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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Yes. 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. 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. (SEC-OGC Opinion 12-06 dated 20 April 2012)
The law says –
What are treasury shares?
Section 9 of the Revised Corporation Code defines Treasury shares as 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.
In other words, treasury shares are shares that have been earlier issued and are regarded as property acquired and currently owned by the corporation and not by any of its stockholders/
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 for the purpose of eliminating 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.
Declaration of shares as property dividends
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.
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 treasy shares as property dividend shall be disclosed and properly designated as property dividend in the books of the corporation and in its financial statements.
(SEC-OGC Opinion 12-06 dated 20 April 2012)
Jurisprudence says:
Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. They are therefore 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 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. (Commissioner of Internal Revenue vs. John L. Manning, G.R. No. L-28398. August 6, 1975)
Read also: PAYMENT OF DIVIDENDS
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