Sale of shares of stock that are not yet fully paid

In today’s world, the concept of owning shares in large corporations is widespread, with many individuals having stakes in corporate entities, their ownership symbolized by shares of stock.

Shares of stocks are property.

Our Civil Code defines property as being “all things which are or may be the objection of appropriation”. In turn, property may be considered either immovable (real) or movable (personal) property. (Art. 414, Civil Code)

What the law refers to as immovable or real property is commonly known as land or real estate. This term actually involves more than land, it also includes other things which have some permanence, such as trees and machineries that are bolted to the ground. On the other hand, personal property refers to those things that are not real property and those that can be transported from place to place without impairment of the real property to which they are fixed (Art. 415 & 416, Civil Code)

Personal property can be further classified into tangible and intangible, where tangible property refers to those which can be held, and intangible, those that cannot be physically held.

Those who own shares of stocks in corporations thereby own personal property which are considered intangible.

When one invests as a co-owner in a stock corporation, the investment is covered by shares of stock issued by the corporation. These shares of stock have a price or value assigned to each share, which the law refers to as the par value.  Moreover, a stockholder may subscribe to a certain number of shares without having to pay the entire price in full.

For example, 100 shares with a par value of P10 are worth P1,000. Out of this amount, the stockholder could, depending on the terms of the subscription agreement, pay only P400 out of the P1,000 price. This P400 is the paid-in capital and the P600 is the balance of the purchase price.

Accordingly, a stockholder may have fully paid for his shares of stock, in which case, he would be entitled to the issuance of the stock certificates covering his share ownership in the corporation. (Sec. 63, Revised Corporation Code)

On the other hand, a stockholder who has not fully paid for his shares of stock, while considered as the owner of the shares, will not be entitled to the issuance of a stock certificate.

Does this mean that one does not own the shares of stock if not yet fully paid ? No, it does not. Even if a stockholder has not fully paid for his subscription of the shares of stocks, the Revised Corporation Code provides that he shall have all the rights of a stockholder, unless he has been declared delinquent. (Sec. 71, Revised Corporation Code)

Among the rights of a stockholder referred to in the Revised Corporation Code are the right to vote, pre-emptive right, power to inspect the corporate records, right to information, right to dividends, and the right to appraisal resulting from dissent due to certain corporate actions and decisions taken by the company.

While entitled to these rights, the stockholder of shares that have not yet been fully paid also have the usual rights of property owners over their shares. These rights derived from Roman Law are:

1. Jus possidendi which is the right to posses
2. Jus utendi which is the right to use
3. Jus fruendi which is the right to the fruits
4. Jus abutendi which is the right to consume
5. Jus disponendi which is the right to dispose
6. Jus Vindicandi which is the right to recover
7. Jus accessiones which is the right to accessories

While the stockholder of shares of stock that have not been fully paid has the right of  jus disponendi, or the right to dispose or sell its property, it is important to note that the law provides some limitations on this right. The limitations are not applicable if the subscription price for the shares of stock has already been fully paid.

The principle of indivisibility of stock subscription provides that the selling stockholder can only sell his shares of stock as a block, and only to one, not several, purchasers. Moreover, the seller must obtain the consent of the corporation which the shares of stock pertain to.

The principle of indivisibility of stock subscription and the limitation on the sale by a stockholder of shares of stock that are not yet fully paid was explained by the Securities and Exchange Commission’s Office of the General Counsel in its opinion as follows:

“Accordingly, if the stockholder has not paid the full amount of his subscription, he cannot transfer part of it in view of the indivisible nature of subscription contract. It is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees. However the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer, must assume the unpaid balance. It is necessary to secure the consent of the corporation since the transfer of subscription right contemplates a novation of contract which under Article 1293 of the Civil Code of the Philippines cannot be made without the consent of the creditor.” (SEC OGC Opinion 16-05, March 31, 2016)

And while the usual taxes, such as capital gains and documentary stamp taxes, are due on the sale of such shares whose subscription price has not yet been fully paid, no clearance or certificate authorizing registration from the Bureau of Internal Revenue (BIR) will be processed and issued,  as one of the requirements of the BIR is the presentation of the stock certificate covering the shares of stock.

To sum it up, the limitations in selling one’s shares of stock that are not yet fully paid are:

1. The buyer is deemed to have the responsibility to pay for the balance of the subscription price
2. No stock certificate will be issued by the Corporation covering the shares of stock that have not been fully paid
3. The usual taxes, such as the capital gains taxes and documentary stamp taxes, are still due on the sale transaction but there will be no clearance or certificate authorizing registration (CAR) issued by the BIR
4. It is necessary to secure the consent of the corporation in such a sale as the SEC has opined that it amounts to a novation
5. The shareholder can only sell to one party
6. The sale of the shares must be as a whole or the entirety of the shares subscribed which are not yet fully paid, i.e. if there are 100 shares, the shareholder cannot sell only 50 but must sell all the 100 shares.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)