Published — June 1, 2022
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Be more knowledgeable: WHEN DOES STOCK CORPORATION BECOME NON-STOCK?
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Shares are issued by stock corporations
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Stock corporations can acquire its own shares
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There two conditions in acquiring its own shares
Man, more often than not, is interested in stock corporations rather than in non-stock corporations.
Stock corporations are called such primarily because it has capital stock divided into shares. The holders of such shares are authorized to receive dividends, or allotments of the surplus profits on the basis of the shares held. Once shares are issued by the stock corporation, may those shares issued be subject to eventual acquisition by the issuing corporation?
The law says:
Yes.
Among the explicit powers of a stock corporation is the Power to Acquire Own Shares as provided for under Section 40 of the Revised Corporation Code. However, as a general rule, such power is anchored on the twin conditions of legitimate corporate purpose and unrestricted retained earnings.
In other words, before a stock corporation can acquire its own shares, it must have unrestricted retained earnings in its books to cover said shares to be purchased or acquired plus a purpose of such intended acquisition.
But, first, what is unrestricted retained earnings? It simply pertains to the accumulated surplus earnings of profits arising from the business of a stock corporation. The requirement of unrestricted retained earnings to cover the shares is based on the “Trust Fund Doctrine.”
Said doctrine would tell that the capital stock, property and other assets of a corporation are viewed as equity in trust for the payment of corporate creditors. The rationale is that corporation’s creditors are preferred over the stockholders.
Once determined that the stock corporation has indeed unrestricted retained earnings, the next question is, “What is the purpose of acquiring or purchasing the stock corporation’s own shares?”
Still, under the same section stated above of the Revised Corporation Code, the purpose of purchasing or acquiring its own shares must be for a legitimate corporate purpose or purposes, including the following cases:
- To eliminate fractional shares arising out of stock dividends;
- 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
- To pay dissenting or withdrawing stockholders entitled to payment for their shares under the Revised Corporation Code.
Is there an exception to the above-stated general rule?
The law says:
Yes.
It is in this picture that redeemable shares come in. Redeemable shares are those which may be purchased by the corporation from the holders of such shares upon the expiration of a fixed period regardless of the existence of unrestricted retained earnings in the books of the corporation.
However, the purchase must be upon such terms and conditions stated in the articles of incorporation and the certificate of stock representing such shares subject to the rules and regulations issued by the Securities and Exchange Commission.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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