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Redemption of shares—

Shares are not bonds or borrowings. They are investments. But shares may be similar to bonds if they are subject to redemption by the corporation under such terms and conditions as may be stated in the articles of incorporation. Shares can be redeemed only when expressly so provided in the articles of incorporation. The period of redemption may be stated in the articles of incorporation. The terms and conditions of redemption may include the price at which the shares may be redeemed, the manner of redemption and the manner of payment. When redemption period has come, it becomes an obligation of the corporation to purchase or take up the redeemable shares regardless of whether there exist in the corporation unrestricted retained earnings. But see Par. 5, Section V of SEC Rules governing redeemable shares, infra.

The above section requires that the terms and conditions on, redemption of redeemable shares must be provided for in the articles of incorporation and stated in the certificates of stock.

Shares redeemed by the corporation become treasury shares. (See Sec. 9, infra).

Redemption must not violate corporate charter or articles of incorporation—

A corporation cannot redeem its preferred shares before the redemption period as fixed in the aiticles of incorporation, nor may it redeem the same at a discount price in contravention of tle provision of the corporate charter. However, should the corporation find the same necessary so as to improve its financial position it is suggested that the company amend its articles of incorporation by changing the redemption features of its preferred shares. (SEC Ruling, January 23, 1985)

Where redemption date has come in the face of absence of retained earnings—

As to the redemption of preferred shares in the absence of retained earnings, Section V, par. 5 of SEC Rules governing redeemable shares provides: “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.”‘SEC Ruling, Jan. 23, 1985)

Redemption may not be made when a corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature. (11 Fletcher, Sec. W9, p. 581) Such limitation is based on the principle that “corporate assets are a trust fund for creditors to the extent that creditors are entitled to payment before any distribution of capital of shareholders.” (Ballentine on Corporations, Sec. 264, p. 621)

Note that when shares are re-acquired in the redemption of redeemable shares pursuant to the conversion right of convertible shares (from preferred to common shares) as provided for in the articles of incorporation, restriction of the retained earnings on the shares redeemed is not required. (See SEC. rules on redeemable and treasury shares; refer to SEC Ruling dated April 2, 1985).

Sec. 9. Treasury shares.—Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (n)

Features of treasury shares—

Under Section 9, treasury shares:

(1) Are shares previously issued by the corporation and fully paid for;

(2) Are subsequently reacquired by the issuing corporation either by (a) purchase; or (b) redemption; or (c) donation; or (d) through some other lawful means like forfeiture, as when delinquent shares are sold at public auction and there was no bidder in which case under Section 68, last paragraph of this Corporation Code, such shares shall be credited as fully paid in corporate books and shall have the category of treasury shares;

(3) Can be disposed of by the board of directors for a reasonable price, indicating clearly that treasury shares cannot be donated by the corporation.

Nature of treasury shares from the Supreme Court’s viewpoint; treasury shares cannot be voted for; they are not entitled to dividends—

Although authorities may differ on the exact legal and accounting status of so-called “treasury shares”, they are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation reacquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid-for interest in the property of the corporation. (Commissioner of Internal Revenue vs. Manning, L-28398, August 6, 1975; 66 SCRA, p. 14.)

Features of treasury shares.—

Treasury shares—

(1) Are issued and re-acquired by the corporation through pur-. chase, donation, forfeiture, etc.;
(2) Are not entitled to be voted upon;
(3) May be re-issued by the corporation;
(4) Are not entitled to dividends;
(5) Are not retired shares;
(6) Cannot be issued as stock dividends; and
(7) Are not included in the computation of outstanding shares.

Title I I—INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Sec. 10. Number and qualifications of incorporators.—

Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines may form a private corporation’ for any lawful purpose or purposes. Each of the incorporators of stock corporation must own or be a sub. scriber to at leaser one (1) share of the capital stock of the corporation. (6a)

Number of incorporators—

The number of incorporators of a private corporation shall be not less than five (5) nor more than fifteen (15). This does not mean that the number of stockholders may not be less than five nor more than fifteen. For after the corporation is organized, there may be transfers of stocks that may reduce the number of stockholders even to less than five or increase the number of stockholders to more than fifteen. These changes in the number of stockholders will not affect the juridical personality of the corporation unless circumstances exist to justify the application of the doctrine of piercing the veil of corporate entity

The law may permit that more than fifteen persons may incorporate. This may possibly take place in the case of non-stock corporations where it is stated (infra) that the number of trustees in a non-stock corporation may exceed fifteen.

Qualifications of incorporators—

The following are the qualifications of incorporators:

(1) Incorporators must be natural persons and so, unless permitted by law, juridical entities like corporations and. partnerships cannot incorporate;

(2) Incorporators must all be of legal age (must have attained the age of twenty one, now eighteen years or more); thus, it seems that minors cannot incorporate, even with the consent of their guardians;

(3) Being contracting parties to form a corporation and signatories to a solemn contract like the articles of incorporation, the incorporators must not suffer from any legal impediment or incapacity like insanity, judicial insolvency, etc.;

(4) Each incorporator must own at least one share in the capital stock; therefore, a member can no longer exist in a stock corporation even as incorporator as was permitted under the old law;