I. Introduction

In Philippine corporate law, a corporation’s ability to acquire its own shares sits at the intersection of managerial flexibility and creditor protection. Share repurchases can stabilize ownership, fund employee equity plans, return value to shareholders, address dissenters’ rights, or support capital structure objectives. At the same time, indiscriminate buybacks can erode the asset base that creditors rely on and can be used to entrench control or manipulate trading markets.

Philippine law therefore recognizes the power—but fences it with substantive limits (especially the “no impairment of capital” concept and the requirement of adequate surplus) and procedural guardrails (board action, disclosures for regulated entities, and compliance with securities rules).

This article discusses the Philippine framework for treasury shares: what they are, how they arise, when a corporation may acquire them, how they are treated once held, and the key legal, governance, regulatory, accounting, and tax considerations.

II. Statutory and Doctrinal Framework

A. Core statutory source

The primary authority is the Revised Corporation Code of the Philippines (RCC). The RCC expressly permits a corporation to purchase or acquire its own shares subject to conditions designed to protect creditors and preserve capital.

B. The “trust fund doctrine” and capital maintenance

A foundational concept in Philippine corporation law is that the corporation’s capital—particularly stated capital represented by outstanding shares—acts as a form of “fund” for creditors. While modern finance recognizes capital as a flexible construct, Philippine corporate doctrine continues to treat impairment of capital as a serious concern. Share repurchases are thus allowed only when they do not unlawfully reduce the capital base or render the corporation unable to meet obligations.

C. General rule and policy

As a policy matter:

Allowed: acquisition of own shares for legitimate corporate purposes using permissible funds.
Disallowed: acquisition that impairs capital, prejudices creditors, or is undertaken without the legally required surplus.

III. What Are Treasury Shares?

A. Definition (Philippine context)

Treasury shares are issued shares that the corporation has lawfully reacquired and is holding in its treasury. They are not “unissued” shares; they are previously issued shares that have returned to corporate ownership.

Treasury shares typically arise through:

Purchase/repurchase by the corporation from shareholders
Donation back to the corporation
Settlement (e.g., acquisition in exchange for a corporate claim)
Delinquency sale outcomes (e.g., when delinquent shares are not sold to outside bidders and are taken up by the corporation, subject to the legal framework)
Other lawful modes of reacquisition recognized under corporate practice

B. Treasury shares vs. unissued shares

Unissued shares: authorized but never issued; can be issued under corporate processes (often subject to subscription rules, pre-emptive rights where applicable, and consideration requirements).
Treasury shares: already issued and outstanding at one point; reacquired and held by the corporation; may be reissued/sold by the corporation subject to law and corporate approvals.

C. Treasury shares vs. redeemable shares

Redeemable shares are a separate class/feature of shares that may be redeemed by the corporation under terms stated in the articles of incorporation and share terms, and subject to legal limitations. Redemption results can resemble treasury holdings, but the legal basis is the redemption feature rather than a discretionary buyback.

IV. Why Do Corporations Acquire Their Own Shares?

Philippine corporate practice recognizes multiple legitimate purposes. Common ones include:

Eliminating fractional shares or stabilizing share structure after corporate actions.
Funding employee equity plans (stock option or stock award programs), where treasury shares are reissued to employees/officers.
Providing a market/support mechanism (for listed companies, subject to securities rules), potentially reducing volatility.
Returning value to shareholders (alternative to dividends), again subject to legal and market restrictions.
Settlement of corporate claims (accepting shares in satisfaction of indebtedness or obligations, where permissible).
Implementing corporate reorganizations, including ownership consolidation.
Addressing dissenters’ rights (where a corporation pays the fair value of shares of a shareholder exercising appraisal rights, the acquired shares may become treasury shares depending on the legal route and corporate treatment).

V. Legal Conditions for a Corporation to Acquire Its Own Shares

Philippine law does not treat the power as absolute. The key constraints are:

A. Must be for a legitimate corporate purpose

A buyback should be anchored on a corporate objective that can be justified as within corporate powers and consistent with fiduciary duties. Repurchases purely to prejudice minority shareholders, evade obligations, or manipulate control can trigger liability.

B. Must not cause impairment of capital; must use permissible funds

As a practical and legal matter, acquisitions should be funded from unrestricted retained earnings or other legally available surplus—i.e., corporate funds that are not part of the stated capital and are not restricted by law, regulation, or contractual covenants.

Conceptually: The corporation should not “return capital” to shareholders through a repurchase unless the law allows it under strict requirements (and, for certain regulated entities, only with regulator consent). The usual rule in Philippine corporate practice is that purchases must come from surplus/profits and not from capital that would prejudice creditors.

C. Shares to be acquired should be fully paid

A corporation generally cannot validly treat partially paid shares the same way as fully paid shares for repurchase purposes without observing rules on subscriptions, delinquency, and capital protection. Reacquisition is safest when shares are fully paid and transferrable.

D. Solvency and creditor protection

Even where there are retained earnings, transactions that leave the corporation unable to pay debts as they fall due can be attacked under doctrines protecting creditors, and directors/officers can face exposure if they approved a prejudicial repurchase.

E. Fiduciary duties apply: fairness, good faith, proper purpose

Directors must satisfy:

Duty of diligence (informed decision-making, adequate financial basis)
Duty of loyalty (avoid conflicts and self-dealing)
Duty of obedience (act within corporate powers and legal constraints)

Buybacks that benefit insiders (e.g., selective repurchases at favorable prices to controlling shareholders or insiders) are especially sensitive.

VI. Corporate Approvals and Documentation

A. Board approval is typically central

A repurchase is ordinarily a board-level action as part of corporate financial management. Good practice includes:

Board resolution specifying: purpose, number of shares, price range or pricing method, funding source, authority to negotiate/execute, and compliance steps.
Verification by finance/accounting of available unrestricted retained earnings and compliance with legal and contractual restrictions.

B. Stockholder approval: when it becomes relevant

While routine repurchases are generally board-driven, stockholder approval can become relevant depending on:

The structure of the transaction (e.g., if it is part of a fundamental corporate act requiring stockholder approval)
Specific charter/bylaw provisions
Regulatory rules for certain corporations
Potential conflicts-of-interest transactions involving substantial stockholders or directors, where ratification may be used as a governance safeguard (though ratification does not cure illegality or fraud)

C. Contracting and transfer mechanics

A repurchase typically requires:

Share purchase agreement or buyback agreement
Delivery/endorsement (or appropriate transfer instructions under the corporation’s system of recording ownership)
Update of the stock and transfer book
Issuance/cancellation/annotation practices consistent with corporate records policies

VII. Legal Effects and Treatment of Treasury Shares

A. Treasury shares are not outstanding

In corporate governance terms, treasury shares are generally treated as not outstanding. Consequences typically include:

No voting rights Treasury shares do not vote because the corporation would otherwise be voting its own shares, which is inconsistent with shareholder democracy and could distort elections.
No dividends Dividends are distributions to shareholders. If the corporation is “holding” the shares, paying dividends to itself is circular and inconsistent with the concept of distribution. Thus, treasury shares are not dividend-bearing while in the treasury.
Excluded from quorum and vote computations Since they are not outstanding, they are generally excluded in determining quorum and voting thresholds that are based on outstanding capital stock.

B. Impact on ownership percentages

Repurchasing shares reduces the number of outstanding shares (even though authorized capital stays the same), which can:

Increase remaining shareholders’ percentage ownership (if shares are not reissued)
Consolidate control (intentionally or as a side effect)
Affect thresholds for corporate actions tied to outstanding shares

C. Distinction from a capital reduction

Holding treasury shares does not automatically mean the corporation has legally reduced its stated capital. But if a repurchase is effectively a return of capital without compliance, it can be challenged as an unlawful capital reduction.

VIII. Reissuance or Sale of Treasury Shares

A. Reissuance is generally allowed

A corporation may sell or reissue treasury shares for a price and on terms determined by the corporation (often through the board), subject to:

Applicable corporate approvals
Compliance with pre-emptive rights principles where applicable (depending on the corporation’s structure and governing documents)
Securities law requirements if the reissuance constitutes an offer/sale of securities to the public or triggers registration/exemptions

B. Pricing and fairness concerns

Treasury shares reissued at an unfairly low price to insiders or favored groups can be attacked as:

Breach of fiduciary duty
Corporate waste
A disguised transfer of value from the corporation to recipients
A dilution mechanism harming minority shareholders

Best practice is to document valuation and rationale, especially for insider allocations.

IX. Special Issues for Listed Companies and Public Companies

For publicly listed corporations, buybacks live not only under the RCC but also under securities regulation and exchange rules. Key issues include:

Disclosure obligations Material buyback programs, board approvals, and significant transactions often require timely disclosures.
Market integrity rules Buybacks may be constrained to prevent:
- Market manipulation
- Insider trading
- Artificial price support
Tender offer and substantial acquisition rules While tender offer rules most commonly apply to acquisitions of a public company’s shares by outsiders, certain structured repurchases (especially large-scale or involving control shifts) can implicate tender offer concepts or analogous protections, depending on how the transaction is executed and who participates.
Trading windows and insider restrictions Repurchases when the corporation possesses material non-public information are high-risk and often restricted by internal governance and securities compliance programs.

X. Regulated Industries: Banks, Insurance, and Other Supervised Entities

Corporations supervised by regulators (e.g., financial institutions) can face additional constraints:

Capital adequacy requirements
Prior approvals for stock repurchases
Limitations designed to protect depositors/policyholders/systemic stability

In these sectors, even if the RCC would allow a repurchase in principle, regulator rules may tighten or effectively prohibit it in specific circumstances.

XI. Treasury Shares and Minority Shareholder Protection

Treasury share transactions can become flashpoints in closely held corporations.

A. Control entrenchment

Buybacks can be used to:

Increase control of a dominant bloc (by reducing outstanding shares not held by them)
Create a pool of shares later reissued to allies

B. Selective repurchases

Repurchasing from some shareholders but not others can be lawful or abusive depending on:

Purpose and rationale
Price fairness
Consistency with fiduciary duties
Whether it constitutes oppressive conduct in a close corporation setting

C. Remedies

Minority shareholders may pursue:

Derivative actions (for harm to the corporation)
Direct actions (for personal harm, e.g., oppressive conduct in close corporations)
Injunctions to stop unlawful transactions
Claims against directors/officers for breach of duty

XII. Treasury Shares, Dividends, and “Distributions” Concepts

A buyback can function economically like a distribution of corporate value. Philippine law therefore treats it as a transaction that must respect capital maintenance principles.

Key practical implications:

If the corporation lacks unrestricted retained earnings, a buyback may be attacked as an unlawful distribution.
Even with retained earnings, boards should consider ongoing liquidity, debt covenants, and foreseeable obligations.

XIII. Accounting and Corporate Records (Practical Legal Relevance)

While accounting treatment is not itself the legal rule, it often becomes evidence of compliance or noncompliance.

Common corporate-accounting realities:

Treasury shares are typically recorded as a contra-equity account (reducing total equity on the balance sheet), reflecting that the corporation has reacquired an equity interest.
Proper documentation in the stock and transfer book and financial statements supports legitimacy and defensibility.

Corporate secretarial controls matter:

Clear board resolutions
Updated shareholder ledger records
Clear identification of shares as treasury shares
Compliance with reporting obligations (especially for public companies)

XIV. Tax Considerations (General Philippine Treatment)

Tax consequences depend heavily on transaction structure and context, but key areas to watch include:

Documentary stamp tax (DST) Transfers of shares can attract DST under Philippine tax law depending on the nature of the transfer and the instrument used.
Capital gains / income tax implications For the selling shareholder, the tax characterization may involve capital gains tax or other relevant taxes depending on whether the shares are listed, traded through an exchange, or sold privately, and depending on current tax rules and exemptions.
Withholding and compliance Corporations may have withholding or reporting obligations depending on how the transaction is structured.

Because tax rules can be highly technical and fact-specific, treasury share programs typically involve coordinated review with tax counsel/accountants.

XV. Common Pitfalls and Risk Points

Repurchasing without sufficient unrestricted retained earnings This is one of the most common legal vulnerabilities.
Repurchase during financial distress Even if “paper earnings” exist, liquidity and solvency concerns can create creditor-prejudice arguments and director liability exposure.
Insider-favoring pricing Reissuing treasury shares to insiders at undervalue (or buying back from insiders at overvalue) invites fiduciary duty claims.
Poor documentation Weak board minutes, unclear funding source, and incomplete transfer book entries can undermine the corporation’s position in disputes.
Public-company compliance failures For listed corporations: inadequate disclosures, improper timing, or trading-rule violations can trigger regulatory enforcement.

XVI. Practical Checklist for a Lawful Treasury Share Acquisition

Before the buyback

Confirm legitimate corporate purpose and board rationale
Confirm availability of unrestricted retained earnings (and absence of restrictions)
Solvency/liquidity assessment (present and foreseeable)
Identify applicable regulator/exchange requirements
Draft board resolutions and transaction documents

During execution

Ensure valid transfer/endorsement mechanics
Update the stock and transfer book
Ensure proper payment flows and documentation

After execution

Record as treasury shares properly in corporate records
Make required disclosures/filings (if applicable)
Establish policies for custody, reissuance, and internal controls

XVII. Conclusion

Treasury shares are a powerful tool in Philippine corporate practice, enabling corporations to manage capital structure, stabilize ownership, implement incentive programs, and execute strategic reorganizations. But the power is tightly bounded by capital maintenance principles, creditor protection, fiduciary duties, and—where applicable—securities and industry regulation. A legally sound treasury share program is therefore not merely a “buyback plan,” but a governance-and-compliance project: properly justified, properly funded from permissible surplus, properly documented, and properly executed.

If you want, I can also provide: (a) a model board resolution package, (b) a buyback policy outline for a Philippine corporation (private vs listed), or (c) a discussion of how treasury shares interact with appraisal rights and close corporation remedies in contentious exits.