Quasha Asperilla Ancheta Valmonte Peña & Marcos Law Office

April 25, 1983 Quasha Asperilla Ancheta Valmonte Pea & Marcos Don Pablo Building, 114 Amorsolo St. Makati, Metro Manila Attention : Atty . Mercy M . Pine Gentlemen: This refers to your letter dated March 28, 1983, requesting the opinion of this Commission on the queries posed therein. It appears therein that you have a client, which is a mining company whose shares of stock are listed in the small board of the stock exchange. Due to the depressed market conditions, the company has been inactive for sometime. A group, however, manifested its interest in investing into the company to revive its business operations, consequently, the Board declared a 10% call for payment of subscription. The board allegedly complied the procedure set forth by law relative to call and sale of delinquent shares. About one-half of the shareholders responded to the call and paid the corresponding dues. However, on the day of the auction sale, there were no bidders. The corporation did not make any bid then as its surplus profits was insufficient to pay for all the unpaid subscription plus the cost of the sale. You now pose the queries quoted hereunder: "1. May the corporation acquire the delinquent shares and stagger or schedule the purchase as surplus profits are accumulated? 2. Could the corporation acquire the delinquent shares by simply paying for the advertising cost and interest? 3. In order to revive its business operations, can the corporation thereafter re-issue the shares to the interested investors?" Under the last paragraph of Section 68 of the Corporation Code of the Philippines, the corporation may bid "should there be no bidder at the public auction who offers to pay the full amount of the balance in the subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a share." Corollary thereto, Section 41 of the Code provides thus: " Power to acquire own share . A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired : xxx xxx xxx 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; xxx xxx xxx." (emphasis supplied). The abovequoted provision is explicit that a corporation should have unrestricted retained earnings in its books to cover the shares to be purchased or acquired ."The dangers incident to the recognition of the right of a corporation to purchase its own stock have led to the enactment of statutory provisions restricting the funds a corporation may use to purchase its own assets, and it is safe to say that where a statute restricts the power to buy, the restriction must be obeyed".6A Fletcher, Cyc. Corp. Sec. 2849 at 368 (1968 Rev. Vol.).Most of the statute now provides that the purchase may be made only from surplus of one kind or another, with varying definitions of "surplus".Thus, it has been held that a corporation may purchase its own stock where it has surplus out of which payment may be made and contract then made for such purchase is valid. 6A Fletcher, supra ,sec. 2849 at 372-373, citing Cross v. Bequelin, 252 NY 262, 169 NE 378, and note to this case in 29 Columbia L Rev. 1152; 43 Harv. L. Rev. 830; 4 St. John's L. Rev. 295, 39 Yale LJ 902. The underlying reason for limiting share 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 Corporations, p. 605). It is therefore essential that the unrestricted retained earnings must be bonafide and not an artificial one and must be founded upon actual earnings or profits and not be dependent for its existence upon a theoretical estimate of future earnings. Your first query is, therefore, answered in the negative as the corporation is merely anticipating future profits which may never be actually realized. As previously stated, this view is likewise guided by the principle of trust fund doctrine which prohibits the corporation from depleting its assets and impairing its capital for the protection of creditors. Nevertheless, it is a generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court and it has been held that the ordinary legal remedy is made in the statute. Instone v. Frankfort Bridge Co., 2 Bibb (KY) 576, 5 Am. Dec. 638, cited in Velasco vs. Poizat, G.R. No. L-11528, March 15, 1918, 37 Phil. 802, 806. Thus, Section 70 of the Code provides: "Court action to recover unpaid subscription. Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription with accrued interest, costs and expenses." Your second query is likewise answered in the negative and in this connection, the provision of paragraph 4, Section 68 of the Corporation Code is reiterated herein. To opine otherwise would amount to a forfeiture of stock which is not sanctioned in our jurisdiction. Your third query is rendered academic by the above answer. Very truly yours, (SGD.) JESUS J. VALDES Associate Commissioner