Atty. Dionisio D.T. Garciano

July 1, 1994 Atty. Dionisio D.T. Garciano Garciano and Associate Suite 1804 Cityland 10 Condominium, Tower II H.V. de la Costa St.,Salcedo Village Makati, Metro Manila S i r: This refers to your letter of June 29, 1994 inquiring on the legal remedy available to a minority stockholder to compel the corporation to buy back his shares, with or without unrestricted retained earnings. Please be advised that the Corporation Code of the Philippines does not confer upon any stockholder the right to demand refund of investment conformably to the general rule that subscription to the capital stock of a corporation constitutes a trust fund for the benefit of the creditors and no valid agreement can be made by which a subscriber can be released therefrom. (SEC Opinion dated 1/21/91 addressed to Lorelei Torralba Gangayco, citing 4 Fletcher Cyc. Corps.) Moreover, "a contract of subscription is, at least in the sense which creates as estoppel, a contract among several subscribers. For this reason no one among the several subscribers can withdraw from the contract without the consent of all the others and thereby diminish without the universal consent, the common fund in which all have acquired interest". (Lingayen Gulf Electric Power Co. v. Baltaz G.R. No. L-4824, 1953, 49 OG 809, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1980 Edition) Therefore, a stockholder cannot compel the corporation to return his investments without the consent of all the stockholders. Neither does he have the right to withdraw even when all the stockholder assent thereto if there is prejudice to creditors. The underlying reason for the restriction springs from the necessity of imposing safeguards against the depletion by a corporation of its assets and the impairment of its capital needed for the protection of creditors which is expressed in terms of the trust fund doctrine. However, should all the stockholders consent and no creditor is prejudiced, the corporation, pursuant to Section 41 of the Corporation Code, may re-acquire the shares subject to the condition that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired. As a remedy in the absence of the required retained earnings, a stockholder may avail of Section 63 of the Corporation Code which allows transfer of shares. Said Section provides: "SECTION 63. Certificates 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 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." (Emphasis supplied) prcd In the absence of a transfer restriction clause in the articles of incorporation, a bonafide transfer of shares to a third party does not require the consent of the corporation and cannot be prevented by it or by its officers. However, it is to be emphasized that while ownership of shares is transferable, it cannot be transferred to several transferees if the selling stockholder has not paid the full amount of the subscription contract. Section 64 of the Corporation Code implicitly sets forth the doctrine that a subscription contract 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. Thus, the Commission, in several occasions, has 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; Ltr. to Conception C. Madarang dated June 3, 1994 ) Please be advised accordingly. cdlex Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner