The Securities and Exchange Commission (“SEC”) issued on 07 May 2021 SEC-OGC Opinion No. 21-05 (“SEC Opinion”) which states that, in the absence of any indication 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 (“ACS”) exclusively to its shareholders, such sale need not be registered with the SEC.
In the said SEC Opinion, the shareholders of the subject corporation ratified the board resolution increasing the corporation’s ACS from 50,000 shares to 125,000 shares. Furthermore, it is planning to include in the shares to be issued relative to the exercise of the stockholder’s pre-emptive rights, certain medical benefits which effectively increased the par value of each share from PHP2,000 to PHP3,500.
Given the foregoing, a shareholder of the subject corporation requested for an opinion from the SEC as to whether the additional shares of stock that may be issued as a consequence of the increase in ACS of the corporation which is subject to the stockholder’s pre-emptive rights need to be registered with the SEC.
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 Implementing Rules and Regulations (“IRR”) provide for certain exemptions to the registration requirement.
Considering that the shares of stock to be issued by the corporation to stockholders exercising their pre-emptive right are not among the securities enumerated under Section 9 of the SRC and Rule 9.1 of the SRC-IRR, they are not exempt securities. However, under Section 10 of the SRC, sale of unissued shares and sale from the increase in the authorized capital stock of a corporation are considered as exempt transactions. Thus, the said shares need not be registered, to wit:
“SEC. 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:
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(e) 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.
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(i) 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)
The SEC emphasized 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.
Thus, for the transaction to be exempt, it must be shown that no amount in addition to the sale price of the capital stock is paid/given in relation to such sale as this is covered by the concept of “direct commission or remuneration”, or no transaction or service is carried out or performed which will benefit another person/entity other than the stockholder purchasing the capital stock, as this is covered by the concept of “indirect commission or remuneration”. Such sale will not be exempt if the same is carried out with the assistance of a financial advisor because expenses are deemed to have been incurred.
The SEC likewise notes that, through the increase in ACS, the subject 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 distinct types of shares: first, the previously issued shares without medical benefits; and second, additional shares with medical benefits. In this regard, the SEC strongly recommends that the subject corporation amends and clearly defines 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.