Opinion No. 14-33 RE: Forced Acquisition of Foreign-Held Shares of Stocks in an Educational Institution

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

OFFICE OF THE GENERAL COUNSEL

18 November 2014

of Stock in an Educational Institution Forced Acquisition of Foreign-Held Shares SEC-OGC Opinion No. 14-33

TIONGCO SIAO AND BELLO Unit 1114 Medical Plaza Building San Miguel Avenue, Ortigas Center ATTY. ROANNE J. ARROLA 1605 Pasig City ATTY. JOHN PHILIP C. SIAO

S:

your client, Philadelphia School Incorporated ("Philadelphia"), requesting for a legal foreign stockholders in equal proportion up until the foreign ownership is reduced to opinion as to whether or not the corporation "can forcibly acquire the shares of existing 40% at market value or book value of the corporation. This refers to your letter request for legal opinion dated July 15, 2013 concerning

shares, or 51.11% thereof, is owned and held by foreigners, contrary to the nationality Commission, which has an outstanding capital stock of 4,500 shares, of which 2,300 restrictions under the Constitution. You stated that Philadelphia is an educational institution registered with the

However, according to you, the foreign stockholders of the corporation refuse to voluntarily divest their shares. Hence, the present query. To this end, Philadelphia seeks to comply with the 60%-40% equity requirement

the corporation from its stockholders, untenable. Section 63 of the Corporation Code expressly provides that shares of stock are personal properties of the stockholders. Thus, the corporation, not even the State, can forcibly acquire, confiscate or sequester We find your position, that the corporation may "forcibly acquire" the shares of

1 Article XIV, Section 4 (2), of the 1987 Constitution: "(2) Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is all educational institutions. xxx" owned by such citizens. The Congress may, however, require increased Filipino equity participation in

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such shares of stock without due process of law, as it partakes of a property right protected by the Constitution.?

compliant with Section 41 of the Corporation Code.3 Thus: Even when the consent is secured, the corporation can buy its shares only if it is

own shares for a legitimate corporate purpose or purposes, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: corporation shall have the power to purchase or acquire its "SECTION 41. Power to acquire own shares. including but not limited to the following cases: Provided, A stock

"1. To eliminate fractional shares arising out of stock dividends;

"2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

payment for their shares under the provisions of this Code. "3. To pay dissenting or withdrawing stockholders entitled to

(Emphasis and underscoring supplied)

impaired;4 (3) the corporation acts in good faith and without prejudice to the rights of stockholders to comply with the constitutional requirements prescribing the minimum must be present: (1) it is for a legitimate and proper corporate purpose; (2) there shall be an unrestricted retained earnings to purchase the same and its capital is not thereby creditors and stockholders; and (4) the conditions of corporate affairs warrant it.5 If the capital stock ownership of Filipino citizens in educational institutions. aforementioned conditions are present, a corporation may acquire the shares of its alien For a corporation to be able to acquire its own shares, the following conditions

While it would appear that the conditions of Philadelphia warrant the acquisition of its own shares held by its foreign stockholders, it is imperative that there must be unrestricted retained earnings before it may purchase its own shares. Otherwise, this would lead to an unauthorized increase of shares of stock, as well as it constitutes stockholders and creditors of the corporation." While there are other exceptions to the rule violation of the trust fund doctrine. The rationale for this is that share repurchases constitute in effect a distribution to the stockholders which, if abused and without proper safeguards, will deplete and impair the assets of the corporation, to the prejudices of the

2 Article III, Section 1, 1987 Constitution: "No person shall be deprived of life, liberty, or property without due process of law xxx 3 De Leon, Corporation of the Philippines Annotated (2002 ed.), p. 373, citing SEC Opinion dated

4 Primer on the Corporation Code of the Philippines, published by the Securities and Exchange 5 Ibid., p. 374-375; SEC-OGC Opinion No. 11-09, May 8, 2009, addressed to Villanueva Gabionza & De Santos. De Leon, supra, p. 375. II Lopez, Corporation Code of the Philippines (1994 ed.), p. 584. August 11, 1961. Commission, p. 62

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requiring unrestricted retained earnings in the self-acquisition of shares,8 it must be own shares from its stockholders by force. emphasized that nothing in the said exceptions suggests that a corporation may acquire its

shares ". In this regard, treasury shares are shares of stock which have been issued and redemption, donation or through some other lawful means.' The said SEC Opinion did that Opinion that if a disqualified stockholder of a rural bank fails to dispose of his shares, the corporation may"re-acquire the same" and that "it may be treated as treasury fully paid for, but subsequently reacquired by the issuing corporation by purchase. not suggest a forced or automatic acquisition of shares - such acquisition must be done through lawful means as contemplated in the Corporation Code. Your reliance on SEC Opinion dated July 1, 1993 is misplaced. It was stated in

Philadelphia for violation of the Corporation Code of the Philippines in relation to Article corporations with the ownership requirements in the Constitution and/or existing laws by corporations engaged in nationalized or partly nationalized activities.11 educational institution. Otherwise, the Commission would monitor, sanction and penalize XIV, Section 4 (2), of the 1987 Constitution,1o in line with its stringent compliance of We trust that while this matter is resolved, Philadelphia is not operating as an

it will be disclosed that the facts relied upon are different, this opinion shall be rendered facts disclosed in the query and relevant solely to the particular issues raised therein and shall not be used in the nature of a standing rule binding upon the courts, or upon the Commission in other cases of similar or dissimilar circumstances.12 If upon investigation. It shall be understood that the foregoing opinion is rendered based solely on the

null and void.

CLMHEOS.CORREA General Counsel

of the corporation; and (d) deadlock with respect to a management of business under a close corporation under Section 104 of the Corporation Code. (De Leon, supra, p. 374; Section III, CCP No) be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall 8 (a) in the case of Treasury Shares under Section 9 of the Corporation Code; (b) with respect to redeemable shares under Section 8 of the Corporation Code; (c) to effect a decrease in the capital stock citizens to less than the required percentage of the capital stock as provided by existing laws shall 12 SEC Memorandum Circular No. 15, series of 2003. 1 on Rules Governing Redeemable and Treasury Shares.) "(Corporations which will engage in any business or activity reserved for Filipino citizens shall be indicated in all stock certificates issued by the corporation." provide the following): No transfer of stock or interest which shall reduce the ownership of Filipino 11 SEC Memorandum Circular No. 8, Series of 2013 Section 9, Corporation Code. XXX "Section 15. Forms of Articles of Incorporation. -- xxx