Real Estate located Abroad as Consideration For Issuance of Shares of Stock

July 25, 2003 SEC OPINION NO. 39-03 Malazarte & Celiz Law Offices F. Clar and San Vicente Sts., Mangagoy, Bislig, 8311 Surigao del Sur SUBJECT : Real Estate located Abroad as Consideration For Issuance of Shares of Stock GENTLEMEN : This pertains to your request for legal opinion on matters summarized below: a) whether real estate properties located abroad can be used as consideration for the issuance of shares of stock; and, b) whether shares of stock can be paid for in foreign currency. You represent that your client, TMA Lending Corporation, is a lending corporation which seeks to raise its paid-up capital to at least P2.5 M to conform with the requirements of SEC Memorandum Circular No. 13, Series of 2001. 1 On your query whether real estate can be used as consideration for the issuance of shares of stock, we refer you to Section 62 of the Corporation Code which enumerates the allowable considerations for the issuance of shares of stock, to wit: "1.) Actual cash paid to the corporation; 2.) Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued price of the stock issued; 3.) Labor performed for or services actually rendered to the corporation: 4.) Previously incurred indebtedness of the corporation; 5.) Amounts transferred from unrestricted retained earnings to state capital; and, 6.) Outstanding shares in exchange for stocks in the event of reclassification and conversion. (Emphasis ours.) Corporations are not restricted to receiving money in payment for subscription of capital stock. Corporations are allowed to receive tangible or intangible properties in exchange of capital stock provided the property transferred in payment approximates the value of the stocks acquired. It is for this reason that Sec. 62 requires that the valuation of the property paid shall be determined by the incorporators or the board of directors, subject to the approval of the Commission. The above rule, however, is qualified by the condition that the property accepted in exchange for capital stock must be of the kind which the corporation may lawfully acquire and hold in carrying out the purposes of its incorporation, and which is necessary or convenient for it to carry on its business or the purposes for which the corporation was organized. ( SEC Opinion dated December 18, 1989, Mr. Piorello Rimandi ).For example, real estate can be used by a corporation engaged in estate development, subdivision, agro-industrial business and the like, as well as for the establishment of its offices. On the other hand, a corporation engaged in import and export business does not need as much real property for the successful pursuit of its business and therefore it may not accept the same as payment on subscription to its capital stock, but only such property as may be needed in its operation ( SEC Opinion dated February 13, 1975, Mr. Emilio Baluyot .). In the past, the Commission allowed real estate properties located abroad to be contributed to the capital of the company when the properties are needed to pursue legitimate corporate objectives. This liberality in the interpretation of Sec. 62 is supported by Sec. 36(7) of the Corporation Code which allows a company to receive, take, hold and otherwise deal with real estate properties as "the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution." Thus, while there appears to be no express prohibition against the proposed infusion of real estate situated abroad, the allowance of the same as consideration for the issuance of shares of stock shall be subject to the determination that said infusion will enhance the value of the company, is needed to carry out its purpose or is reasonably necessary or convenient in the pursuit of its business, and will meet the objectives sought to be achieved by SEC Memorandum Circular No. 13, Series of 2001. The said infusion, of course, presupposes that the transfer will be properly documented, that there will be actual transfer of title to the company, and it is not prohibited by the Philippine Constitution and other pertinent laws, as well that of the state where the real estate property is located. HaTDAE On your second query, there is no prohibition to the payment of shares of stock in foreign currency. While Sections 14 and 16 of the Corporation Code require that shares to be issued by a company shall be expressed in legal currency of the Philippines, the Corporation Code does not prohibit that these peso-denominated shares can be paid for using foreign currency. However, while the payment may be in foreign currency, the recording of the said payment shall be in pesos and at the conversion rate prevailing at date of sale. Foreign currency may not qualify as "actual cash" but can be accepted as other "property" under Sec. 62 of the Corporation Code. ( SEC Opinion dated November 6, 1995, Villaraza and Cruz Law Offices ). In fact, as early as August 4, 1995, the Commission adopted a resolution expressly allowing foreign currency consideration for issuance of stocks. Subsequently, it issued Memorandum Circular No. 4 dated September 28, 1995 laying out the implementing guidelines for the said policy. Lastly, with the repeal of Republic Act No. 529 (otherwise known as the Uniform Currency Law of 1950) by Republic Act No. 8183, obligations can now be settled in currencies other than the legal tender of the Philippines, Sec. 1 of R.A. 8183 reads: "All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment ." (Emphasis ours.) We hope you find the above satisfactory. Very truly yours, (SGD.) VERNETTE UMALI-PACO General Counsel Footnotes 1. Memorandum Circular No. 13, Series of 2001 imposes among others, minimum paid up capitalization for lending corporations.