In the Philippine corporate landscape, the transfer of shares is governed primarily by the Revised Corporation Code (RCC) (Republic Act No. 11232) and various circulars from the Securities and Exchange Commission (SEC). Understanding when shareholder consent is mandatory requires a clear distinction between three different scenarios: the sale of individual shares by a stockholder, the issuance of new shares by the corporation, and the sale of substantially all corporate assets.
1. The General Principle: Free Transferability of Shares
Under Section 62 of the RCC, shares of stock are considered personal property. The general rule is that a stockholder has the inherent right to transfer their shares to anyone without the need for consent from the board of directors or other shareholders.
However, this "freedom to alienate" is not absolute and can be restricted by:
- The Articles of Incorporation (AOI) or Bylaws.
- Shareholder Agreements (e.g., Buy-Sell Agreements).
- Statutory Restrictions (e.g., Foreign ownership limits in nationalized industries).
2. Shareholder Consent in Close Corporations
The rules change significantly for Close Corporations (Sections 95 to 104, RCC). These are entities where the number of stockholders is limited (not exceeding 20) and the shares are not listed on any exchange.
Validity of Restrictions
For a restriction on the transfer of shares (such as a requirement for shareholder consent or a Right of First Refusal (ROFR)) to be binding, it must appear in:
- The Articles of Incorporation;
- The Bylaws; and
- The Certificate of Stock.
If these conditions are met, any transfer made in violation of the restriction can be refused registration in the corporation’s Stock and Transfer Book (STB).
The "Default" Consent Rule
If a transfer is attempted in a close corporation and violates a restriction, the corporation may still recognize it if all stockholders consent to the transfer or if the AOI is amended to allow it.
3. Issuance of New Shares and Pre-emptive Rights
When the corporation itself "sells" shares (either from its unissued capital stock or treasury shares), the "consent" requirement manifests as the Pre-emptive Right (Section 38, RCC).
- The Rule: All stockholders have the right to subscribe to all issues or dispositions of shares of any class, in proportion to their respective shareholdings.
- Why it matters: This prevents the dilution of a shareholder’s voting power and equity.
- The "Consent" Aspect: If the corporation wishes to sell these shares to a third party or a specific shareholder without offering them to others, it must usually obtain a waiver of these pre-emptive rights, or the AOI must specifically deny such rights.
4. Sale of Substantially All Assets vs. Sale of Shares
A common point of confusion is the "Sale of the Corporation." If a corporation decides to sell "all or substantially all" of its property and assets, this is a corporate act that requires high-level consent:
- Board Approval: A majority vote of the Board of Directors.
- Shareholder Approval: An affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock.
[!NOTE] Under SEC Memorandum Circular No. 12 (Series of 2020), for publicly-listed companies, a sale of at least 51% of total assets is considered a sale of "substantially all" assets, triggering the 2/3 shareholder vote requirement.
5. Procedural Requirements for a Valid Sale
Even if consent is obtained or not required, a sale of shares is only "binding" on the corporation once it is recorded. The checklist for a successful transfer includes:
| Step | Requirement | Responsible Party |
|---|---|---|
| 1 | Execution of Deed of Sale | Seller & Buyer |
| 2 | Payment of Taxes (CGT and DST) | Seller/Buyer |
| 3 | Issuance of CAR (Certificate Authorizing Registration) | Bureau of Internal Revenue (BIR) |
| 4 | Surrender of Old Certificate | Seller |
| 5 | Recording in the STB | Corporate Secretary |
| 6 | Issuance of New Certificate | Corporate Secretary |
6. The Appraisal Right
In instances where a shareholder’s consent is bypassed or where they dissent from a major corporate action (such as a sale of all assets or an amendment to the AOI that restricts share transfers), the stockholder may exercise their Appraisal Right (Section 80, RCC). This allows them to demand payment of the fair value of their shares and withdraw from the corporation entirely.
The fair value is typically determined as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action.
Are you looking for more details on the tax implications (Capital Gains vs. Donor's Tax) of these transfers, or perhaps the specific wording for a Right of First Refusal clause?