Feria, Feria, Lugtu & Lao Law Office

November 6, 1990 Feria, Feria, Lugtu & Lao Law Office Ferlaw Building, 366 Cabildo St. Intramuros, Metro Manila Attention : Mr . Jose Luis R . Gomez Gentlemen : This refers to your letter dated October 3, 1990 requesting opinion on the query posed therein based on the following facts: "Mr. A and Mr. B are co-owners of a parcel of land and a building which is currently earning income. Mr. A wants to exchange his share in the co-ownership with shares of X Corporation. Said shares shall be taken from the unissued portion of the authorized capital stock of X Corporation. Mr. B as the co-owner has no objection thereto. The new co-owners therefore shall be Mr. B and X Corporation. Is X Corporation, a company engaged in real estate development, allowed to do this?" 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. The property must be of such character that it can be delivered to the corporation , instead of being merely communicated, and it must be actually so transferred. Furthermore, it must also be such as is capable of being applied to the payment of debts and of distribution among its stockholders , and that only such property may be taken for stocks as can be sold and transferred by the corporation , and as shall subject to levy and sale on execution, or other process issued out of any court having competent jurisdiction, for the satisfaction of any judgment or decree against the corporation. (11 Fletcher; sec. 5188 citing several cases) The pertinent provision of the Civil Code of the Philippines provides: "ARTICLE 493. Each Co-owner shall have the full ownership of his part and the fruits and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership." (Emphasis supplied) It is clear from the foregoing that interest in a co-ownership can be validly alienated. While under Article 1620 of the Civil Code, "a co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them, are sold to a third person", said provision does not affect its nature of being transferable since under Article 1623 of the Civil Code, "the right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be". Thereafter, the same can be transferred to third persons. What is important is, the property must be capable of being transferred by the corporation. In the light of the foregoing, your query is answered in the affirmative, subject to the following conditions: 1. That the property must be something which the corporation may acquire and hold in carrying out its purpose or reasonably necessary or convenient in the pursuit of its business; 2. That interest in the co-ownership must have a pecuniary value capable of ascertainment (at a fair valuation equal to the par or issued value of the stock issued); and 3. That the right over the property must actually be transferred to the corporation and no creditors of the property held in common shall be prejudiced by the transfer; 4. That the transfer shall be subject to Articles 1620 & 1623 of the Civil Code. LibLex (SGD.) RODOLFO L. SAMARISTA Associate Commissioner