SEC Clarifies Protocols on the Sale of Unissued Shares at a Premium and the Exercise of Pre-Emptive Rights

On 19 May 2023, the Securities and Exchange Commission (“SEC”) through the Office of the General Counsel (“OGC”), issued SEC OGC Opinion No. 2023-11 on addressing Tomas Claudio Colleges, Inc.’s (“TCC”) queries:

1. Whether TCC is allowed to sell a portion or whole of its unissued shares at over par value price of PHP200.00 per share exclusively to its currently listed stockholders under their pre-emptive rights.
2. What can be done with the remaining unsubscribed stocks in case not all pre-emptive rights are exercised by the stockholders?
3. Whether TCC is allowed to hold its annual stockholders’ meeting in October 2020 and be exempted from the prohibition of mass gatherings as provided by the government’s COVID-19 health protocols. If in the negative, what is TCC’s remedy in place of the face-to-face meeting?

On the first query, the SEC answered in the affirmative. The pre-emptive right extends not only to the issuance of new shares resulting from an increase in capital stock but also to the issuance of previously unsubscribed shares which form part of the existing authorized capital stock, as well as to the disposition of treasury shares. 

To this, it is legal for a company to issue shares at a premium or over the par value of the shares as stated in its Articles of Incorporation, and for the subscribers of a corporation to pay more than the par value of the shares they subscribed as there is no law, rule or regulation that prohibits the same.  

The contribution of stockholders over the par value of shares is called additional paid-in capital or APIC, “share premium” or “paid-in surplus” which is defined as the amount received by a firm over the par value of its share. 

As regards the second query, the SEC explained that as long as the current shareholders exercise their pre-emptive rights, their relative and proportionate voting strength in the corporation will not be affected adversely. Thus, the shares may be offered to non-stockholders of record on a first come first serve basis without violating the pre-emptive rights of the stockholders. However, it is a sound corporate practice to offer always the remaining shares to interested stockholders of the record whenever practical and feasible before offering them to third parties.  

As to the last query, the SEC refrained from rendering an opinion on questions that involve the interpretation of administrative rules and issuances of other government agencies considering that it is the promulgating agencies that are competent to undertake such construction because of their knowledge of the specific intent and extent of application of the subject issuances.
However, the SEC also explained that for purposes of information only, Section 49 of the Revised Corporation Code provides that the right to vote of stockholders or members may be exercised in person, through a proxy, or when so authorized in the bylaws, through remote communication or in absentia. According to this, the SEC issued on 12 March 2020 Memorandum Circular No. 6, Series of 2020 (“MC No. 6“) or the “Guidelines on the Attendance and Participation of Directors, Trustees, Stockholders, Members, and Other Persons of Corporations in Regular and Special Meetings through Teleconferencing, Video Conferencing and Other Remote or Electronic Means of Communication.” MC No. 6 can be of relevance to TCC when conducting its annual stockholders’ meeting.