Opinion No. 19-60 Re:Shares Previously under Escrow, Liquidation; Condonation of Corporate Rights

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEL

20 December 2019

SEC-OGC Opinion No.19-60 RE: Shares Previously under Escrow, Liquidation Condonation of Corporate Rights

ATTY.FRANCES CM AGUINDADAO-ARABE

Universal Leisure Club Inc. Corporate Secretary

Mandaluyong City Cor. Madison and Pioneer Sts.. Unit 703 Globe Telecom Plaza II,

Dear Ms.Aguindadao-Arabe:

Development Agreement which were previously under an Escrow Agreement, for purpose after liquidation vis-a-vis existing claimants who gained favorable decisions from regular opinion regarding the (1) validity and inclusion of the shares of stock acquired through a of determining quorum, (2) stockholder's waiver of participation in the distribution of assets of a corporation undergoing liquidation, and (3) stockholder's entitlement to properties We write in response to your letter dated 14 September 2014 requesting for an

courts.

A perusal of the Agreement date 15 November 1996 attached to your letter disclosed that revoked on 28 June 2004, was organized primarily to promote social, recreational and athletic activities among its members by constructing, developing, and maintaining, initially at least five (5) component clubs consisting of a mountain golf and nature resort, a city sports club, a city business club, etc. ("Project"). To carry out the Club's purpose, it entered into a Development Agreement ("Agreement") with Universal Leisure Corporation ("Developer"). among its salient features are as follows: corporation whose Registration of Securities and Permit to Sell Securities to the Public was You averred that Universal Leisure Club, Inc. ("Club"), a non-profit domestic

XXX

"E. DEVELOPER has agreed to assign its rights to purchase the Additional Property which UNIVERSAL CLUB needs to achieve its primary purpose,and to pay,by way of equity participation in UNIVERSAL CLUB, the minimum amount of P2.66 BILLION (the "Acquisition Cost") xxx.(emphasis supplied

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"F.DEVELOPER has likewise undertaken to pay,also by way of equity participation in for the construction and development of the Project. (emphasis supplied) UNIVERSAL CLUB, the minimum amount of P2.54 BILLION (the "Development Cost")

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and development of the Project xxx. "3. DEVELOPER shall xxx on behalf of UNIVERSAL CLUB, complete the construction

"6. In consideration of DEVELOPER's capital contribution equivalent to the Acquisition completion and full turn-over of the five (5) components of the Project. (emphasis least P500, 000.00 worth of Acquisition Cost and Development Cost actually shares of the remaining 11,250 shares shall issue only to the DEVELOPER upon a total of 11,250 shares representing the remaining unissued shares out of its DEVELOPER as the development of the project progresses at the ratio of 1 share for at contributed for the Project by the DEVELOPER.Provided,however,that the last 5,000 supplied Cost and the Development Cost,UNIVERSAL CLUB has agreed to issue to DEVELOPER authorized capital stock. These shares shall be issued on a quarterly basis to

Xxx

disolution escrow) to constitute a quorum and allow the Developer to vote on the issue of the Club's Since the completion of the entire project is no longer feasible, the dissolution of the Club is dissolution of the Club, the existence of quorum was questioned by the members present, specifically, the Developer's use of 3,615 shares (including the 2,104 shares previously in being considered. However, in a special shareholders'meeting held on 22 April 2014 for the You likewise declared that only 2 out of the 5 destinations were completed in 2003.

In view of the foregoing, you seek clarification on the following:

1 Whether the shares of the Developer, acquired pursuant to the Development

2 Should the answer in question No. 1 be in the affirmative, whether or not the during the shareholders' meeting as valid shares for purpose of determining quorum Agreement and which were previously under Escrow Agreement, can be recognized and voting for dissolution?

3. Who among the shareholders are entitled to equal share from the liquidation of implementation thereof, be treated in the process of liquidation.1 properties and how will existing claimants who have gained favorable decisions (final) from the regular courts over their claims for refund and currently seeking the Developer can waive its right to participate in the distribution of assets despite its participation in the quorum and voting?

rendering categorical opinions on issues which may potentially be litigated in the future in At the outset, it bears stressing that the Commission, as a matter of policy, refrains from

1 Additional questions pursuant to Atty. Aguindadao-Arabe's Letter dated 10 October 2014.

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an intra-corporate and/or civil case such as matters involving the substantive and

a general basis and not on specific legal issues.3 if the opinion turns out to be adverse to their interest,2 and on matters which necessarily require a review and interpretation of contracts or on their validity since interpretation of contract is justiciable in nature and contract review calls for legal examination of contract on contractual rights of private parties who would, in all probability,contest the same in court

information purposes only, the following may be instructive. consideration, we refrain from rendering categorical opinions on the same. However, for Considering that the issues you presented fall within the ambit of the afore-said policy

accorded the rights belonging to a regular stockholder.5 Consequently, the Developer's use holders of shares in escrow must necessarily be determined. In previous opinions,4 the stockholder until the conditions set forth for the release of such shares are fully met. The reason lies on the fact that the shares he is supposed to be entitled to are not yet actually issued to him, thus he is not yet the owner of said shares and consequently, he cannot be of the subject shares and its validity for the purpose of determining quorum depends on whether the conditions for release of the said shares were met, in accordance with the Escrow Agreement vis-a-vis the Development Agreement. Commission held that holders of escrow shares are not entitled to the rights pertaining to a Relative to the first issue, the nature of Development Agreement and the rights of

provision can be considered as a subscription contract and whether there was a valid consideration for the shares. consideration of DEVELOPER's capital contribution equivalent to the Acquisition Cost and the Development Cost", the same must be clearly analyzed to determine whether such In addition, while the Agreement provides that the shares were issued "in

stockholders' meeting is not required considering that additional issuances of shares of stocks from the approved authorized capital stock do not need approval from the stockholders.8 Since the power to approve the opening for subscription and issuance of shares from the unissued authorized capital stock is not expressly granted to the issue or sell stocks, which is ordinarily carried out through a subscription contract.7 The power to issue shares of stock in a corporation is lodged in the board of directors and It cannot be gainsaid that stock corporations have the express and inherent power to

2 SEC Memorandum No. 15 Series of 2003 as cited in SEC-OGC Opinion 15-09 dated 27 August 2015 4 Mr. Delfin L. Gonzales, 19 May 1989, SQB June 1989 p. 34 and Atty. Enriwue M. Bello, 20 Nov. 1989; SQB March 1990 p. 66. 5 Mr. Delfin L. Gonzales, 19 May 1989, SQB June 1989 p. 34 citing (Blythe vs Dohemy 73 F (2d 779, 803, C.C.A). 7 Section 59. Subscription contract. - Any Contract for the acquisition of unissued stock in an existing corporation or corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the 8 Majority Stockholders of Ruby International Corporation vs Miguel Lim, GR 165887, 6 June 2011 citing (Dee v SEC, 199 SCRA 238 (1 99 6 Section 36(6), Corporation Code now Section 35 (f) of the RCC) parties refer to it as a purchase or some other contract

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stockholders by any provision of the Revised Corporation Code (RCC), the same, as a general rule, is subject to the pre-emptive rights under Section 38' of the RCC.

Further, Section 61 of the RCC sets forth the valid considerations for issuance of shares, to wit:

SEC. 61. Consideration for Stocks. -- Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be

(a) Actual cash paid to the corporation;

(b) 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 value of the stock issued;

(c) Labor performed for or services actually rendered to the corporation;

(d) Previously incurred indebtedness of the corporation;

(e) Amounts transferred from unrestricted retained earnings to stated capital:

(f) Outstanding shares exchanged for stocks in the event of reclassification or conversion;

(g) Shares of stock in another corporation; and/or

(h) Other generally accepted form of consideration.

Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval of the Commission

Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation.

the stockholders. That is the underlying principle in the distribution of corporate assets.11 have a right to look for the satisfaction of their claims. The assets of a dissolved corporation belong to the stockholders.10 However, the corporate debts must be paid and its obligations subscriptions to the capital stock of a corporation constitute a fund to which the creditors discharged before the proceeds obtained in liquidating the assets may be distributed among As to the second issue, apropos is the Trust Fund Doctrine, which provides that

10 A.F. Agbayani. II COMMENTS AND JURISPRUDENCE ON THE COMMERCIAL LAWS OF THE PHILIPPINES 651 (1996) 11 SEC Opinion No. 08-04 dated 04 February 2008 addressed to Sycip Salazar Hernandex & Gatmaitan 9 Section 39 of the Old Corporation Code

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Thus, a corporation is not authorized to condone a debt/receivables owing it. Debts due to a corporation constitute a portion of its assets which constitutes a "Trust Fund" for the benefit of the creditors, and which the creditors may claim. Gratuitous abandonment of the payment of the debt if done to the prejudice of creditors and stockholders may constitute an ultra-vires act.12

dissolution of a corporation. It is the process of settling the affairs of said corporation, which With respect to the third issue, liquidation is a necessary consequence of the

consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.13 It is specifically governed by Section 139 of the RCC, which reads:

"SEC. 139. Corporate liquidation. -- "xxx.... every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years,the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all

interest vests in the trustees, and the beneficial interest in the stockholders, interest which the corporation had in the property terminates, the legal members, creditors or other persons in interest.

stockholder or member who is unknown or cannot be found shall be escheated in favor of the national government. winding up of corporate affairs, any asset distributable to any creditor or Except as otherwise provided for in Sections 93 and 94 of this Code, upon the

corporation shall distribute any of its assets or property except upon lawful Except by decrease of capital stock and as otherwise allowed by this Code,no dissolution and after payment of all its debts and liabilities."

13 Anthony S. Yu v Joseph S. Yukayguan, GR 177549, 18 June 2009 citing (China Banking Corp v M. Michelin & Cie, 58 Phil 261, 12 De Casa, p.130, citing SEC Opinion dated 19 June 1987 addressed to Philippine Contractors Accreditation Board 266 (1 33

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assets, the payment of all its creditors, and the distribution of the remaining assets, if any contract, on the basis of their respective interests. The manner of liquidation or winding up with law.14 among the stockholders thereof in accordance with their contracts, or if there be no special may be provided for in the corporate by-laws and this would prevail unless it is inconsistent Liquidation entails winding up the affairs of the corporation through the collection of

interests. There can be no distribution of assets among the stockholders without first paying must first be paid before any corporate assets may be distributed among stockholders.15 As void.16 The stockholders cannot claim for refund, before the actual dissolution of the appropriation by, and the distribution among them, of part of the corporate assets, which Section 139 of the RCC proscribes. to pay all its creditors and the remainder of such assets shall be distributed among the stockholders thereof in accordance with their contracts, or on the basis of their respective corporate debts. Under the Trust Fund Doctrine, the capital stock, property,and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who such, any disposition of corporate funds and assets to the prejudice of creditors is null and corporation and the liquidation of its debts and liabilities as it would amount to Thus, in the event of the Club's liquidation, its properties shall be collected and used

issue on prioritizing the right of a claimant against the assets of a corporation sought to be dissolved and liquidated in the payment of his claims becomes material. Thus, the following order in the application of assets may be considered: However, when the assets of the corporation are insufficient to pay all the claims, the

1 When the corporation is insolvent, the creditors of the corporation are entitled to

2. Stockholders, members, directors, or officers of the corporation who are also its have all its assets distributed first among them according to their respective rights and priorities.17

3. The remaining assets are then to be distributed among the stockholders or members creditors as a result of a legitimate or proper loan or claim must be paid next to the other creditors of the corporation.18

in proportion to their shareholdings or interest in the absence of any provision to the contrary.19

Development Corporation v CA, GR L-77860, 22 November 1988). 17 Hector S. De Leon and Hector M. De Leon, Jr., THE CORPORATION CoDE OF THE PHILIPPINES ANNOTATED 9TH EDITION, p. 750 (2006) citing (F. Guanzon & Sons, Inc. v Register of Deeds, 6 SCRA 373). SELECTED CASES, Vol.2, p. 415 (1990)) 15 Philip Turner and Elnora Turner v Lorenzo Shipping Corp, GR 157479, 24 November 2010 citing (Boman Environment 19 Hector S. De Leon and Hector M. De Leon, Jr. THE CORPORATION CoDE OF THE PHILIPPINES ANNOTATED 9TH EDITION, p.750 (2006 citing 14 Anthony S. Yu v Joseph S. Yukayguan, GR 177549, 18 June 2009 citing (Campos, THE CoRPORATION CoDE: CoMMENTS, NoTES AND (18 Am.Jur. 1029-1030). 16 ld 18 Id

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Considering that the share of stockholders in the remaining assets of the corporation depends on their contracts or their respective interests, i.e. common stock and preferred stock with respect to distribution of assets, said contracts or interests must be carefully reviewed.

We hope the foregoing discussion has provided you sufficient guidance in resolving your concerns.

Gomald ROMUALD C.PADILLA Officer-In-Charge