Atty. Jose S. Tayag

January 25, 1995 Atty. Jose S. Tayag Joaquin Cunanan & Co. 8th Flr. BA-Lepanto Bldg. 8747 Paseo de Roxas, Makati, Metro Manila S i r : This refers to your letter of January 18, 1995 requesting confirmation that a foreign subsidiary corporation can be formed in the Philippines using financial instruments, such as notes, shares of stocks or bonds as paid-up capital instead of cash. The pertinent provision of the Corporation Code provides: "SECTION 62. Consideration for stocks . Stocks shall not be issued for a consideration less than the par or issued price thereof. 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; xxx xxx xxx; Where the consideration is other than actual cash ,or consists of intangible property such as patents or copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission . Shares of stock shall not be issued in exchange of promissory notes or future services. xxx xxx xxx." (Emphasis ours) The above provision allows payment in exchange for shares of stock in the form of property. Since financial instruments/receivables may be classified as personal property, they may be legally accepted as capital contribution. However, the above law imposes the conditions that the property which a corporation may accept for exchange of stocks must be: 1. actually received by the corporation; 2. necessary or convenient for its use and lawful purpose; 3. at a fair valuation equal to the par value of the stock issued to be approved by the SEC . Regarding the first condition, the law requires that the property must be of such character that it can be delivered or actually transferred in the name of the corporation . Under the Civil Code, the thing shall be understood as delivered when it is placed under the control and possession of the transferee. Financial receivables when used as payment cannot be considered as actually received since the actual payment thereof would still be in the future. Therefore, payment in the form of receivables shall be subject to the following: (a) verification by this Commission of their existence, collectibility and valuation ;(b) The shares to be issued shall be held in escrow until the actual payment is received by the corporation. When shares of stock are said to be held in escrow, they are deemed to be subjected to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be held by the latter until the performance of a certain condition or the happening of a certain event contained in the agreement. ( Letter dated August 10, 1972 addressed to International Metallurgical Corporation citing Common vs. Hadley 12 p. 315) An escrow deposit makes the depository a trustee under an express trust. Title to the stock does not pass under such an agreement until the performance of a certain condition, and does not relate back to the time when the stock was deposited. (Fletcher, sec. 5567) Thus, the Commission previously opined that a holder of escrow shares does not become entitled to the rights pertaining to a stockholder until the conditions for the release of such shares are fully met. ( Letter dated November 6, 1972, addressed to International Metallurgical Corporation citing Ballantine, H.W. Ballantine on Corporations, p. 467) This being the case, the subscriber is not yet the owner of said shares and consequently, he cannot be accorded the rights belonging to a regular stockholder. (Ibid, citing Blythe vs. Dohemy 73 F 2d 779, 802, C.C.A.) Take note further that under the above-cited provision of the Corporation Code, receivables in the form of promissory notes cannot be used as payment to subscriptions . Relative to the second condition, the law requires that the property must be something that the corporation may legally acquire and hold in carrying out its purpose or reasonably necessary or convenient in the pursuit of its business. As to the third condition, the SEC allows the use of fair market value in the valuation of property in exchange for shares of stock in conformity with the generally accepted accounting principles. In no case however shall shares of stock be issued for properties received therein with a fair market value of less than the par value or stated value of the stock. llcd Considering further that the proposed corporation is a subsidiary of a foreign corporation, it has to comply with the provisions of RA 7042, otherwise known as the Foreign Investments Act of 1991. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner