Opinion No. 16-05 Re: Indivisibility of subscription contract; Payment of Balance of Unpaid Subscriptions; Delinquent Shares; Delinquency Sale.

Republic of the Philippines

SEC Building, EDSA, Greenhills, Mandaluyong City Securities and Exchange Commission Department of Finance

OFFICE OF THE GENERAL COUNSEL

31 March 2016

SEC-OGC Opinion No. 16-05 RE: Indivisibility of subscription Delinquent Shares; Delinquency Sale contract; Payment of Balance of Unpaid Subscriptions;

Maasin City, Southern Leyte Corporate Secretary E. Rafols St., Tunga-tunga, RURAL BANK OF MAASIN (SOUTHERN LEYTE), INC. ESTELITAY.SY

Madam:

opinion on various matters, particularly on making of calls for payment of subscription on installment basis, indivisibility of subscription contract, payment of the balance of unpaid subscriptions, delinquent shares and delinquency sale. This refers to your letter dated 17 August 2015 requesting for a legal

is contemplating to make a call for the payment of the subscription for all stockholders on installment basis; that a certain percentage of the unpaid Rural Bank of Maasin (Southern Leyte), Inc. (the Corporation, for brevity) subscriptions shall be declared due and payable at different dates. Consequently, you requested clarification and/or confirmation on the following: You mentioned in your letter that the Board of Directors of the

1. Whether or not calls for the balance of subscriptions may be made by installments;

2. Whether or not stock certificates may be issued for the by the subscriber; equivalent of the shares partially paid in a subscription, even if the whole subscription has yet to be fully paid or cannot be fully paid

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3. Whether or not cash or stock dividends may be used to pay the balance of unpaid subscriptions;

call for payment of the balance of subscription by installment; and 4. Whether or not the whole subscription becomes delinquent upon a stockholder's failure to pay an installment pursuant to a

5. Whether the procedure for the delinquency sale prescribed in Sec. 68 of the Corporation Code (the Code) is mandatory in such a manner that the board of directors of a corporation is precluded from adopting a different procedure.

I. Whether or not calls for the balance of subscriptions may be made bu installment.

under Section 67 of the Code, a call for payment for the balance of subscriptions may be made by installments. In your letter, you asked for confirmation whether, as provided for

The second paragraph of Section 67 provides:

thereof._ together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date stockholder liable for interest at the legal rate on such balance, shall render the entire balance due and payable and shall make the unless a different rate of interest is provided in the by-laws, days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be directors orders otherwise." computed from such date until full payment. If within thirty (3o) subject to sale as hereinafter provided, unless the board of "Payment of any unpaid subscription or any percentage

subscription or the call by the board of directors, as the case may be, may made on installment, because the Code itself provides that the contract of require the payment of the entire unpaid subscription or only a certain percentage thereof on the date specified for payment.1 Thus, calls for the payment of the balance of the subscription maybe

We, therefore, answer your first query in the affirmative.

of Directors absolute power to make a call for the payment of the unpaid subscription. The first paragraph of Section 672, in relation to Section 133 It is worth noting, however, that Section 67 does not give the Board

1 H. De Leon, the Corporation Code of the Philippines, Annotated, p. 614 (2010). contract of subscription, the board of directors of any stock corporation may at any time 2 Section 67. Payment of balance of subscription.- Subject to the provisions of the

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will make the subscription due and payable until the arrival of the fixed of the Code, succinctly provides that the call for the payment of the unpaid] subscriptions is required only when there is no fixed date for payment in the contract of subscription; otherwise, no amount of calls from the board date provided for in the subscription contract.

II. Whether or not stock certificates may be issued for the equivalent of has yet to be fully paid or cannot be fully paid by the subscriber. the shares partially paid in a subscription even if the whole subscription

import of Section 64 of the Code which states that no certificate of stock subscription is one, entire, and indivisible whole contract based on the shall be issued to a subscriber until the full amount of his subscription together with the interest and expenses (in case of delinquent shares), if any is due, has been paid",and (b) the principle of indivisibility of You thereby request for interpretation of the foregoing principles in relation to the following: subscription is absolute as Section 64 of the Code speaks of no exception.4 As you mentioned, the Corporation understands that: (a) a

1. Whether stock certificates may be issued representing the 2 Whether a stockholder may assign the balance of the amount equivalent to subscriptions partially paid despite the balance being unpaid and/or cannot be fully paid by a subscriber; and

subscription to a third person in such a manner that the stock certificates will be issued to the stockholder for the paid payment of the balance of the subscription. portion and the balance to the third person who assumes the

the Commission consistently opined that a stockholder shall only be indivisibility of the subscription contract implicitly set forth under Section entitled to the issuance of his certificate of stock upon payment of the full amount of his subscription together with the interest and expenses (in case of delinquent shares), if any is due5. This is pursuant to the doctrine of As to your first sub-query, we answer it in the negative. To amplify.

may collect the same or such percentage thereof, in either case with accrued interest, if incorporation. - At least twenty-five percent (25%) of the authorized capital stock as 5 SEC Opinion dated o6 March 2006 addressed to Atty. Roderick R.C. Salazar III. declare due and payable to the corporation unpaid subscriptions to the capital stock and 3 Section 13. Amount of capital stock to be subscribed and paid for the purposes of stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. 4 Citing SEC Opinion dated o3 September 1982 addressed to Mr.Adolfo Martinez. any, as it may deem necessary. dates, upon call for payment by the board of directors: Provided, however, That

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is due.6 The purpose of the prohibition is to prevent the partial disposition 64 of the Code, that is, a subscription is one, entire and indivisible contract. It cannot be divided into portions so that the stockholder shal not be entitled to a certificate of stock until he has remitted the full of a subscription which is not fully paid, because if it is permitted, and the subscriber subsequently becomes delinquent in the payment of his subscription, the corporation may not be able to sell as many as his subscribed shares as would be necessary to cover the total amount due payment of his subscription together with the interest and expenses if any from him, which is authorized under Section 68.7

because of the principle of the indivisibility of subscription under Section 64 of the Code, the subscription cannot be divided into portions. In one instance, the Commission opined that: As to your second sub-query, we also answer in the negative. Again,

balance. It is necessary, however, to secure the consent of the the Philippines cannot be made without the consent of the amount of his subscription, he cannot transfer part of it in view of the indivisible nature of subscription contract. It is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees. However, the entire subscription, transferee, who as a result of the transfer, must assume the unpaid although not yet fully paid, may be transferred to a single corporation since the transfer of subscription right contemplates a novation of contract which under Article 1293 of the Civil Code of creditor." 9 "Accordingly, if the stockholder has not paid the full

Travel Corporation and SEC Opinion dated April 11, 1994 addressed to Mr. Gonzales M. 7 See note 1, at 587. payments made should be applied as full payment for the corresponding number of shares which can only be covered by such payment or as proportional payment to each 9 See note 6, citing SEC letter dated January 6, 1983 addressed to Bay Sunset Tours & 6 SEC Opinion dated 23 April 2010 addressed to Dr. Federico A. Arcenas, citing SEC Opinion dated April 11, 1994 addressed to Mr. Gonzales M. Mallari. 8 The reason behind the principle disallowing transfer of not fully paid subscription to several transferees is that it would be difficult to determine whether or not the partial and all of the entire number of subscribed shares. Consequently, it would be difficult to determine the unpaid balance to be assumed by each transferee. Thus, it is only upon ful transferees. (SEC Opinion dated9 October 1995 address to Atty. A.B.F. Gaviola, Jr. citing SEC Opinion dated March 8, 1990 addressed to Mr. Manuel R. de Jesus; SEC Opinon dated 3 June 1994 addressed to Concepcion Madarang; SEC Opinion dated September 17, 1990 addressed to Atty. Luciano S. Borja) Mallari. payment of the whole subscription that a stockholder can transfer the same to several

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III. Whether or not cash or stock dividends may be used to pay the balance of unpaid subscriptions.

subscription is when the stocks have been declared delinquent. Hence, you Code, the only time cash dividends may be applied to an unpaid raised the following sub-queries: In your letter, you stated your position that under Section 43 of the

1. Whether cash dividends may be applied to the balance of 2 Whether stock dividends may be used to pay the balance a non-delinquent subscription; and of the unpaid subscriptions.

cannot be withheld from the subscribers who have not fully paid their subscriptions unless they are delinquent on their unpaid subscriptions.io due and demandable. The corporation may use the cash dividends to pay delinquent only if the stockholders concerned give their consent thereto. 1 Basically, this is because the balance of the unpaid subscription is not yet off stockholders' subscription but which have not been declared We answer the first sub-query in the negative. Cash dividends

agreement cannot be compensated with the amount of his shares in the regard to such share. Under Section 43 (par. 1), "stock dividends shall be stockholder's indebtedness to a corporation under a subscription same corporation, there being no relation of creditor and debtor with withheld from the delinquent stockholder until his unpaid subscription is fully paid." In other words, under the said provision, it is not allowed to apply stock dividend to unpaid subscription.12 As to your second sub-query, we likewise answer in the negative. A

involves the creation and issue of new shares of stock. The basis of the issue, insofar as payment into the corporation is not required of the with all which that implies. Thus, a stock dividend which requires a transfer of surplus to capital account cannot be made without issuing new shares. Considering that the retained earnings/profits are already applied as payment to the new issuance of shares, the same cannot be reapplied to of which will be applied to the unpaid subscription, which case is not recipient, is surplus assets which thus become converted into strict capital previous subscriptions which are still unpaid. Likewise, to allow the stocks issued pursuant to the declaration of stock dividend as payment to unpaid subscription would be, in effect, re-acquiring its own shares, the proceeds allowed under Section 41 of the Code which enumerates the instances and Moreover, it should be noted that the "declaration of stock dividend

10 SEC Opinion dated o8 March 1991 addressed to China Banking Corporation. 12 See note 1, at 415. 1 Ibid

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conditions wherein a corporation can legally purchase or acquire its own shares.13

IV. Whether or not the whole subscription becomes delinguent upon - of the balance of subscription by installment. stockholder's failure to pay an installment pursuant to a call for payment

You requested that the following sub-queries be addressed:

1 Does the subscription become automatically delinquent within

3. What is the meaning of the word "unless the board of directors subscription while not lifting the status of subscriptions 3o days from the date stated in the call should the stockholder fails to pay? orders otherwise"? Does it authorize the board of directors of a Should a stockholder fail to pay an installment within 30 days from the date stated in the call made by the board of directors, corporation to remove the delinquency status of a particular portion/percentage of the subscription which becomes due similarly situated does that render the whole subscription delinquent or just the and payable?

become delinquent in the event of failure to pay the unpaid subscription within the prescribed 3o day period from the date specified in the subscription contract or the date stated in the call.i4 Henceforth, the subscription becomes automatically delinquent upon the lapse of the 30 day period stated in the call, with the stockholder failing to pay. need of a formal declaration of the Board for an unpaid subscription to On the first sub-query, the answer is in the affirmative. There is no

Relative to your second sub-query, the Code provides:

date no payment is made, all stocks covered by said subject to sale as hereinafter provided, unless the board of directors orders otherwise." (Emphasis supplied) subscription shall thereupon become delinquent and shall be subscription. "SECTION 67. : If within thirty (30) days from the said Payment of balances of

otherwise" means that the board of directors may order the removal of the Under the above provision, the phrase "unless the board orders

Corporations, Vol. II p. 747 citing Green v. Bissell, 79 Conn. 547, 65A1056, 8 LRA(NS) 14 SEC Opinion dated 13 March 1998 addressed to Atty. Jose A. Feria Jr. 13 SEC Opinion dated 04 July 1984 addressed to Jose S. Tayag, citing Fletcher Cyclopedia 1011, 118 An St. Rep 156, 9 Ann Case 287.

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from the board, its delinquent status remains.15 delinquent status of unpaid subscription. Unless, there is such an order

applied only to a particular subscription, it has been held that a call made permit the directors to practice favoritism or act oppressively.16 In like manner, if a call cannot be made discriminatorily, so should the removal of the delinquency status. upon some of the subscribers is void or which requires some to pay a higher rate than the others, pursuant to the rule that calls must operate uniformly upon all shareholders. A call cannot be of such a character as to As to whether the removal of the delinquency status could be

subscription delinquent and subject to sale at public auction.17 on the date fixed by the board on call of subscription shall render the entire balance due and payable and make all the stocks covered by the said On the last sub-query, we answer in the affirmative. Failure to pay

V. Whether the procedure for the delinquency sale prescribed in Sec. 68 of the Code is mandatory in such a manner that the board of directors of a corporation is precluded from adopting a different procedure.

We answer in the affirmative.

call, there are two (2) remedies under the Code for the corporation to enforce the liability. The first remedy consists of permitting the subscription pursuant to Section 70 thereof. The unsuccessful attempt to corporation to put up delinquent shares for sale under Section 68 thereof and the second one is by an action in Court to recover the unpaid Court to recover the unpaid subscription pursuant to Section 70.18 follow the remedy by sale under said Section will not bar an action in If a stockholder fails to pay his unpaid subscription after a valid

necessary, the power to make the sale being merely granted by law and an extra ordinary one.19 Unless the delinquent shares are sold in accordance with the said Section, the ownership thereof remains with the stockholder.2o Strict compliance with the formalities of sale under Section 68 is

17 Ibid, at 614; SEC Opinion dated 23 April 2010 addressed to Dr. Federico A. Arcenas 20 SEC Opinion dated 3 September 1990 addressed Dr. Raul D. Jara. 16 See note 1, at 615, citing Seybreth vs. American Commander Min. and Mill. Co., Idaho 254; Great Western Peleg. Co. vs. Burnham, 79 Wis. 47; North Milwaukee Town Site Co. 18 SEC Opinion dated 9 October 1992 addressed to Virginia A. Maghuyop 19 See note 1, at 620, citing 4 Fletcher, at 670. 15 SEC Opinion dated 26 August 1992 addressed to Institute for Development Alternative. vs. Bishop, 103 Wis 492

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standing rule binding upon the courts, or upon the Commission in other solely on the facts disclosed in the query and relevant solely to the particular issues raised therein and shall not be used in the nature of a cases of similar or dissimilar circumstances.21 If upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void. It shall be understood that the foregoing opinion is rendered based

Please be guided accordingly.

CkoEA General Counsel

21 SEC Memorandum Circular 2003-15, No. 7.