Santiago, Tiñga & Associates

May 26, 1983 Santiago, Tiga & Associates Grd. Flr.,Ortigas Bldg., Ortigas Ave.,Pasig, Metro Manila Gentlemen: This has reference to your letter dated April 5, 1983, requesting the opinion of this Commission on the queries posed therein. It appears therein that your client which is a duly organized domestic corporation increased its authorized capital stock a few years ago. Relative to said increase, the corporation offered some shares to all its stockholders at the time in accordance with their pre-emptive rights. The stockholders who availed of their pre-emptive rights executed the corresponding subscription agreements with the corporation. The shares which were subscribed by the said stockholders represent the minimum percentage of the increase in capital stock as required by law. In due time, said stockholders paid in full the amounts due them under the subscription agreements. Together with the filing of the certificate of increase of capital stock and in compliance with the requirements of this Commission, the corporation likewise presented an application for registration with the Commission. The project, by reason of which the increase was made, however, no longer proved economically viable so that the corporation decided not to continue with the registration. Under the foregoing circumstances you now posed the following queries and we have stated the corresponding answers thereto: 1. Is the sale of shares to the stockholders in connection with the increase of capital stock and the exercise by the stockholders of their pre-emptive rights an exempt transaction under Section 6 (a) (4) of the Revised Securities Act? Is the corporation, therefore, correct in deciding that the shares involved do not have to be registered with the Commission? Section 6 (a) of Batas Pambansa Blg. 178, otherwise known as "the Revised Securities Act" provides, and we quote: "SECTION 6. Exempt transactions . a) The requirement of registration under subsection (a) of Section 4 of this Act shall not apply to the sale of any security in any of the following transactions: 4) ...the issuance of additional capital stock of a corporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock." (emphasis supplied) Furthermore, this Commission in previous opinions, has held that: "The issuance of shares of stock out of the proposed increase of capital stock to its existing shareholder for cash where no commission is paid for such sale is an exempt transaction ( Ltr. to Atty. Luciano Salazar dtd. Sept. 6, 1963, Ltr. to Universal Reinsurance Corp. dtd. June 16, 1971 ) (emphasis supplied) However, if shares of the corporation had been previously registered with this Commission pursuant to the Revised Securities Act, any shares to be issued subsequently should likewise be registered with this Commission. 2. If said sale is indeed an exempt transaction, may the corporation issue the corresponding stock certificates to the stockholders concerned? prcd Section 64 of the Corporation Code provides, and we quote: "SECTION 64. Issuance of stock certificates . No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares) if any, is due, has been paid." Inasmuch as, according to you, the stockholders have already paid their subscription in full, the corresponding stock certificates should be issued in their favor by the corporation. Thus, it has become the ministerial duty of the corporation upon demand by the stockholders, to issue the latter their certificates of stock. This is of course, without prejudice to the requirement for registration if such is the case (as mentioned above). 3. If so, can the shareholders concerned thereafter transfer the same? Or, must the corresponding stock certificates contain a notation prohibiting the transfer of the shares pending registration thereof? Yes, the shareholders concerned thereafter can transfer the shares of stock in the absence of restrictions in the articles, corporate by-laws and in the stock certificates provided the transfer is in good faith, and to a person capable of assuming the obligations of a stockholder and provided it is not done continuously and successively (Fletcher Cyclopedia Corps. Vol. 12, Ch. 58, p. 186). The corresponding stock certificates only contain a notation prohibiting the transfer of the shares pending registration thereof only if such restrictions appear in the articles of incorporation and in the by-laws. 4. If the corporation refuses to issue the corresponding stock certificates to the subscribers, can the corporation be compelled to do so? If so, what is the nature of those damages? In reply thereto, this Commission, in a previous opinion has ruled that: "While a certificate of stock is not necessary to the complete ownership of the stock or to the creation of the relationship of stockholder, there can be no doubt that a corporation is bound, even in the absence of a statutory provision, through its proper officers to issue to each stockholder who has fully paid for his subscription a stock certificate representing his interest in the corporation, and refusal of the corporation, upon demand, to issue a certificate of stock to the person entitled thereto, the latter may at his election bring an action at law against the corporation for damages." ( Ltr. to Atty. Ofelia Francisco dtd. Feb. 10, 1981 ,citing 13 Am. Jur. 399). The stockholders may, instead of suing to compel the issuance and delivery of a certificate, have an action against the corporation for his damages sustained by reason of the failure or refusal to issue a certificate to him .(Fletcher Cyclopedia Corporation, Vol. II, Chap. 58, p. 272). 5. Can the subscribers instead ask for the rescission of the subscription contracts? "Under certain circumstances, the stockholder may have a remedy by rescission. Thus, a subscriber for stock may, as against the corporation, rescind his contract of subscription, if the corporation wrongfully refuses to deliver a certificate and sue to recover what he has paid. (Ibid)" llcd Please be guided accordingly. Very truly yours, (SGD.) JESUS J. VALDES Associate Commissioner