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EPISODE 23
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 REVIEW on EPISODE 22: POWER TO ACQUIRE OWN SHARES

o Power to Acquire own shares: SECTION 40 -  Power to Acquire Own Shares.

- Provided, That the corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired, a stock corporation shall have the
power to purchased or acquired, a stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including the following cases:

(a) To eliminate fractional shares arising out of stock dividends;

 FRACTIONAL SHARE (ex: 1.5, 6.5) - cannot vote. To eliminate this, the
corp must have to buy it. 

(b) To collect or compromise an indebtedness to the corporation, arising out of

unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold
during said sale; and
 There are instances that subscribers are unable to pay their subscription.
Eventually, these shares/subscription will be declared delinquent. Thus, in
case of delinquency, we have what we call delinquency sale. So that it will
be sold to the highest bidder with the least number of shares. 

(c) To pay dissenting or withdrawing stockholders entitled to payment for their

shares under the provisions of this Code.
 Dissenting stockholders have the right to demand their fair value of their
shares. In case a dissenting stockholder wants to go out of the corp
because of certain corporate acts, they’re considered dissenting
stockholders and they can now let the corp buy their own shares. In that
way, the corp can acquire its own shares.

 WHAT WILL HAPPEN TO SHARES AFTER REDEMPTION? Once you redeem

those shares, what will happen? 
o When redeemable shares are reacquired, the same shall be considered retired
and no longer issuable unless otherwise provided for in the AOI.
 If you are going to retire your shares or part of your capital stock, you are
now reducing your capital stock. Thus, you have to amend your AOI. 

o NOTE: For tax purposes, there are cases when redemption of shares is
considered a scheme to circumvent the tax consequences of cash dividends.
Hence, the amounts received by the shareholders shall be treated as cash
dividends because proceeds of redemption in such a case is additional wealth and
note merely a return of the capital (PH Corp Law Compendium, Aquino, 2005 ed)
 TREASURY SHARES 
o SECTION 9: Shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corp by purchase, redemption, donation or
through some other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the BODs. 
 They are outstanding one time. Then, they are given to stockholders.
They're part of the outstanding capital stock but was later reacquired by
the corp.

o EFFECT OF REACQUIRING YOUR (corp) OWN SHARES: 

 TS are not retired shares. They do not revert to the unissued shares of
the corp but are regarded as property acquired by the corp which may be
reissued or resold at a price to be fixed by the BOD (SEC Rules
Governing R and TS, CCP No. 1-1982)

 They form part of the TS. 

 Can the corp reissue the TS? - YES! It’s a management decision.
What price? It shall be decided by the BOD. (see explanation
above)
 TS can be allowed by the corp to stay that way (remain as TS) or
reissue. 
 TS are assets of the corp. The corp can declare it as a stock
dividend. 
 They can be reissued below the par value. Q: Won’t that be
considered as watered stocks? A: NO! Q: Why? A: Because the
issuance and subscription is already done. Watering of stocks only
happens during the issuance of original and unissued shares. 
 Can the board retire the TS? YES. But they have to approve it and
amend their articles. Because if you are going to retire those
shares, then you are decreasing your capital stock. 
 Will these TS affect capital stock? No. it is still considered as
issued but it is with the corp. But once you retire it, it will now
affect capital stock because you are decreasing your capital stock.
Thus, you have to amend (the AOI).
 Reminder: In TS, there has to be unrestricted retained earnings.
Otherwise, if you are going to buy back your shares or reacquire
your shares and you don’t have URE, that could be a violation of
the Trust Fund Doctrine.

o What will happen to TS if they're purchased from stockholders?

 The transaction in effect is a return to the stockholders of the value of their
investment in the company and a reversion of the shares to the corp. The
corp must have surplus profits with which to buy the shares so that the
transaction will not cause an impairment of the capital. 
  Impairment of the capital is a violation to the Trust Fund Doctrine

 If acquired by donation from the stockholders:

 The act would amount to a surrender of their stock without getting
back their investments that are instead, voluntarily given to the
corp

o TS need not be sold at par or issued value but may be sold at the best price
obtainable, provided it is reasonable. When TS are sold below its par or issued
value, there can be no watering of stock because such watering contemplates an
original issuance of shares. 

o TS have no voting rights as long as they remain in treasury (uncalled and subject
to reissue) (Sec. 57)
 Reason: a corp cannot in any proper sense be a stockholder in itself and
equal distribution of voting rights will be effectively lost
 the board cannot vote itself

o Neither are TS entitled to dividends or assets because dividends cannot be

declared by a corp to itself. 
 Read SEC 56

o TS may be declared as property dividend to be issued out of the retained earnings

previously used to support their acquisition provided that the amount of the
retained earnings has not been subsequently impaired by losses.
 It’s mandatory that the corp has Unrestricted Retained Earnings