under Section 63 of the Corporation Code, quoted in part hereunder, no transfer of shares shall be valid and effective as against the corporation until the transfer is recorded in the corporate books. "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 or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation." (Emphasis supplied) cdlex Please be advised accordingly. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner