Notes on issue premiums
In Securities and Exchange Commission (SEC) OGC Notice 22-12 dated September 27, 2022, the requesting party asked whether a corporation may be permitted to issue premium stock and whether a corporation is permitted to have more paid-up shares than its authorized share capital.
The SEC answered affirmatively to both questions and discussed the terms “authorized share capital”, “paid-up share capital”, “paid-up share capital” and “additional paid-up share capital”. It stated that the “authorized share capital” referred to the “amount fixed in the articles of incorporation to be subscribed and paid by the shareholders of the company”, while the “paid-up capital” was the “portion of the authorized share capital which has been subscribed and paid.”
In SEC Memorandum Circular (MC) 11, Series of 2008, the SEC defined “paid-up capital” as the “amount of share capital and additional paid-up capital or premium to stock value”, while ” the additional paid-in capital – in capital” is the “contribution of the shareholders on the value of the shares”. It is also the “premium paid in addition to the price of the shares”.
Previously, the SEC had clarified that the creation of additional contributed capital did not need to be approved by the regulator. A company, however, at its option can still seek SEC approval. Simply put, creating additional contributed capital is a matter of business judgment.
The contribution of assets may also be treated as contribution premium. In the event that the property is used as such, a request for confirmation of the valuation must be filed with the SEC, which has advised the company to prepare the valuation with the assistance of an appraiser. This requirement is in line with a revised provision of the Companies Code stipulating that the SEC must confirm the valuation of non-cash consideration to avoid stock impairment.
Furthermore, the injection of additional capital may be permitted even without the corresponding issuance of shares. As to whether additional contributed capital may be considered in determining compliance with the foreign/Filipino ownership ratio in a corporation, the SEC has held that this will not affect the ratio, additional contributed capital being a premium on the share price in which the price is increased but no additional shares are issued.
The ownership ratio in a company should be the same before and after the creation of additional contributed capital. Even if a foreign shareholder injects additional contributed capital, there will be no corresponding increase in foreign capital because there has been no issuance of additional shares.
It should also be noted that the additional contributed capital can no longer be declared as a stock dividend, as provided for in SEC MC 11, Series of 2008. The SEC has confirmed that the additional contributed capital, namely the premium paid on the shares falls within the trust fund doctrine and that its subsequent conversion into subscribed capital will violate that doctrine. (SEC OGC Notice 22-13 dated September 30, 2022).
The Supreme Court, on the other hand, has ruled that capital assets of a corporation can only be distributed in the following cases: amendment of the articles of incorporation to reduce the authorized share capital; purchase of redeemable shares by the company (regardless of the existence of unallocated retained earnings); and the eventual dissolution and liquidation of the company.
The use of the Company’s capital assets (or the Trust Fund) for purposes other than those listed above will, in effect, constitute an unauthorized distribution of the Trust Fund. When additional paid-up capital is converted to subscribed capital so that it becomes a shareholder’s additional subscription payment, the trust fund doctrine is violated.
Additional contributed capital, provided it is already reflected in a company’s financial statements, can be used to eliminate negative equity and liquidate liabilities. In this regard, SEC approval is required via a recapitalization petition. It should be noted that a company cannot, on its own, reclassify the additional contributed capital to absorb the deficit without SEC approval.
Nica Marsha V. Gasapo is a Junior II Partner of Mata-Perez, Tamayo and Francisco (MTF Counsel). This article is provided for general information only and does not replace professional advice when the facts and circumstances warrant it. If you have any questions or comments, you can email the author at [email protected] or visit the MTF website at www.mtfcounsel.com.