Saturday, February 19, 2011

Can one assign or transfer unpaid shares of stocks?

While the Corporation Code provides that, “No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation,” a stockholder may, subject to the corporation’s by-laws, assign and/or transfer his shares to a third party.

However, the transfer of shares which are not yet fully paid shall only be valid between the parties, “until it 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.” (Section 63) The recording is conditioned on the payment of said unpaid subscription by the assignee or transferee. Taxes, including documentary stamp tax, must also be paid.

In two old cases the Supreme Court said that a corporation cannot release an original subscriber from paying for his shares without a valuable consideration (Philippine National Bank vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous consent of the stockholders (Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).

Related to this, in 2004, the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 17 which states that: “…the recording of the Deed of Assignment of Shares of Stocks with the SEC does not give rise to any legal benefit to the corporation or the persons involved.” It continues that SEC shall no longer accept such deeds for acknowledgment or recording purposes unless they are being submitted as supporting documents to applications for registration.

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