Atty. Michael P. Pasagui

July 25, 1983 Atty. Michael P. Pasagui 403 Madrigal Building Ayala Ave.,Makati, Metro Manila Sir : This has reference to your letter dated June 16, 1983, requesting the opinion of this Commission on the following queries regarding the application of the provision on founder shares in connection with Section 148 of the Corporation Code. LibLex 1. If the articles of incorporation and by-laws of a corporation existing as of May 1, 1980 provided for founder shares with exclusive voting rights to vote and be voted for in the election of directors, and said corporation fails to amend its articles and by-laws or otherwise obtain the requisite approval from the Securities and Exchange Commission within the two (2) year period from May 1, 1980 as required by Section 148, in order to conform with and henceforth be governed by Section 7, is the classification and grant of exclusive voting privileges ipso facto rendered invalid for non-compliance with the requirement of law? In reply thereto, please be informed that such classification and grant of exclusive voting privileges ipso facto have not been rendered invalid for non-compliance with Section 148 of the Corporation Code inasmuch as the Commission, in several opinions, has ruled that "if a corporation does not file an amendment to its articles of incorporation on or before May 1, 1982, the Commission will consider the limitation laid down by Section 7 of the Corporation Code as written into said articles on May 1, 1980". (SEC Opinions dated April 26, June 29, 1982 and July 11, 1983). In effect, this Commission considers the limitation period granting exclusive voting right to be effective only up to April 30, 1985. 2. Apropos to the above, on the assumption that said grant of exclusive voting rights become invalid, may said founder shares continue to subsist in the corporate capital stock with similar rights as the common stock and/or such other preference the articles give such founder shares? We need not answer this question in view of our answer to query no. 1. 3. On the other hand, may the corporation be allowed to retire said founder shares by repurchase under Section 41? Section 41 of the Corporation Code provides: "SECTION 41. Power to acquire own shares . A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose of purposes. ...Provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired." ... The abovequoted provision authorizes the corporation to purchase or acquire its own shares out of unrestricted retained earnings for a legitimate corporate purpose or purposes. The underlying reason for limiting shares purchases 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. This is sometimes expressed in terms of the trust fund doctrine. (Ballantine on Corporation p. 605) The rights of a corporation to purchase its own stock is subject to the condition that the purchase shall be made in good faith and without prejudice to the rights of other stockholders or creditors. It is unauthorized and invalid if made for the purpose of defrauding or injuring other stockholders or creditors or if it does in fact defraud or prejudice creditors, though made in the most perfect, good faith. (6 A Fletcher, Cyc. Corp.,see 2854 pp. 389-390 (1968 Rev. Vol) 4. In the event of retirement, can the founder shareholders demand payment of said shares at more than book value? In a previous opinion, this Commission has ruled that "As to the price that the corporation will pay to acquire the shares of stock of the selling stockholders, the Supreme Court in the case of National Exchange Co. vs. Dexter, G.R. No. 27872, February 25, 1928 (51 Phil. 601) ruled that if in the course of permissible business transaction, shares of its own stock are acquired by the corporation, such shares . . . need not be sold at par value but may be disposed of at the best price obtainable. It is, therefore, for the corporation to determine the price that it will pay for the shares to be sold by your client" ( Ltr. to Trident Development Corporation dtd. December 15, 1982 citing Ltr. to Mr. Johnny Roman dtd. December 3, 1975 ). llcd Please be guided accordingly. Very truly yours, (SGD.) JESUS J. VALDES Associate Commissioner