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    Nature of Treasury Shares

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    Mae Sampang
    Treasury shares are shares that were issued and paid for but later reacquired by the issuing corporation. They do not have voting rights or earn dividends while held in the treasury. A corporation can dispose of treasury shares by retiring, selling, or distributing them as property dividends if it has sufficient unrestricted retained earnings beyond the amount used to reacquire the shares. Treasury shares can be reissued or sold by the board of directors.

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    Nature of Treasury Shares

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    Mae Sampang
    148 views4 pages
    Treasury shares are shares that were issued and paid for but later reacquired by the issuing corporation. They do not have voting rights or earn dividends while held in the treasury. A corporation can dispose of treasury shares by retiring, selling, or distributing them as property dividends if it has sufficient unrestricted retained earnings beyond the amount used to reacquire the shares. Treasury shares can be reissued or sold by the board of directors.

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    Treasury shares are shares that were issued and paid for but later reacquired by the issuing corporation. They do not have voting rights or earn dividends while held in the treasury. A corporation can dispose of treasury shares by retiring, selling, or distributing them as property dividends if it has sufficient unrestricted retained earnings beyond the amount used to reacquire the shares. Treasury shares can be reissued or sold by the board of directors.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    148 views4 pages

    Nature of Treasury Shares

    Uploaded by

    Mae Sampang
    Treasury shares are shares that were issued and paid for but later reacquired by the issuing corporation. They do not have voting rights or earn dividends while held in the treasury. A corporation can dispose of treasury shares by retiring, selling, or distributing them as property dividends if it has sufficient unrestricted retained earnings beyond the amount used to reacquire the shares. Treasury shares can be reissued or sold by the board of directors.

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    of 4

    NATURE OF TREASURY SHARES

    Under the Revised Corporation Code, Treasury Shares are defined as:

    SECTION 9. Treasury Shares. — Treasury shares are shares of stock


    which have been issued and fully paid for, but subsequently
    reacquired by the issuing corporation through purchase, redemption,
    donation, or some other lawful means. Such shares may again be
    disposed of for a reasonable price fixed by the board of directors.1

    Likewise, under the Rules Governing Redeemable and Treasury Shares


    released by the Securities and Exchange Commission, treasury shares are defined
    as:

    SECTION 2. Definitions. — The following terms shall have the


    respective meanings when used in these rules:
    a. Treasury shares — Treasury shares are shares of stock
    which have been issued and fully paid, but subsequently
    reacquired by the issuing corporation by purchase, redemption,
    donation or through some other lawful means.

    The nature and character of treasury shares was discussed in detail by the
    Court in the case of Commissioner of Internal Revenue v. Manning. In this case,
    the corporation repurchased 24,700 of its shares. Thus, a resolution was passed
    authorizing that the 24,700 shares be declared as stock dividends to be distributed
    to the stockholders. BIR subsequently discovered that the 24,700 shares declared
    as dividends were not disclosed by respondents as part of their taxable income for
    the year 1958. Hence, the CIR issued notices of assessment for deficiency income
    taxes to respondents. The Court emphasized that –

    Treasury shares are issued shares, but being in


    the treasury they do not have the status of outstanding shares.
    Consequently, although a treasury share, not having been retired by
    the corporation re-acquiring it, may be re-issued or sold again, such
    share, as long as it is held by the corporation as a treasury share,
    participates neither in dividends, because dividends cannot be

    1 Section 9, Revised Corporation Code of the Philippines, Republic Act No. 11232, [February 20, 2019]
    declared by the corporation to itself, nor in the meetings of the
    corporations as voting stock, for otherwise equal distribution of voting
    powers among stockholders will be effectively lost and the directors
    will be able to perpetuate their control of the corporation though it still
    represent a paid — for interest in the property of the corporation.

    The Court took the opportunity to discuss the effects of converting common
    shares to treasury shares in the case of Philippine Coconut Producers Federation,
    Inc. v. Republic, to wit:

    1. When the SMC converts these common shares to treasury stock, it


    is converting those outstanding shares into the corporation's property
    for which reason treasury shares do not earn dividends.

    2. The retained dividends which would have accrued to those shares


    if converted to treasury would go into the corporation and enhance the
    corporation as a whole. The enhancement to the specific sequestered
    shares, however, would be only to the extent aliquot in relation to all
    the other outstanding SMC shares.

    3. By converting the 26.45 million shares of stock into treasury shares,


    the SMC has altered not only the voting power of those shares of stock
    since treasury shares do not vote, but the SMC will have actually
    enhanced the voting strength of the other outstanding shares of stock
    to the extent that these 26.45 million shares no longer vote.2

    Once treasury shares are repurchased, they do not revert to the


    unissued shares of the corporation but are regarded as property acquired by
    the corporation which may be reissued or sold by the corporation at a price
    to be fixed by the Board of Directors. As compared to redeemable shares, the
    latter shall be considered retired and no longer issuable, unless otherwise provided

    2Philippine Coconut Producers Federation, Inc. v. Republic, G.R. Nos. 177857-58 & 178193 (Resolution),
    [October 5, 2016]
    in the Articles of Incorporation.3 Furthermore, redeemable shares may reacquire
    4

    its outstanding redeemable shares regardless of the existence of unrestricted


    retained earnings, provided that the reacquisition is made in accordance with the
    conversion or redemption features as provided for in the articles of incorporation
    and covering stock certificates.5
    There are many ways to dispose treasury shares. This was discussed at
    length by the Securities and Exchange Commission (SEC) in its opinion dated
    20 April 2012, viz:

    Being the owner of treasury shares, the corporation may opt


    to retire, sell or distribute as property dividends said shares. In
    case of retirement of treasury shares, the corporation shall amend its
    Articles of Incorporation by decreasing the capital stock of the
    corporation in accordance with Section 38 of the Corporation Code of
    the Philippines for the purpose of eliminating the treasury shares. On
    the other hand, the corporation may, like any of its other properties,
    sell/dispose said shares for a reasonable price fixed by the board of
    directors. Once sold or reissued, the treasury shares again become
    outstanding stock and regain voting rights.

    In case of declaration of treasury shares as property


    dividends, the corporation can only do so if the amount of the
    retained earnings previously used to support their acquisition
    has not been subsequently impaired by losses. Generally, a
    corporation can reacquire its own shares for legitimate corporate
    purpose/s provided it has sufficient amount of unrestricted retained
    earnings to support the cost of said shares. Consequently, the
    amount of such earnings equivalent to the cost of the
    treasury shares being held cannot be declared and distributed as
    dividends until said shares are reissued or retired. The reason for this
    is that such amount of earnings equivalent to the cost
    of treasury shares is not considered part of earned or surplus profits
    that is distributable as dividends.

    3 Rules Governing Redeemable and Treasury Shares, SEC RULES AND REGULATIONS, [April 26, 1982]

    5 Philippine Export and Foreign Loan Guarantee Corporation, SEC OPINION, [May 7, 1986]
    On the other hand, if there are retained earnings arising
    from the business of the corporation other than the amount
    equivalent to the cost of treasury shares, treasury shares, being
    property of the corporation, may be distributed among the
    stockholders as property dividends. Any declaration and issuance
    of treasury shares as property dividend shall be disclosed and
    properly designated as property dividend in the books of the
    corporation and in its financial statements.

    The requirement of unrestricted retained earnings is based


    on the trust fund doctrine which means that capital stock,
    property and other assets of a corporation are regarded as equity
    in trust for the payment of corporate creditors. Creditors of a
    corporation are preferred over the stockholders in the distribution of
    corporate assets. There can be no distribution of assets among the
    stockholders without first paying corporate creditors.

    In sum, treasury shares are regarded as property owned


    by the corporation and cannot be distributed as property
    dividends among the stockholders in the absence of unrestricted
    retained earnings other than the amount equivalent to the cost
    of treasury shares, because to do so would violate the trust fund
    doctrine. (Emphasis supplied)

    It bears emphasis that when two corporations engage in a merger, the


    absorbed corporation is deemed automatically dissolved. All the rights, duties and
    liabilities of the absorbed corporation shall be assumed by the surviving
    corporation.6

    6 China Banking Corporation v. Dyne-Sem Electronics Corporation, 527 Phil. 74 (2006) |||

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