SEC-OGC Opinion No. 21-05: Increase of Authorized Capital Stock; Registration of Shares of Stock to be Issued

Atty. Tonio Tinsay is a stockholder of a corporation (the “corporation”) engaged in the operation of a hospital and medical center. The said corporation, during its annual stockholders’ meeting, ratified a board resolution increasing the corporation’s authorized capital stock (“ACS”), a portion of which is planned to be issued by the corporation to the existing shareholders pursuant to their pre-emptive rights. Such shares had certain medical benefits which effectively increased its par value. Atty. Tinsay, as one of the stockholders, expressed his intent to exercise his pre-emptive right, and to acquire certain number of additional shares. He sought the opinion of the Securities and Exchange Commission (“SEC”) to confirm the position of the corporation that the said shares need not be registered with the SEC considering that the same will be offered only to the existing stockholders and not to the investing public.

The SEC stated that as a general rule, securities shall not be sold or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the SEC. However, the Securities Regulation Code (“SRC”) and its IRR provides for certain exemptions accorded to selected classes of securities where the registration requirement is not made applicable enumerated under Section 9 of the SRC and Rule 9.1 of its IIRR. Under Section 10.1 (e) and (i), it likewise provides for exempt transactions where the requirement for registration also does not apply, to wit:

“Section 10. Exempt transactions. – 10.1. The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions

x x x

5. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.

xxx xxx xxx

9. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.” (Emphasis supplied)

It bears emphasis that the exemptions provided under Section 10.1 (e) and (i) cannot be availed if a commission or fee is paid, directly or indirectly, in connection with the sale of such capital stock, or the corporation incurs an expense in the sale or disposition of such securities. In such case, the sale will have to be registered with the Commission.

The SEC, applying the above provisions, opined that the additional shares, based on the information provided and in the absence of any showing that the corporation has incurred or will incur expenses in connection with its sale of the capital stocks pursuant to an increase in its authorized capital stock exclusively to its shareholders, such sale is an exempt transaction that does not require to be registered with the Commission. (Emphasis supplied).

The SEC, however, reminded that while the exemptions provided under the SRC and its related IRR may be immediately availed of by the corporation, as the same proceeds from a statutory grant, the corporation (or any person) claiming such exemption has the burden of proof of showing that it is entitled to the exemption should the SEC challenge the same. As further protection, a corporation may secure a confirmation of exemption under Section 10.1.5.1 of the IRR of the SRC by filing SEC Form 10.1 with the SEC.

The SEC further advises the corporation that it should amend and clearly define in its Articles of Incorporation the features of this new set of shares to be issued from the increase in ACS to substantially differentiate and/or distinguish them from the previously issued shares since through the increase in ACS, the corporation intends to issue shares with medical benefits which can be enjoyed by stockholders who are purchasing the same in the exercise of their pre-emptive rights thereby effectively creating two (2) distinct types of shares: (1) the previously issued shares without medical benefits; and (2) additional shares with medical benefits.The SEC Opinion may be accessed here.