Redemption And Retirement Of Preferred Shares

The Securities and Exchange Commission – Office of the General Counsel (“SEC-OGC”), in its SEC Opinion No. 21-10 dated 21 September 2021, explained the rules and conditions governing the redemption and retirement of preferred shares.

The SEC-OGC clarified that, 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. Hence, redemption may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. 

The above condition is consistent with the trust fund doctrine which provides that property of a corporation is a trust fund for the payment of creditors. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts.

Once redeemed, a corporation’s redeemable preferred shares become part of the corporation’s treasury shares, as specifically provided in Section 9 of the Revised Corporation Code (“RCC”). However, the Rules Governing Redeemable and Treasury Shares provides that in the case of reacquired redeemable shares, the same shall be considered retired and no longer issuable, unless otherwise provided in the Articles of Incorporation (“AOI”). Hence, if the AOI is silent as to the “re-issuable” nature of the redeemable preferred shares, the redeemable preferred shares, once redeemed, are considered retired and may no longer be reissued.

Nevertheless, while redeemed preferred shares are considered retired, the same remains in treasury until removed by decreasing the authorized capital stock of the corporation in accordance with Section 37 of the RCC.The SEC-OGC further explained that the in case the Company Registration and Monitoring Department (“CRMD”) or the Cebu Extension Office will require the Company to submit an interim financial statements (“FS”) in relation to the proposed decrease in authorized capital stock, it is recommended that the Company submits an audited interim FS.