WWW -16

I.

POWER TO ACQUIRE OWN SHARES

Lets proceed to the issue on whether or not the corporation can acquire its own shares. Can we answer that? A: As a general rule, it CANNOT acquire its own shares. If this were allowed, then it would violate the trust fund doctrine. The creditors will be prejudiced because the assets of the corporation will be reduced which means the creditors will no longer be secured. There is no more assurance that the creditors will be paid because once the corporation buys its own stocks, it would, in effect, be returning the investments of the stockholders.

That is insofar as the creditors are concerned. However, this will also be disadvantageous to who? A: The other stockholders. In what way will this be disadvantageous to other stockholders? A: The other stockholders are prejudiced not because they will be made personally liable to the creditors (because stockholders are liable only up to their investments and as long as they have investments, they will not be personally liable) but they will be prejudiced because the stockholders who received their shares are no longer exposed to the risk of losses while the remaining stockholders are still at risk for losses. There is an undue preference.

Therefore the general should be that it cannot acquire its own shares. What are the exceptions to the general rule? 1. 2. To eliminate fractional shares To collect or compromise indebtedness of the stockholders to the corporation who have not yet paid their subscriptions (This occurs when the stockholders do not pay to the corporation what they said they would pay in terms of investment) To pay off dissenting stockholders (Right of Appraisal in situations provided by the Code)

3.

So under what circumstances may the corporation exercise this power? What are the conditions? 1. 2. The reacquisition must be for a legitimate corporate purpose There must be unrestricted retained earnings to cover the value of the shares reacquired. (most important requisite)

Why must there be unrestricted retained earnings?

A: Because if there are no unrestricted retained earnings, then that would violate the Trust Fund Doctrine since the capital of the corporation is used to reacquire the shares. It would be prejudicial to the creditors and the remaining stockholders alike.

Once reacquired, what happens to the shares? A: These shares revert to the treasury and become treasury shares.

As treasury shares, who exercises their voting rights? A: No one exercises voting rights. They lose their voting rights because if they dont, the votes would be used by the directors to perpetuate their position in the board.

II.

POWER TO INVEST IN ANOTHER CORPORATION

If they were to invest in another corporation, what is needed? A: It depends. A. If the investment is for a purpose other than that stated in the AOI, then a majority vote of the BOD and also 2/3 vote of the stockholder/s representing the major controlling interest of the outstanding capital stocks is needed. B. If the investment is for a purpose in line with or incidental to the primary purpose in the AOI, then there is no need for the 2/3 vote.

III.

DECLARATION OF DIVIDENDS

As a stockholder, why do you want to invest? A: Monetary benefits! Although, what could happen to the investment? A: There could also be losses. Once you invest, you are taking a risk for both profit and loss. There is no guaranty of success in business.

We distinguished investor from a creditor before. Lets have that again. A: An investor is one who gives money to gain profit but also takes the risk of loss. A creditor, however, gives money but with certainty that he will reacquire the money from the borrower.

So these profits are given back by the corporation to the stockholders in the form of dividends. Dividends can be given in the form of? 1. 2. 3. Cash directly culled from the profits (unrestricted retained earnings) Property excess property of the corporation is used as dividends Stocks unsubscribed capital stocks are distributed as dividends

Remember the treasury shares? So these treasury shares are now in the possession of the corporation. May they be distributed to the stockholders in the form of dividends? A: YES. Not as stock dividends but rather property dividends. When a corporation distributes dividends, the corporation keeps the cash because it needs the cash and instead distributes stocks from the unsubscribed capital stocks. So the corporation, in effect, retains the cash and increases the shareholdings of the stockholder through VIRGIN STOCKS. However, regarding treasury shares, these shares do not revert to unsubscribed capital stocks; they are still subscribed capital stocks hence, they cannot be distributed as stock dividends because they are USED STOCKS already. The solution is to declare them as property dividends because they are excess property of the corporation. BOTTOMLINE: Virgin Stocks vs. Used Stocks

Whats the difference between declaring dividends and distributing dividends? In declaring dividends, the corporation signifies their intention to distribute the specific cash, property or stock to the shareholders because the corporation has profits. Once the corporation declares dividends, the corporation distributes the dividends. Distribution entails the actual transfer of the cash, stock, or property from the corporation to the stockholders.