Tesoro Electro-Digital Systems, Inc.

October 12, 1982 Tesoro Electro-Digital Systems, Inc. Suite 702, 7th Flr.,V.V. Soliven Towers EDSA, Greenhills, San Juan, Metro Manila Attention : Mr . Bienvenido C . Tesoro Sir : This has reference to your letter dated August 4, 1982, regarding the following queries. 1. Can a shareholder of a close family corporation dispose or sell his/her stock certificate to another member of the family corporation or to a third party (non-member of the family) without the need for a formal board resolution approving such sale? Sec. 98 of the Corporation Code provides, and we quote: "SECTION 98. Validity of restrictions on transfer of share. 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 or the corporation fails to exercise the option to purchase the transferring stockholder may sell his shares to any third person." Furthermore, this Commission has held in a previous opinion that "In the absence of restrictions in the charter of the corporation, a bona fide transfer does not require the consent of the corporation and cannot be prevented by its officers." ( Letter to Pacifico Tacub & Associates dtd. August 26, 1971 citing Sec. 5452, Fletcher Cyclopedia Corp. Law) In view of the above, and considering that a perusal of your articles of incorporation and by-laws reveal that the same do not provide for restrictions on transfer of shares and considering further that shares of stock are personal property and as such, the owner has the absolute and inherent right to sell or transfer the same at will, a shareholder of a close corporation can dispose of or sell his stock certificates to another without the need of a board resolution approving such sale. 2. Can a stockholder use her certificate of stocks as security or collateral for a loan without the approval of the board? In the absence of the aforesaid restrictions in the articles of incorporation, by-laws and the stock certificates and since shares of stock are transferable at will a stockholder can use her stock certificates as collateral for a loan without need for any board approval. cdll 3. Can the family corporation pass a board resolution requiring that all future sale of stocks to third parties should have the formal approval of the board? A family corporation cannot adopt a board resolution requiring that all future sale of stocks to third parties should have the formal approval of the board. In this instance, the articles of incorporation and by-laws should be amended to include the restrictions on the transfer of shares, and said restrictions must likewise appear in the stock certificates, as provided in the aforequoted provision. Furthermore, the restrictions cannot be more oppressive than granting the existing stockholders or the corporation the option to purchases the shares of the selling stockholders under reasonable terms and conditions or period stated therein. 4. Can the company purchase the stock certificates of a stockholder and redistribute the same shares equally among the shareholders to maintain the same number of shareholdings among the stockholders? The same is hereby answered in the affirmative provided the purchase complies with Sec. 41 of the Corporation Code quoted hereunder and the following conditions: "SECTION 41. Power to acquire shares . A stock corporation shall have the power to purchase or acquire its own shares for a legitimate purpose or purposes, including but not limited to the following uses: Provided that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:" To summarize, a corporation may purchase its own shares subject to the following conditions: 1. Its capital is not thereby, impaired; 2. A legitimate and proper corporate objective is advanced; 3. The condition of corporate affair warrants it; 4. The transaction is designed and carried out in good faith; 5. There is intended and there results no undue advantage to a few favored stockholders at the expense of the remainder; 6. The right of creditors are not jeopardized; 7. There must be surplus to reacquire the same. Please guided accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner