The Principle of Indivisibility of Stock Subscription is enunciated under the relevant portion of Section 62 and Section 63 of the Revised Corporation Code of the Philippines or Republic Act No. 11232. Said provisions provide:
“Section 62: x x x Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or any other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. XXX”
Section 63. Issuance of stock certificates. – No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.” (Emphasis Supplied)
Also, as duly opined by the Securities and Exchange Commission’s Office of the General Counsel on its several opinions addressed to different corporations, subscribed stocks cannot be divided into portions so that the stockholder shall not be entitled to a certificate of stock until he has remitted the fully payment of his subscription. As a result, a stockholder cannot transfer portion or part of his stock in view of the indivisible nature of the subscription contract. It is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees. (SEC OGC Opinion No. 10-15 dated April 23, 2010, citing SEC Opinion dated April 11, 1994; SEC OGC Opinion No. 16-05 dated March 31, 2016 addressed to Rural Bank of Maaasin (Southern Leyte) INC.’s Corporate Secretary Estelita Y. Sy; SEC OGC Opinion dated September 03, 1982 addressed to Mr. Adolfo Martinez; SEC OGC Letter dated January 6, 1983 addressed to Bay Sunset Tours and Travel Corporation)
Effect of the Principle of Indivisibility of Stock Subscription to Sales of Shares of Stock
The sale or transfer of portion of the not fully-paid subscribed shares is not allowed as it will be in violation of the doctrine of indivisibility of stock subscription or in view of the indivisible nature of the subscription contract under the import of Sections 62 and 63 of the Revised Corporation Code. The reason behind the principle is that, it would be difficult to determine whether or not the partial 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 and all of the entire number of subscribed shares, and the difficulty in determining the unpaid balance to be assumed by each transferee. (Villanueva, Cesar Lapuz et al, Philippine Corporate Law, 2013 Edition; Page 557, citing SEC OGC Opinion dated June 3, 1994, XXVIII)
Sale or Transfer of Entire Not-Fully Paid Shares
In a recent SEC Opinion, the SEC discussed that, although the subscribed stocks are not yet fully paid, the right of the stockholder as the owner of such shares to sell, transfer and assign his stockholdings are not proscribed by law if the entire subscription is to be sold, transferred or assigned to a single transferee. To go about the transfer of the entire not fully paid shares, it is necessary, however to secure the consent of the corporation since the transfer of the subscription right contemplates a novation of contract which under Article 1293 of the Civil Code of the Philippines cannot be made without the consent of the creditor. (SEC OGC Opinion No. 16-05 dated March 31, 2016 addressed to Rural Bank of Maaasin (Southern Leyte) INC.’s Corproate Secretary Estelita Y. Sy)
However, the sale, assignment or transfer between the original subscriber and transferee, although binding between them, cannot be forced upon the corporation, since it covers not fully paid shares. This principle is in consonance with the principle of Contract of Law that the substitution of the party obligor can be made only with the express consent of the obligee, the corporation being considered the obligee in a subscription contract (Villanueva, Cesar et al, Philippine Corporate Law, 2013 Edition; page 557) and Section 63 of the Corporation Code where there shall be no issuance of Certificate of Stock when the subscribed shares have not been fully paid. An unrecorded transfer, though valid as between the parties, cannot be effective as against the corporation. The rights of a stockholder accrue only upon entry of his name in the books of the corporation. (Batangas Laguna Tayabas Bus Company, Inc. vs Bitanga, 362 SCRA 635 (2001))
Issuance of Certificate of Stock over Paid-Up Shares
The provisions under Section 63 of the Revised Corporation Code does not actually prohibit the corporation from “dividing” the subscription of the subscriber by considering portion thereof as fully paid and issuing a corresponding certificate over the paid-up shares, but such option is only available to the corporation (Villanueva, Cesar et al, p. 537). Corporation Law expert, Cesar Villanueva in his book “Philippine Corporate Law” discussed that the restriction under Section 63 provides for the principle that a certificate of stock may be taken by a person dealing with the underlying shares to consider them as “fully paid and non-assessable” making said section the statutory basis to support the proposition that when a corporation issues a certificate of stock, it certifies to the whole world that the shares described and covered therein are fully paid. (Villanueva, Cesar et al, p. 538)
Furthermore, one of the justifications of Atty. Cesar Villanueva in discussing the possibility of issuance of Certificate of Stock over the portion of paid-up share, is the Principle in Contract Law that the contractual parties may waive the indivisibility of an obligation. In applying said principle, the author explained that the indivisibility of subscription of shares of stock may be waived by the corporation as obligee in the contract of subscription. Consequently, although the subject matter of an obligation is essentially indivisible, the obligee has the legal right to waive the indivisibility and break the obligation into sub-components or even to waive it entirely (Villanueva, Cesar et al, p. 538). The obligation to pay the balance of the subscription will not be suspended or ceased since it will still be enforced by the corporation against the seller-subscriber, thus negating the chance of violating the trust fund doctrine.[
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.
All rights reserved.
SUBSCRIBE NOW FOR MORE LEGAL UPDATES!
[email-subscribers-form id=”4″]
I love what you guys are up too. This kind of clever work and reporting! Keep up the fantastic works guys I’ve incorporated you guys to my blogroll.
Very great post. I simply stumbled upon your blog and wanted to mention that I’ve really enjoyed browsing your blog posts. After all I will be subscribing to your rss feed and I hope you write once more soon!