Honorable Narciso D. Monfort

June 14, 1988 Honorable Narciso D. Monfort House of Representatives Batasang Pambansa Quezon City Dear Congressman Monfort: This refers to your letter, dated June 2, 1988 requesting the opinion of this Commission on the query posed therein. It appears that the Honorable Congressman, together with Messrs. Jose Monfort and Roberto Guevara were grantees of government concession for collecting or gathering of marine mollusks or their shells, sponges, seaweeds and other aquatic products in any of the territorial waters of the Philippines under Section 6(b)5 of P.D. 43, otherwise known as the "Fishery Industry Development Decree of 1972". The contract of lease were granted for a period of 25 years, subject to renewal for an equal or longer period. Two of the lease contracts have an expiry date of December 31, 1998 while the other one is valid up to December 31, 2004. In this connection, your plan is to transfer the lease rights above mentioned in favor of Aquatic Agro-Industrial Development Corporation (AAIC), as additional contribution under Section 7 of P.D. 1705, which reads in part thus: "Section 35(c)(2) of the National Internal Revenue Code is hereby amended to read as follows: ...No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property." Your query is whether or not the proposed assignment of right covering certain fishing concessions in exchange for shares of stock of AAIC is feasible in the light of the provisions of the Corporation Code. Many jurisdiction now have constitutional or statutory provisions defining the type of consideration to be paid upon the issuance of stock by a corporation. Our statutory provision on the matter is found in Section 62 of the Corporation Code which provides in part thus: "Stocks shall not be issued for a consideration less than the par or issued price. Consideration for the issuance of stock may be any or a combination of any two or more of the following: xxx xxx xxx 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; xxx xxx xxx." Stocks may be paid for in various kinds of property, including valuable contract rights. (Sterling Varnish Co. v. Sonom Co.,241 Miss. 810, 133 SO2d 624, cited in 11 Fletcher, Cyc. Corp.,1986 rev. vol.,sec. 5188, p. 413)."Stock may be issued by a corporation ... for a contract assigned to the corporation " (Fletcher Supra.,sec. 5193, citing Fuller v. Carku Motor Car Co.,137 Ga. 370, 73 SE 647; Halcombe v. Trenton White City Co.,80 N.J. Eq. 22, 82 A 618, Affg. 82 NJ Eq. 364 91A 1069) "... or for the assignment of a lease ." (Fletcher, sec. 5193, citing Ellis v. Penn Been Co.,Del Ch 213, 80 A 666; Halcombe v. Trenton White City Co.,Supra; Close v. Noye, 147 NY 597, 41 NE 570; Vermillon Parish Peat Moss Co.,(Tex. Civ. App),465 SW2d 950. (Emphasis supplied). However, the prevailing view is that "the property which a corporation may accept in exchange for its stock must be of a kind which the corporation may lawfully acquire and hold in carrying out the purposes of its incorporation and which is necessary or proper for it to own in carrying on its business. It cannot lawfully issue stock for property which its charter does not authorize it to acquire, or for property acquired for an unauthorized purpose".(11 Fletcher, sec. 5188, citing various cases). A verification of the record of Aquatic Agro-Industrial Development Corporation, on file in this Commission, shows that said corporation is primarily engaged in fishing. Therefore, the right to the fishing concessions is something which the corporation may acquire and hold in carrying out its purposes. In view of the foregoing, your query is answered in the affirmative, subject however to the following conditions, to wit: that assignment or transfer of contractual right to the fishing concession carries the imprimatur of the Bureau of Fisheries (Department of Agriculture and Natural Resources);that the leasehold is of a substantial nature, having a pecuniary value capable of ascertainment; that the right over the property can be delivered to the corporation and must be actually so transferred. We trust that the foregoing merit your request. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman