Tierra International

September 11, 1985 Tierra International Construction Corporation c/o Cherry-Lynn S. Ricafrente Tierra Building Angono cor. Osmea Sts. Makati, Metro Manila Gentlemen: This refers to your letter dated July 12, 1985 relative to reacquisition of corporation's own shares. LexLib It appears that one of your stockholders, an American-based company owning 1,123,500 shares out of the total 4,483,047 issued and outstanding shares of the company, wishes to sell its shares back to the company. The net book value per share of the company, as of December 31, 1984, is P2.8751, while the total current liabilities thereof as of December 31, 1984 is P2,442,705. You stated that at year-end 1984, your unappropriated retained earnings was P5,049,733 and the retained earnings appropriated for future local expansion was P3,000,000.00 The reacquisition of the said stockholder's shares will entail a cash outlay of P3,230,174.80 which is well within your unappropriated retained earnings. Your query is whether on the basis of the foregoing facts you can buy back the shares using the company's funds. "Statutes sometimes expressly or impliedly authorize corporations to purchase their own stock after compliance with certain conditions precedent, as for example, obtaining the approval of a certain number of its outstanding shares, or after obtaining both the consent of the stockholders, and authority from the board of directors, provided always the transaction is fair and in good faith, is free from fraud, actual or constructive, and the corporation is not insolvent or in the process of dissolution, and the rights of creditors and other stockholders are in no way injuriously affected, and provided further there is no impairment of its capital; and in the construction of these statutes the federal courts will follow the decisions of the state courts." (Fletcher Cyclopedia Corporation, Vol. 6-A Chapter 33, Sec. 2850, 1950 Revised Edition p. 381) In our jurisdiction, the pertinent provision of the Corporation Code provides, to wit: "SECTION 41. Power to acquire own shares . 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: 1. To eliminate fractional shares arising out of stock dividends. 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; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provision of this Code." (Emphasis supplied) LibLex The above-quoted provision authorizes corporations to purchase or acquire its own shares out of unrestricted retained earnings for a legitimate corporate purpose or purposes . The underlying reason for limiting shares 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. (SEC opinion dated July 25, 1983 citing Ballantine on Corporation p. 605). It is to be noted further that "even in those jurisdiction in which it is held that a corporation may purchase its own stock, the rule is subject to the condition that the purchase shall be made in good faith and without prejudice to the rights of other stockholders or creditors .It is unauthorized and invalid if made for the purpose of defrauding or injuring other stockholders or creditors of the corporation, or if it does in fact defraud or prejudice creditors, though made in the most perfect good faith. (Fletcher Cyclopedia Corporations, Vol. 6 A Ch 33 Sec. 2854, 1950 Revised Edition pp. 397-398). Thus, the Commission, in a previous opinion, has ruled that a corporation may make use of its surplus earnings to purchase its own stocks provided that the following conditions are complied with. a) Its capital is not thereby impaired; b) A legitimate and proper corporate objective is advanced; c) The condition of corporate affairs warrants it; d) The transaction is designed and carried out in good faith; e) There is intended and there results no undue advantages to a few favored stockholders at the expense of the remainder; f) The rights of creditors are not jeopardized; g) There must be surplus (unrestricted retained earnings to acquire the same) (SEC Opinion dated December 15, 1982) Please be guided accordingly. cdlex Very truly yours, (SGD.) MANUEL G. ABELLO Chairman