Opinion No. 14-28 RE: SEC- OGC Opinion No. 10-21; Interest in Co-Ownership as Consideration for Shares of Stocks

9 SEC Building, EDSA, Greenhills, Mandaluyong City Securities and Exchange Commission Republic of the Philippines Department of Finance

Office of the General Counsel

13 October 2014

SEC-OGC Opinion No. 14-28

InterestinCo-Ownership Consideration for Shares of Stock Re: SEC-OGC Opinion No. 10-21; as

F. Ortigas, Jr. Road, Ortigas Center Pasig City BUNAG & LOTILLA LAW OFFICES Suites A and B 10th Floor Strata 100 Building

Attention: Atty. Perpetuo M. Lotilla, Jr.

Sir:

No. 10-21, specifically on the right of redemption of a co-owner over an interest in a co- owned property used as consideration for shares of stock. This is in response to your letter dated 11 July 2013, in relation to SEC-OGC Opinion

redemption or preemption under Articles 16202 and 16233 of the New Civil Code of the capable of being applied to the payment of the corporation's debts or can be subject to levy ownership to a corporation as consideration for shares of stock is subject to the right of Philippines, becau$e the exchange involves a transmission of ownership by onerous title. It was opined further that the property or interest so transferred should be free from any right of redemption or pre-emption considering that the property must be in such a manner that it is and execution. In SEC-OGC Opinion No. 10-21,' it was opined that the transfer of interest in a co-

or redemptioners,or an affidavit of the transferor that all the possible co-owners or redemptioners have been notified in writing of the transfer and that the 30-day period of redemption has alfeady expired, should be submitted in applications for registration where the payment for subscription is an interest in a co-owned property, in order to free the interest therein from any right of redemption or pre-emption. Thus, this Office deemed it necessary that a waiver of rights of all possible co-owners

notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be 2 Article 1620 provide$: owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice'thereof to all possible redemptioners Dated 26 May.2010, addressed to Kapunan Lotilla Garcia & Castillo Law Offices. redemptioner shall pay only a reasonable one." Article 1623 provide$: A co-owner of a thing may exercise the right of redemption in case the shares of all the other co. The right of redemption of co-owners excludes that of adjoining owners. (1524a)" The right of legal pre-emption or redemption shall not be exercised except within thirty days from the

Re: SEC-OGC Opinion No. 10-21; Interest in Co- Ownership as Consideration for Shares of Stock SEC-OGC Opinion No. 14-28

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dissent, you submitted the following arguments: It is implied in your letter that you disagree with the Opinion, and, in support of your

1. The Opinion expanded the coverage of Articles 1620 and 1623 of the New Civil Code. The 2 The right of redemption or pre-emption does not and cannot prevent the application of the transferee is essentially not a third person; said articles only refer to sale to third persons and do not mention transfer by onerous title. Also, as the transferee is a corporation majority owned and controlled by the transferor, the

property or interest therein as payment for debts. It likewise cannot prevent levy and sale on be used as payment for a debt or to satisfy a levy and execution. execution. The other co-owners may only exercise their right to redeem on such cases. But should theydo so, they will then have to pay for the value of the property or interest therein. Thus, the corporation will have cash arising from the redemption or pre-emption which will

that the transferor should not be required to submit any waiver of the right to redemption or pre-emption executed by the other co-owners. In view of your disagreement, you asked that the subject Opinion be corrected and

can be alienatedby way of subscription to shares of stock, subject to the following conditions: In previous Opinions, the Commission has discussed that interest in a co-ownership

2 The property must be something which the corporation may acquire and hold in Interest in the co-ownership must have a pecuniary value capable of ascertainment (at carrying out its purpose or reasonably necessary or convenient in the pursuit of its business;

3 The right over the property must actually be transferred to the corporation and no a fair valuation equal to.the par or issued value of the stock issued);

4.The transfer shall be subject to Articles 1620 and 1623 of the Civil Code. creditors of the property held in common shall be prejudiced by the transfer; and

coverage of Articles 1620 and 1623 of the New Civil Code. First, Article 1619 of the New Civil Code provides: With regard to your first position, it is our view that there is NO expansion of the

conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. Legal redemption is the right to be subrogated, upon the same terms and

ownership from the coverage of the rules on legal redemption would be absurd. definition of legal redemption under Article 1619 covers transactions where ownership is transmitted through onerous title. In view thereof, to exclude this mode of transmitting Despite the wording of Articles 1620 and 1623 that pertains only to sale, the very

that a corporation fegistered under the Corporation Code is considered a juridical person with Second, the corporation is a third person, as opposed to your theory. It is well settled

dated 6 November 1990, addressed to Feria, Feria, Lugtu & Lao Law Offices. 4 SEC-OGC Opinion No. 08-02, dated 3 January 2008, addressed to Suarez & Narvasa Law Firm; SEC Opinion

Re: SEC-OGC Opinion No. 10-21; Interest in Co- Ownership as Consideration for Shares of Stock SEC-OGC Opinion No. 14-28

Page 3 of 4 a personality separate and distinct from that of each shareholder/members. This attribute stockholders/members of a corporation are not the same as the corporation itself,3 regardless if the stockholder owns the controlling interest in a corporation. gives rise to a fundamental principle in corporation law that under normal conditions, the

not and cannot prevent application of the property or interest therein as payment for debts, or the levy and sale on execution of the property or interest. However, as long as the right of legal redemption or pre-emption subsists, meaning, that the period to exercise the right of the interest in the co-ownership to anyone other than the co-owners who possesses the right. legal redemption or pre-emption has not yet expired or the co-owner has not waived his right prior to the lapse cf said period, the purchaser or transferee is not at total liberty to dispose of As to your second position, we agree that the right of redemption or pre-emption does

emption may be exercised by the co-owner, the purchaser or transferee is constrained from any liability. Meaning, while the subsequent sale or transfer of the interest in the co-owned property to persons other than the co-owners will be valid if the same is made by the purchaser or transferee while the right is subsisting, the seller or transferor in the subsequent sale or transfer may be held liable for ignoring the right of the co-owners, especially when the co-owners sustain injuries arising from the subsequent sale or transfer. selling or transferring the interest in the co-owned property to other persons without incurring Before the end of the period within which the right to legal redemption or pre-

transferable by the buyer or transferee to persons aside from the co-owner during the existence of the right of legal redemption or pre-emption. Consequently, the interest so acquired through purchase or transfer is not readily

corporation as consideration for subscription to shares of stock, that is, the property or interest therein must be capable of being applied to the payment of the corporation's debts or can be subject to levy and sale on execution for the satisfaction of any judgment or decree corporation as consideration for subscription must be readily transferrable (i.e., capable of being used for payment) by the corporation to any other person from the moment of transfer. against the corpoffation." By this it must be understood that the property transferred to a To hold otherwise would be to place the corporation in a more complicated situation in the future, which is not the intention of the law. This runscounter to the very nature of the property to be transferred to the

right of the co-owners in relation to the transfer to the corporation still exists. effect diminished due to the limitation on the free transferability thereof for as long as the As well, thp value of the interest in the co-ownership acquired by the corporation is in

subscription consideration, free from any right of legal redemption or pre-emption. In order Thus, it is important to make the interest in a co-owned property, which is used as

Under Article 19 of the New Civil Code, "Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." Further, under Section 20 .of the same law, "Every person who, contrary to law, willfully or negligently causes damage 5 SEC Opinion dated 18 November 1998, addressed to Archt. Jaime C. Marquez. to another, shall indemnify the latter for the same.' $5188, 14 Fletcher Cyclopedia Corporations 413 (Permanent Ed.).

Re: SEC-OGC Opinion No. 10-21; Interest in Co- Ownership as Consideration for Shares of Stock SEC-OGC Opinion No. 14-28

Page 4 of 4 to achieve this, all the possible co-owners must waive their right to exercise legal redemption Or the period withih which this right may be exercised must have lapsed.

valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission, in order to prevent watering of stocks Incidental to this power of the Commission to approve the valuation of the property or interest used as subscription payment is the authority to require the submission of documents or compliance with conditions for the purpose of ensuring that the value of the property or interest therein is not below the value of the shares issued. Further, where the consideration for the subscription is other than actual cash, the

property so as to free the same from any right of legal redemption or pre-emption: applications for registration where the payment of subscription is an interest in a co-owned Accordingly, in the Opinion subject of your query, the following are required in

2. An Affidayit, executed by the co-owner who exchanged his interest for the shares of 1. A Waiver of Rights signed by all possible co-owners/redemptioners stating that they possible cofowners/redemptioners and the Proof of Receipt by them. stock, stating the following: are waiving their right of redemption or pre-emption in relation to the said transfer: The said Affidavit must be accompanied by a copy of the actual Written Notice to all or a. that he has given b. that the same was received by them; and c. that the 30-day period of redemption has already expired. owners/redemptioners; written notice thereof to all possible co-

and shall not be u$ed in the nature of a standing rule binding upon the Commission in other opinion shall be rendered void. 10 inquiry and investigation, it will be disclosed that the facts relied upon are different, this the facts and circumstances disclosed and relevant solely to the particular issue raised therein cases or upon the courts whether of similar or dissimilar circumstances. If, upon further It shall be understood, however, that the foregoing opinion is rendered based solely on

Please be guided accordingly.

Very truly yours,

CAM.ORRE A General Counsel

the par or issued value of the stock issued, contrary to Section 62, in relation to Section 65, of the Corporation 10 SEC Memorandum Cricular No. 15, Series of 2003. 9 Watering of stocks i$ a situation wherein the consideration for subscription is not at a fair valuation equal to Section 62, Corporation Code of the Philippines. Code