Carlos J. Valdez & Co.

March 1, 1984 Carlos J. Valdez & Co. CJVC Building, Aguirre St. Legaspi Village, Makati Attention : Atty . Lourdes Guillergan Madam : This has reference to your letter dated September 9, 1983, requesting the opinion of this Commission on whether a corporation can redeem its preferred shares in the absence of any retained earnings. It appears therein that your client, Mabuhay Vinyl Corporation (MVC) is a corporation engaged in the manufacture of electro-chemical products. Its authorized capital stock is divided into the following number of shares. 1) 50,000 no par value shares 2) 100,000,000 common shares with a par value of P1.00 per share 3) 50,000,000 preferred shares with a par value of P1.00 per share The articles of incorporation of MVC provides that 14,000,000 of the aforesaid preferred shares are redeemable at par value to the extent of 25% every 6 months for a total period of 2 years. This fact of redemption and terms thereof are annotated at the back of the certificates of the redeemable shares already issued. The redemption period has matured and the holders have requested MVC to redeem them by setting-off their outstanding accounts with the company arising from their purchases of various chemical products. MVC does not have any retained earnings but since the shares will be redeemed by way of set-off of stockholders' accounts, there will be no cash outflow on the part of the corporation. You now request for a ruling on whether MVC will be allowed to re-acquire the redeemable shares inspite of the absence of retained earnings. You opine that a corporation may not purchase or acquire its shares from the stockholders unless it has unrestricted retained earnings as provided under Section 41 of the Corporation Code. However, the Code provides a different rule with respect to redeemable shares issued pursuant to the provisions of the company's articles of incorporation, wherein the law allows redemption regardless of any "unrestricted retained earnings". In a previous opinion, this Commission has held that "It is generally held that a corporation may redeem its preferred stock only when it is expressly authorized or has contractually reserved the right to do so, and that it has no inherent power in this respect (Am. Jur. 2d, Sec. 282 citing Bowman vs. Armour & Co. 17 III, 2d, 43, 162 d 753).But corporations are frequently given the right to retire or redeem preferred stock either by statute or by provisions to that effect in the articles of incorporation, or the stock certificates ,or the contract under which the stock is issued. (emphasis supplied) ( Ltr. to Mr. Manuel Morales dtd. December 4, 1968 ,citing Fletcher, pp. 913-915, citing Patterson vs. Shaver, 165 vs. 298). Your amended articles of incorporation approved on February 27, 1978, has provided for the right of redemption of the preferred shares in Article VII, (c) (15),quoted hereunder: "5) Mandatory redemption at par value seven (7) years after issuance, provided that five (5) years after date of issuance, upon six (6) months advanced notice, company may at its option and right of determination, redeem all or a portion of the outstanding preferred shares at par value." Considering the above, this Commission shall not interpose any objection to the redemption of the preferred shares by setting-off their outstanding accounts with the company so long as Subsection 5 of Section V of CCP No. 1 "Rules Governing Redeemable and Treasury Shares", quoted hereunder shall be observed: "5. Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock ." (emphasis supplied) Please be advised accordingly. LibLex Very truly yours, (SGD.) MANUEL G. ABELLO Chairman