A.N. Bolinao, Jr.

June 11, 1982 A.N. Bolinao, Jr. Sabena Mining Corporation 6th Floor, Asian Reinsurance Bldg. Gamboa Cor. Salcedo Streets Legaspi Village, Makati Metro Manila Sir : This has reference to your letter dated September 22, 1981 requesting the opinion of this Commission on the following queries: 1. Can we settle trade accounts (suppliers) in shares from the unissued capital computed at current marker price, which is now below par value? 2. Can we issue stock to settle collection cases pending in court without need of securing your approval? 3. Is pre-audit of the suppliers' account by independent auditors necessary before we can issue shares of stocks in payment of trade accounts, if settlement thereof can be reached before the filing of the collection case in court, without your prior approval? 4. Can we issue stock in settlement of obligations without securing prior approval of the stockholder in the light of the provision of Sec. 39 of the New Corporation Code? Section 62 of the Corporation Code of the Philippines allows stocks to be issued in consideration of "previously incurred indebtedness by the corporation." However, the same section expressly provides that "stock shall not be issued for a consideration less than the par or issued price thereof." We, therefore, answer your first query in the negative. Relative to the second query, the SEC allows the issuance of shares from the unissued portion of the authorized capital stock of the corporation to pay corporate liabilities. The amount of the indebtedness or liabilities to be settled should be at least equal to the par value of the shares of stock which the corporation intends to issue. Inasmuch as the corporation, as stated in the said letter, has a Permit to Sell Securities to the public, the prior approval of this office on the issuance of shares by the company may not be secured. As a matter of policy, however, determination of the validity and the amount of the liabilities to be set-off is a prerequisite, unless the debtor is also a duly registered corporation. The pre-audit of the suppliers' account by the independent auditors before issuance of shares of stock in settlement of your trade accounts is a corporate matter which does not require the approval of this Commission. However, the actual issuance of stocks needs prior SEC approval. Issuance of stocks in settlement of financial obligation is covered by Section 40 of the Corporation Code which states that the board of directors may "sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets . . . when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock ." (emphasis supplied).Section 39 which you cited in your last query applies only if the stocks will be taken from the unissued portion of the authorized capital stock in which case the stockholders may not exercise their pre-emptive rights. However, regardless of whether the stockholders can exercise their pre-emptive rights or not, their approval on this arrangement will be necessary pursuant to the aforementioned Section 40. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner