Atty. Victor Africa

May 5, 1986 Atty. Victor Africa Telecoms Plaza, 316 Gil Puyat Ave. Salcedo Vill.,Makati, MM Sir : This relates to your letters, dated March 24 and April 1, 1986, requesting the opinion of this Commission on the following queries: 1. Where a government agency is going to sequester the shares of stock of a person/entity under the powers vested in it by Executive Orders 1 and 2, what documents must be presented to the corporate secretary for him to: a) record the transfer; b) register the government as stockholder; and c) release the corresponding certificate of stock thereto? 2. If the shares to be sequestered and which the government seeks to be transferred, (either to itself or other persons/entities, neither of which 2 groups are incumbent stockholders),are of a close corporation and subject to a right of first refusal by the corporation and/or incumbent stockholders, what documents should a corporate secretary seek for, prior to recording such transfer? "Sequestration" and Freeze Order" are defined by the Presidential Commission on Good Government in its Rules and Regulations, implementing Executive Order Nos. 1 and 2, dated April 11, 1986, a: follows: "Sequestration means taking into custody or placing under the Commission's control or possession any asset, fund or other property as well as relevant records, papers and documents, in order to prevent their concealment, destruction, impairment or dissipation pending determination of the question whether the said asset, fund or property is ill-gotten wealth under Executive Order Nos. 1 and 2." (Sec. 1 B) "A 'freeze' order is an order intended to stop or prevent any act or transaction which may affect the title, possession, status, condition, integrity or value of the asset or property which is or might be the object of any action or proceeding under Executive Order Nos. 1 and 2, with a view to preserving and conserving the same or to preventing its transfer, concealment, disposition, destruction or dissipation." (Sec. 1, C) As the term is further defined, "Sequestration is the provisional seizure or setting apart of specific property upon which a party to a suit has a claim of ownership, or a right, lien or privilege, so as to preserve it pending the litigation, in order that it may be subjected to any final judgment or decree that may be rendered in the cause." (70 Am. Jur.,2d, Sec. 1).It is a "provisional remedy, or an auxiliary process, issued as an incident of a main action, and not an original process, except where the statute specifically, provides that the writ may be issued even in the absence of a principal demand pending before the court granting it." (Am. Jur. Supra.,Sec. 2) As a conservatory process, the writ of sequestration is intended to preserve the sequestered property during the pendency of the main suit to which the writ is auxiliary process. It operates to protect a property right, resting on the property seized; it does not in any manner increase, or diminish the rights of either of the parties to the action in which the property is sequestered, but it simply preserves the sequestered property in status quo. The writ of sequestration creates no lien or privilege in, or title to, the property which is the subject of the sequestration proceedings, and it does not divest the title of the owner, or otherwise affect the question of title .(C.J.S. Supra.,Sec. 2, C) It is well settled that property of every description, anywhere within the jurisdiction of the court is subject to sequestration. (Baldwin v. Block, 119 U.S. 643, 30 L Ed.,530, 73. Ct. 326, cited in 70 Am. Jur.,2d, sec. 13).Sequestration may be issued among others, over choses in action, negotiable instruments and shares of stock (Am. Jur. Supra.,sec. 15).Sequestration may also be issued with respect to dividends. (Am. Jur.,Supra.,citing Wife v. Husband, Del. Ch. A2d 256). The levy of a writ of sequestration merely constitutes a judicial deposit, of the property levied on, into the custody of the law, for the purpose of keeping the seized property safely, pending the trial in which the writ is issued, and to enable the court ultimately to dispose of the property (79 C.J.S, sec. 13, a).The levy of the writ does not constitute a conversion of the property levied on, or effect the title to the property and creates no lien. (C.J.S.,sec. 13). In our jurisdiction, shares of stock or an interest in stock or shares of any corporation or company may be attached, by leaving with the president or managing agent thereof a copy of the order and a notice stating that the stock or interest of the party against whom the attachment is issued, is attached in pursuance of such order. (Sec. 7, d, Rule 57, Rules of Court.) In the same manner, it is submitted that shares of stock may be levied, under a writ of sequestration, by leaving with certain corporate officers or agents, such as the president, corporate secretary, or general manager, a copy of the writ and notice stating that the shares of stock or interest of the defendant therein are sequestered. Appropriate notation relative to the existence of the writ of sequestration should be effected by the corporate secretary in the stock and transfer book of the corporation. Property sequestered remains, during the pendency of the levy, in the custody of the law, so to speak. The plaintiff who has obtained property through a writ of sequestration should prosecute his suit to final judgment. (C.J.S.,sec. 20) Thus under the Rules and Regulations of the PCGG, said Commission may contact a hearing, after due notice to the party or parties concerned within the purview of Executive Order Nos. 1 and 2, to ascertain whether any particular asset, property or enterprise constitutes ill-gotten wealth and to determine the appropriate action to be taken in order to carry out the purposes of said Executive Orders. (Sec. 7). Based on the evidence adduced the Commission shall determine whether there is reasonable ground to believe that the asset, property or business enterprise in question constitutes ill-gotten wealth as described in Executive Order Nos. 1 and 2. In the event of affirmative finding, the Commission shall certify the case to the Solicitor General for appropriate action in accordance with law. Businesses, properties, funds, and other assets found to be lawfully acquired shall be immediately released and the writ of sequestration, hold/freeze orders lifted accordingly. (Sec. 10) Thus, pending the outcome of the main suit as may be filed by the Solicitor General, there should be no transfer of title of shares of stock in the stock and transfer book. Sequestration as noted in the corporate book, merely "operates to preserve property during the litigation in order that it may be subjected to such orders or judgment as the court may make or render." (70 Am. Jur.,2d. sec. 26, citing Jackson v. The Proctorians, Tax Civ. App.,80 S.W. 2d 322).Sequestration does not divest the defendant of all his interest in the property. (Am. Jur.,Supra.,citing Forest v. Forest, 22 N.Y. Sup. Ct. (9 Bosw) 686). A judgment for the plaintiff in the main suit recognizing his lien and privilege on the sequestered property entitles him to have the sequestered property and sold to satisfy his judgment. (79 C.J.S.,sec. 20) Hence, anent the queries posed in number 1 hereof please be advised that the decision of the appropriate authority entitling the Government ownership of the sequestered shares of stock is a vital document before you may register the Government as the record owner of said shares, and correspondingly releasing certificates of stock evidencing its equity in the corporation. Anent your second query, quoted hereunder are the pertinent provisions of the Corporation Code on close corporations under Title XII thereof, to wit: SECTION 96. Definition and Applicability of Title . A close corporation within the meaning of this Code is one whose Articles of Incorporation provide that: (1) all of the corporation's issued stock of all classes exclusive of treasury shares, shall be held of record by not more than a specified number of persons not exceeding twenty (20); (2) all of the issued stock of all classes shall be subjected to one or more specified restrictions on transfer permitted by this title; and (3) the corporation shall not list in any stock exchange or make any public offering of its stock of any class. . . . " "SECTION 97. Articles of Incorporation . The articles of incorporation of a close corporation may provide: 1) For a classification of shares or rights and the qualifications for owning or holding the same, and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2) ...." "SECTION 98. Validity of restrictions on transfer of shares . Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchase thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporations the option to purchase the shares of the transferring stockholders with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person." Considering the special circumstances attending a close corporation, it is oftentimes justifiable, and at times imperative, for its stockholders to protect themselves from future conflicts by placing restrictions on the right of each one of them to transfer his share to an outsider. It is perhaps for this reason that the Corporation Code explicitly allows such restriction in, and in fact makes it an attribute of the close corporation. (Campos, Campos, the Corporation C od e, "Comments, Notes and Selected Cases", 1981 ed., p. 849). Hence, provisions in the charters, articles of incorporation or general laws requiring stockholders desiring to sell their stock to offer it to the corporation or the other stockholders before disposing of it to others are valid. and a fortiori, such a provision contained in the contract of subscription for shares, the articles of incorporation and the by-laws, and which also appears on the face of the stock certificates, is valid. (12 Fletcher, Cyc. Corps., 1957 Vol., sec. 5453. pp. 300-301). The reason for the rule is that a corporate charter is a contract both between the corporation and the state, and the corporation and its stockholders; that is to say, the relation existing between the corporation and its stockholders is contractual (Ibid). It has been said, however, that they do not apply to a sheriff's sale on execution against a stockholder. (Barrows v. National Rubber Co., 12 R.I. 173), nor to a sale of stock by a receiver pursuant to an order of the court. (Stern v. Stern, 146 F (2d), 870 (DC); McDonald v. Farley & Loetscher Mfg., Co., 226, Iowa 53, 283 N.W. 261). Ordinarily, therefore, restrictions apply only to voluntary transfers, not when the devolution or transmission of the shares is inevitable. (Stern v. Stern, Supra.) They do not apply to judicial sales. (McDonald v. Farley & Loetscher Mfg. Co., Supra) Even in common law, the prevailing view is that unless specifically so provided, the option restriction applies only to voluntary transfers and not to judicial sales or transfers by operation of law. (Campos, Campos, Supra., p. 855). Considering the foregoing, if the shares to be sequestered and which the Government seeks to be transferred, (either to itself or to other persons or entities, neither of which 2 groups are incumbent stockholders),are of a close corporation, the same documents as previously stated, number 1 above, need be presented to the corporate secretary for recordation. Consequently, however, should the transfer of shares result in converting the close corporation into an ordinary one, the provisions of Section 103 of the Corporation Code must be complied with. Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Acting Chairman