Republic Planters Bank vs. Agana[GR 51765, 3 March 1997]First Division, Hermosisima Jr. (J): 3 concur, 1 concurs in result

Facts: On 18 September 1961, the Robes-Francisco Realty & Development Corporation (RFRDC) secured a loan from the Republic Planters Bank in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to RFRDC through its officers then, Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, the Bank lent such amount partially in the form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes. Said certificates of stock bear the following terms and conditions: "The Preferred Stock shall have the following rights, preferences, qualifications and limitations, to wit: 1. Of the right to receive a quarterly dividend of 1%, cumulative and participating. xxx 2. That such preferred shares may be redeemed, by the system of drawing lots, at any time after 2 years from the date of issue at the option of the Corporation." On 31 January 1979, RFRDC and Robes proceeded against the Bank and filed a complaint anchored on their alleged rights to collect dividends under the preferred shares in question and to have the bank redeem the same under the terms and conditions of the stock certificates. The bank filed a Motion to Dismiss 3 private respondents' Complaint on the following grounds: (1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the action was unenforceable under substantive law; and (3) that the action was barred by the statute of limitations and/or laches. The bank's Motion to Dismiss was denied by the trial court in an order dated 16 March 1979. The bank then filed its Answer on 2 May 1979. Thereafter, the trial court gave the parties 10 days from 30 July 1979 to submit their respective memoranda after the submission of which the case would be deemed submitted for resolution. On 7 September 1979, the trial court rendered the decision in favor of RFRDC and Robes; ordering the bank to pay RFRDC and Robes the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment. The bank filed the petition for certiorari with the Supreme Court, essentially on pure questions of law.

Issue [1]: Whether the bank can be compelled to redeem the preferred shares issued to RFRDC and Robes.

Held [1]: While the stock certificate does allow redemption, the option to do so was clearly vested in the bank. The redemption therefore is clearly the

type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. The redemption of said shares cannot be allowed. The Central Bank made a finding that the Bank has been suffering from chronic reserve deficiency, and that such finding resulted in a directive, issued on 31 January 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power.

Issue [2]: Whether RFRDC and Robes are entitled to the payment of certain rate of interest on the stocks as a matter of right without necessity of a prior declaration of dividend.

Held [2]: Both Section 16 of the Corporation Law and Section 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. In compelling the bank to redeem the shares and to pay the corresponding dividends, the Trial committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law.

Philippines Corporation Code

Redemption of shares-

Shares are not bonds or borrowings. They are investments. But shares may be similar to bonds if they are subject to redemption by the corporation under such terms and conditions as may be stated in the articles of incorporation. Shares can be redeemed only when expressly so provided in the articles of incorporation. The period of redemption may be stated in the articles of incorporation. The terms and conditions of redemption may include the price at which the shares may be redeemed, the manner of redemption and the manner of payment. When redemption period has come, it becomes an obligation of the corporation to purchase or take up the redeemable shares regardless of whether there exist in the corporation unrestricted retained earnings. But see Par. 5, Section V of SEC Rules governing redeemable shares, infra.

The above section requires that the terms and conditions on, redemption of redeemable shares must be provided for in the articles of incorporation and stated in the certificates of stock.

Shares redeemed by the corporation become treasury shares. (See Sec. 9, infra).

Redemption must not violate corporate charter or articles of incorporation-

A corporation cannot redeem its preferred shares before the redemption period as fixed in the aiticles of incorporation, nor may it redeem the same at a discount price in contravention of tle provision of the corporate charter. However, should the corporation find the same necessary so as to improve its financial position it is suggested that the company amend its articles of incorporation by changing the redemption features of its preferred shares. (SEC Ruling, January 23, 1985)

Where redemption date has come in the face of absence of retained earnings-

As to the redemption of preferred shares in the absence of retained earnings, Section V, par. 5 of SEC Rules governing redeemable shares provides: "Redeemable shares may be redeemed regardless of the

existence of unrestricted retained earnings, provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock." "SEC Ruling, Jan. 23, 1985)

Redemption may not be made when a corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature. (11 Fletcher, Sec. W9, p. 581) Such limitation is based on the principle that "corporate assets are a trust fund for creditors to the extent that creditors are entitled to payment before any distribution of capital of shareholders."(Ballentine on Corporations, Sec. 264, p. 621)

Note that when shares are re-acquired in the redemption of redeemable shares pursuant to the conversion right of convertible shares (from preferred to common shares) as provided for in the articles of incorporation, restriction of the retained earnings on the shares redeemed is not required. (See SEC. rules on redeemable and treasury shares; refer to SEC Ruling dated April 2, 1985).

Sec. 9. Treasury shares.-Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (n)

Features of treasury shares-

Under Section 9, treasury shares:

(1) Are shares previously issued by the corporation and fully paid for; (2) Are subsequently reacquired by the issuing corporation either by (a) purchase; or (b) redemption; or (c) donation; or (d) through some other lawful means like forfeiture, as when delinquent shares are sold at public auction and there was no bidder in which case under Section 68, last paragraph of this Corporation Code, such shares shall be credited as fully paid in corporate books and shall have the category of treasury shares; (3) Can be disposed of by the board of directors for a reasonable price, indicating clearly that treasury shares cannot be donated by the corporation.

Nature of treasury shares from the Supreme Court's viewpoint; treasury shares cannot be voted for; they are not entitled to dividends-

Although authorities may differ on the exact legal and accounting status of so-called "treasury shares", they are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation reacquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid-for interest in the property of the corporation. (Commissioner of Internal Revenue vs. Manning, L-28398, August 6, 1975; 66 SCRA, p. 14.)

Features of treasury shares.-

Treasury shares-

(1) Are issued and re-acquired by the corporation through pur-. chase, donation, forfeiture, etc.; (2) Are not entitled to be voted upon; (3) May be re-issued by the corporation; (4) Are not entitled to dividends; (5) Are not retired shares; (6) Cannot be issued as stock dividends; and (7) Are not included in the computation of outstanding shares.

Title II-INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Sec. 10. Number and qualifications of incorporators.-

Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines may form a private corporation" for any lawful purpose or purposes. Each of the incorporators of stock corporation must own or be a sub. scriber to at leaser one (1) share of the capital stock of the corporation. (6a)

Number of incorporators-The number of incorporators of a private corporation shall be not less than five (5) nor more than fifteen (15). This

does not mean that the number of stockholders may not be less than five nor more than fifteen. For after the corporation is organized, there may be transfers of stocks that may reduce the number of stockholders even to less than five or increase the number of stockholders to more than fifteen. These changes in the number of stockholders will not affect the juridical personality of the corporation unless circumstances exist to justify the application of the doctrine of piercing the veil of corporate entity

The law may permit that more than fifteen persons may incorporate. This may possibly take place in the case of non-stock corporations where it is stated (infra) that the number of trustees in a non-stock corporation may exceed fifteen.

Qualifications of incorporators-

The following are the qualifications of incorporators:

(1) Incorporators must be natural persons and so, unless permitted by law, juridical entities like corporations and. partnerships cannot incorporate; (2) Incorporators must all be of legal age (must have attained the age of twenty one, now eighteen years or more); thus, it seems that minors cannot incorporate, even with the consent of their guardians; (3) Being contracting parties to form a corporation and signatories to a solemn contract like the articles of incorporation, the incorporators must not suffer from any legal impediment or incapacity like insanity, judicial insolvency, etc.; (4) Each incorporator must own at least one share in the capital stock; therefore, a member can no longer exist in a stock corporation even as incorporator as was permitted under the old law;

(2) (5) Majority of the incorporators must be residents of the Philippines; it is not required that majority of the incorporators must be Filipino citizens; it is enough that majority of them are residing in the Philippines and hence, it is possible that all incorporators are aliens as long as majority of them are residents of our country but whether they can engage in any kind of business in the Philippines depends on their purpose or purposes

because there are areas of business that are reserved to Filipino citizens or Filipino-controlled entities.

(3) Sec. 11. Corporate term.-A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for period not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. (6)

(4) Life of the corporation-(5) The corporate life shall not exceed fifty (50) years

unless:(6) (1) The corporation is dissolved earlier; or (2) The

corporate term as fixed in the articles of incorporation is extended but such extension shall be subject to the following limitations: (a) that the extension cannot be made earlier than five (5) years prior to the expiration date unless demanded by a justifiable reason to be determined by the Securities and Exchange Commission; (b) that the period of extension shall not exceed fifty(50) years in any single instance of extension; and (c) that the articles of incorporation shall be correspondingly amended to set forth the extension of corporate life.

(7) Of course, the amendment extending the corporate term must bear approval of the board and stockholders (or

members) as required in Section 37 of this Corporation Code, infra.

(8) Extension of corporate life must be made before expiration of corporate term; it cannot be made after dissolution of the corporation-

(9) While it is required by the instant section (Sec. 11) that the extension of corporate term cannot be made earlier than five years prior to the expiration of such term unless an earlier extension is justified, it will be noted that the corporate term can no longer be extended after dissolution of the corporation (and even if there is a period of liquidation) because in such case there is no more corporate life to extend. (See Alliambra Ciga.r and Cigarette Manufacturing Co., Inc. vs. Securities and Exchange Commission, L-23606, July 29, 1968) In such case, the old corporation must file new articles of incorporation; but it can no longer adopt its original name that had "died" with the dissolved corporation. Some words of the original name may be used in adopting a new name to preserve in some way the goodwill of the business. Sec. 12. Minimum capital stock required of stock corporations.-Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section.

(10) No minimum capital stock required but there is a minimum paid-up capital-

(11) Unless required by special law, no minimum authorized capital stock is required of stock corporations organized under this Corporation Code but subject to the requirements of minimal subscription and payment on such subscription. And moreover, the paid-

up capital of any stock corporation under the next following section (Sec. 13) must not be less than five thousand pesos (5,0OO.0O).

(12) Sec. 13. Amount of capital stock to be subscribed and paid for purposes of incorporation.-At least twenty-five (25%) percent of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) percent 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 dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five thousand (P5,000.00) pesos. (n)

(13) Minimal capital requirements of a stock corporation-

(14) At least twenty-five per cent (25%) which was formerly (in the old law) twenty per cent (20%), of the authorized capital stock stated in the articles of incorporation must be subscribed at the time of incorporation. In the case of par value shares, the 25% shall be based on the sum of the capital (total par value) and in the case of no par value shares, the 25% subscription must be based on the total number of authorized shares.

(15) Let us consider the possibility that the par value shares of a proposed corporation are divided into different series:

Series "A", 1,000 shares with per value of

P1.00 per share P 1,000.00

Series "B", 2,000 shares with per value of

P.50 per share P1,000.00

Series "B", 10,000 shares with per value of

P.30 per share 3,000.00

Series "C", 100,000 shares with per value of

P.20 per share 20,000.00

Series "D", 500,000 shares with per value of

P.10 per share 50,000.00

Series "E", 1,000,000 shares with per value of

P.05 per share 50,000.00

Authorized Capital Stock php 125,000.00(16) In the above example, the 25% subscription

must be based on the P125,000 sum of the capital stock, not on any class or particular series.

(17) At least twenty-five per cent (25%) of the total subscription must be paid upon subscription.

(18) Let us consider this example: X, Y, Z, L AND M FORMED A CORPORATION NAMED XYZ CO., INC. WITH AN AUTHORIZED CAPITAL STOCK OF P1 MILLION PESOS DIVIDED INTO 1,000,000 SHARES WITH PAR VALUE OF P1.00 PER SHARE. AT LEAST 25% OF P1 MILLION OR P250,000 MUST BE SUBSCRIBED BY THE INCORPORATORS. AND AT LEAST 25% OF THE SUBSCRIBED STOCK (P250,000) OR P62,500 MUST BE PAID. THE MINIMAL SUBSCRIPTION NEED NOT BE EQUALLY DIVIDED AMONG THE INCORPORATORS. THUS, X MAY SUBSCRIBE TO 100,000 SHARES, (P100,000), Y TO 20,000

SHARES (P20,000), Z TO 30,000 SHARES (P30,000), L TO 60,000 (P60,000) AND M TO 40,000 (P40,000). IT IS NOT NECESSARY THAT EACH ONE OF THEM MUST PAY 25% OF HIS SUBSCRIPTION AS LONG AS THE TOTAL PAYMENT WILL AMOUNT TO AT LEAST 25% OF THE TOTAL SUBSCRIPTION. THUS, OF THE P62,500 PAID-UP CAPITAL, X MAY PAY P50,00(AND THE BALANCE OF P12,500 MAY BE DIVIDED EQUALLY AMONG THE OTHER INCORPORATORS.

(19) Balance on subscription, when payable-(20) The balance on the subscription of the

incorporators shall be payable on the date or dates fixed in the contract of subscription (it may be payable on stated installment with specified dates of payment), without need of any call by the board and if no specified date or dates for payment of the unpaid subscription have been agreed upon in the subscription contract, then payment shall be made upon call for payment made by the board of directors.

(21) Special laws may require higher paid-up capital-(22) Special laws may provide for higher paid-up

capital and therefore such provisions may constitute as exceptions to the minimal capital requirements of Section 13 above. As examples:

(23) (1) An insurance corporation is required to have a paid-up capital of P5 million. (2) An investment house is required to have a paid-up capital of P20 million. (3) A pawnshop corporation must have a paid-up capital of P100,000. (4) Commercial banks must have a paid-up capital of P100 million; a commercial bank under license to operate an expanded foreign

currency deposit system must have a paid-up capital of at least P150 million and a commercial bank authorized to do universal banking must have a paid-up capital of at least P500 million.

There are instances when a certain percentage of capital stock (should well refer to the subscribed stock) must be owned by Filipino citizens and which percentage must be maintained while the corporation is in operation. Let us cite some of these instances:

(1) At least 60% of the capital of corporations engaged in exploitation of natural resources, or public utilities must be owned by Filipino citizens. (2) At least 70% of the voting stock of banking institutions must be owned by Filipino citizens. (3) One Hundred per cent (100%) of the capital stock of a rural bank must be owned by Filipino citizens. (4) Only corporations wholly owned by Filipinos may engage in retail trade. (5) At least 70% of the voting stock of a pawnshop corporation must be owned by Filipinos. (6) Majority of the voting stock of any investment house must be owned by citizens of the Philippines. (7) At least 60% of the capital of a registered enterprise under the Investment Incentives Act (refer to the 1987 Investments Code) shall be owned by "Philippine nationals" as this term is defined by the Investment Incentives Act.

It was held in People vs. Quasha (I-6O55, June 12, 1953) that the 60% Filipino ownership required of public utilities need, not exist at the time of incorporation as long as such requirement is complied with by transfer of shares at the time of application for secondary franchise. This rule has already been superseded by this Corporation Code. (See Sections 15 (1) and 17, infra.)

Meaning of legal capital, capital, working capita! and circulating capital-

Legal capital is that amount equal to: (a) the aggregate of the par value of all issued par value shares; or (b) the aggregate of the cash or consideration received for all issued no par value shares. Capital is the actual property or estate of the corporation, whether in money or property. It may be higher or lower than capital stock.Working capital is the excess of the current assets over the f current liabilities.

Circulating capital is the total amount of all current assets.

Underwriting agreement-

Promoters or incorporators, to drum up financial support for their corporate venture (where the business undertaking is big business) usually have recourse to underwriting agreement for public sale of shares or subscriptions.

There are three known kinds of underwriting agreement according to Prof. Rohrlich of New York University and they are:

(1) The English type of strict underwriting agreement, where the underwriter sells what the corporation cannot sell; (2) Firm commitment type, where the underwriter purchases outright the securities and then resells the same; and (3) Best efforts type, where the underwriter merely sells for commission. Before corporate shares (Or other securities) may be sold to the public-

Before corporate shares may be sold to the public, there must, as a general requirement, be an authority from the Securities and Exchange Commission to do so, complying with the provisions of the Securities Act (Appendix "A", infra). There is a registration statement to be filed with the SEC.

Sec. 14. Contents of articles of incorporation.-All corporations organized under this Code shall file with the Securities and Exchange Corn. mission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law:

1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes; Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities and residences of the original sub.

scribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.