Atty. Manuel C. Moyco

July 20, 1989 Atty. Manuel C. Moyco United Coconut Planters Bank UCPB Building, Makati Avenue, Makati, Metro Manila Sir : This refers to your letter, dated July 3, 1989, requesting the opinion of this Commission on the legality of issuance of shares in consideration of intangible assets. LexLib You alleged therein that United Savings Bank, Inc. (USB),United Bicol Savings Bank, Inc.,United Eastern Savings Bank, Inc.,United Mindoro Savings Bank, Inc. and Domestic Savings and Loan Association, Inc. (DSLA) have entered into a merger agreement. Under the plan of merger, USB, the surviving corporation, will issue shares of stock in favor of DSLA, one of the absorbed corporations, on a 10:1 ratio (ten DSLA shares for every one USB shares) taking into consideration the recognized value of intangible assets of DSLA to cover the bank's capital deficiency in the amount of P16,554,737.11 as of May, 1989, such as goodwill of the bank, franchises of the head office in Lucena and its branches in Lucban, Atimonan, Tayabas, Gumaca and Calaoag, personnel staffing patterns, clientele and location of the banks premises. The pertinent provision of the Corporation Code provides: "SECTION 62. Consideration for stocks . ...Consideration for the issuance of stock may be any or a combination of any two or more of the following: xxx xxx xxx 2. Property ,tangible or intangible ,actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued ; ...(emphasis supplied) Intangible properties may therefore constitute valid consideration as long as they can be of use to the corporation and have actual value. The goodwill of a business purchased by a corporation, and paid for by stock, is property, and is to be taken into consideration in determining the value paid for the stock and is to be valued on the basis of worth and never arbitrarily. (11 Fletcher Cyc. Corp. 1986 rev. vol. sec. 5216). Thus, in the case of the merger of Rural Bank of Opol, the Community Rural Bank of Claveria and Rural Bank of Laguindingan, the Commission had occasion to approve in principle the issuance of shares by the surviving corporation in consideration of the intangible assets or goodwill of the other constituent corporations, subject to the following conditions : 1. That the value of the goodwill has been approved by the Central Bank, and had been recognized in the books of constituent banks, and 2. That the shares representing the amount of the goodwill shall be held in escrow by the Commission to be released after the cost of the intangible assets shall have been amortized in accordance with a schedule to be submitted to this Commission by the constituent banks. ( SEC letter dated June 20, 1988, addressed to United Coconut Planters Bank ). In view of the foregoing, the Commission interposes no objection on the proposed issuance of shares of USB in consideration of the intangible assets or goodwill of DSLA, subject however to the aforementioned conditions. Please be advised accordingly. Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner