Atty. Armando Q. Ongsioco

March 5, 1980 Atty. Armando Q. Ongsioco Angara Abello Concepcion Regala & Cruz Law Office 5/F ACCRA Bldg. 122 Gamboa St.,Legaspi Village Makati, Metro Manila Dear Atty. Ongsioco: This is to formally acknowledge receipt of your letter-query dated February 28, 1980 requesting opinion the query posed therein. In your letter, you claim that the entire outstanding capital stock of a corporation is presently owned by five (5) individuals who are also the directors in the Board of five (5).Two of the individuals (your clients) own 62% of the outstanding capital stock in said corporation and they desire to be proportionately represented in its Board of Directors considering that the other three (3) stockholders, who own only 38% of said subscribed capital stock, nevertheless, compose the majority of three (3) seats in said board. However, you also cited therein Section 2 of Article III of the amended By-laws of the corporation which provides: "It is understood, however, that the Corporation shall be given the priority, to acquire the shares of stock at acquisition cost of any stockholder, should they sell their holdings." (emphasis, ours) Naturally, your clients wish to untangle themselves from the strait-jacket that shackles them. To effect this, they propose to assign one share each to the two (2) nominees, who will receive the naked ownership or legal title while your clients will retain the beneficial or equitable interests therein. You wish to know if under these circumstances, your clients may legally assign one share each to their two (2) respective nominees, notwithstanding the above-quoted by-law restriction. Please note that this Commission refrains from rendering its opinion on any hypothetical case presented before it involving any of the statutes entrusted to it for administration and enforcement. Unless the case is an actual one and the facts thereof are fully presented and disclosed, the Commission cannot and should not make any pronouncement on the points brought up in the query. But, for purposes of general information strictly confined to the facts and issues given in your letter and without setting a precedent on the matter, the following may be imparted to you and your clients. It is undeniable that your clients' shares, collectively representing 62% of the subscribed capital stock, possess the voting power to elect at least three (3) directors out of five (5) in accordance with Section 31 of the Corporation Law, as amended, on election of directors by cumulative voting. However, Section 30 of the same law prescribes that "every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporation. . . ." Considering that the 62% subscribed capital stock is owned by only two individuals, we do not see any legal impediment for them to assign qualifying shares, in the nature of a trust, to their respective nominees, for the express purpose of qualifying and electing them to the Board. For the weight of authority is: "The general rule is that beneficial ownership is not necessary, and that the person who holds the legal title to stock on the books of the corporation is qualified, although the beneficial ownership may be in another. In other words, it is sufficient that the title to the stock, as it appears on the books of the corporation, is in the director, since the legal title is what counts and it is the person whose name appears as owner on the books of the company who is stockholder and eligible as director. For instance, a director may hold his stock as trustee and yet be legally qualified. So a person to whom one share of stock has been transferred for the express purpose of qualifying him as a director is eligible ...." (2 Fletcher, Cyclopedia of Corporation, Sec. 300, emphasis ours). Inasmuch as the assignment of a share each to the nominees is only for the purpose of qualifying them as directors of the corporation, and the assignment will only be by way of trust where in the beneficial interest in such shares will remain with the assignors while the assignees-trustees "will hold in their own right the legal title to the stock" (Fisher, The Philippine Law of Stock Corporation, p. 234),we believe that the same does not violate the above-quoted by-law provision. This is of course without delving into the validity or invalidity of the by-law provision which has not been raised as an issue in your query. Furthermore, the aforecited by-law restriction obviously contemplates only a sale whereby the seller "obligates himself to transfer the ownership of and to deliver" the stock, and the buyer "to pay therefor a price certain in money or its equivalent." (Art. 1458 Civil Code) so that the corporation has the priority to re-acquire the shares of stock at acquisition cost to any stockholder, should he sell his shareholdings. Consequently, the mere assignment of one share for the purpose of qualifying the nominee as director, where only the legal title is transferred to the nominee but the beneficial interest is retained by the assignor, is more of a trust (Art. 1440, Civil Code) and not a sale within the purview of the restriction. Finally, please note also that stock transfer restrictions impair property rights of the stockholders (Fleischer v. Botica Nolasco, G.R. No. 23241, March 14, 1925, 49 Phil. 583) so that they should be embodied in the charter of a corporation and should be construed strictly. It is settled that a restriction expressed only as one on sale, the right to sell, or the like, is generally narrowly construed as applicable only to sale and not to mere transfers. Thus, a gift of corporate stock does not constitute sale within the meaning of a corporation's right of first refusal in case of sale of stock (12 Fletcher, Cyc Corps, 1978 Cumulative Supplement, Sec 5461.5 citing McLeod v Sandy Island Corp SC, 216, SE 2d 746). In light of all the foregoing, our answer to your query is in the affirmative. cdlex Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner