Mr. Edward S. De Los Reyes

June 22, 1995 Mr. Edward S. De Los Reyes Pacific Seamen Services, Inc. 690 Aurora Blvd.,Quezon City Metro Manila S i r : This refers to your letter of April 21, 1995 following-up your letter-query dated July 26, 1994 addressed to the Brokers and Exchanges Department wherein you posed certain queries pertaining to stock option coming from treasury shares . LexLib As stated your corporation is a close corporation with 13 stockholders, capitalized at P3M, all issued with 46 shares held in treasury .One of the stockholders proposes a stock option from the shares held in treasury to non-stockholder middle level management .Your queries are: 1. May treasury shares held by the corporation be available for stock option ? 2. Should stock option come from the unissued capital stock of the company? 3. Does the company need to amend and delete its right of first refusal when granting stock options to non-stockholders? 4. With the right of first refusal clause, does the company need a 100% approval of the stockholders in granting the stock options? 5. Would there be a violation of pre-emptive rights of existing stockholders if the stock option is offered to non-stockholders? 6. Would there be a violation of the right of the first refusal clause if the stock option is offered to non-stockholders? 7. What is the remedy, if any, of dissenting stockholder not agreeing to the grant of stock option to non-stockholders? 8. Is the corporation compelled to buy out the dissenting stockholder? 9. To avoid the share going to non-stockholders, in the exercise of his rights, could the dissenting stockholder buy all the stock in treasury if other stockholders waive their right? llcd Treasury shares is distinguished from the authorized but unissued shares in several respect: their "acquisition does not reduce the number of issued shares or the amount of stated capital and their "sale" does not increase the number of issued shares or the amount of stated capital. (11 Fletcher Cyclopedia Corporation, Chapter 58 sec. 5088) To settle doubts on the status of treasury shares, Section III (2) of the "SEC Rules Governing Redeemable and Treasury Shares" provides thus: "2. Treasury shares do not revert to the unissued shares of the corporation but are regarded as property acquired by the corporation which may be reissued or sold by the corporation at a price to be fixed by the Board of Directors ,..." (Emphasis supplied) Since treasury shares do not revert back to the unissued shares of the corporation, they do not lose their status as "issued shares." Accordingly, the corporation need not comply with the "SEC Rules Governing the Grants of Stock Options" inasmuch as said rules applies only to stock options coming from the "unissued shares". Section 1 of said rules defines a "stock option", thus: " ...A stock option is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a specified period and under the terms and conditions of the grant, exercisable by the grantee at any time within the period granted." (Emphasis supplied) However, while the transaction does not fall under the SEC Rules Governing the Grants on Stock Options, the same may be re-issued pursuant to Section 9 of the Corporation Code which provides: "SECTION 9. Treasury shares . Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors ." (Emphasis supplied) Thus, instead of complying with the SEC Rules Governing the Grants of Stock Options, the corporation may only secure exemption from the registration requirements under the Revised Securities Act ,in which case, the following basic requirements are required to be submitted to the Commission in triplicate copies: 1. Letter petition requesting for exemption from the registration requirements under the Revised Securities Act indicating the following: a. Name(s) of purchaser(s) b. Number of shares and issue value c. Nature of payment (cash, property, etc.); 2. Resolution of the Board of Directors authorizing the issuance of shares (under oath); 3. List of stockholders of record as of the date of the Board Meeting authorizing the issuance certified by the corporate secretary; 4. Written waiver of non-subscribing stockholders of record, unless pre-emptive right is denied in the articles of incorporation; 5. Filing fee of 1/10 of 1% of the total issue but not less than P500.00 Relative to Queries 3-6, since the re-issuance of treasury shares is not covered by the SEC Rules Governing Grants of Stock Options, we answer your queries in relation to the requirements for request for exemption from the registration requirements of the Revised Securities Act. While under Section 9 of the Corporation Code the reissuance of treasury shares does not require stockholders approval, the same is subject to the pre-emptive rights of the stockholders. The Corporation Code provides, thus: "SECTION 39. Power to deny pre-emptive right . All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt." (Emphasis supplied) The Commission had occasions to rule that Sec. 39 had widened the coverage of pre-emptive right as to include re-issuance of treasury shares by explaining that the broad phrase " all issues or disposition of shares of any class" in the above provision is construed to include not only new shares issued in pursuance of an increase of capital stock or from the unissued shares which form part of the authorized capital stock, but would come under the term "disposition". The SEC further opined that since re-issuance of treasury shares is not included among the exceptions enumerated therein where pre-emptive right shall not extend, the intention is to include it in its application. (SEC Opinion dated January 14, 1993 addressed to Ms. Imelda P. Maiquez.) Furthermore, Section 102 of the Corporation Code is explicit in case of " close corporations ". "SECTION 102. Pre-emptive right in close corporations . The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued including reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts unless the articles of incorporation provide otherwise ." (Emphasis supplied) Thus, unless specifically denied in the articles of incorporation or the issuance fall under any of the exceptions enumerated in Section 39 of the Corporation Code, all stockholders of record shall have the pre-emptive right to subscribe to all issuances of shares .Accordingly, in the event the treasury shares are reissued, waiver of such right by all non-subscribing stockholders is necessary. Being a personal right, such waiver should be given individually by the non-subscribing stockholders concerned. ( SEC Letter dated October 1, 1981 addressed to Mr. Fernando C. Santico ) Relative to the issue on the rights of dissenting stockholders (Queries 7-9), the re-issuance of treasury shares, is not one of those instances enumerated under Section 81 of the Corporation Code, wherein a dissenting stockholder is entitled to exercise his appraisal right. His only right is merely to choose whether or not to subscribe to the re-issuance. llcd The Commission had also previously opined that if the shares corresponding to one stockholder are not subscribed or purchased by him, it is not necessary that said shares should again be offered on a pro-rata basis to the stockholders who took advantage of their right of pre-emption. This is because for as long as they exercise their pre-emptive rights, their relative and proportionate voting strength in the corporation will not be affected adversely. Thus, the shares may be offered to non-stockholders of record on a first come first serve basis without violating the pre-emptive rights of the stockholders. However, the Commission considers it a sound corporate practice to offer always the remaining shares to interested stockholders of record whenever practical and feasible before offering them to third parties. ( SEC Opinion dated September 24, 1974 addressed to Atty. Salvador P. De Guzman, Jr. ) Please be advised accordingly. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner