Disclosing treasury shares



A company owned by the Antonino family has “bought out three of its shareholders…” It was not identified but was named only as “Company A” in a legal query posed to the Securities and Exchange Commission by Ma. Fenora L. Pigon, vice president for finance of the Antonino Group of Companies.

In her letter dated Feb. 24, Pigon said Company A “has an authorized capital stock of P2.75 million divided into 27,500 shares of stock with par value of P100.” Of the authorized capital stock, “7,810,764 shares, or 28.4028 percent are subscribed.”

The buyout, according to Pigon, “effectively reduced the subscribed capital stock to 15.8127 percent or less than the 25 percent minimum capital stock that is required to be subscribed, pursuant to Section 13 of the Corporation Code.”

Pigon also admitted in her letter to the SEC that “the subject treasury shares were not reported in the balance sheet of the corporation.”

While Pigon did not identify the company, she nevertheless sought the SEC’s legal opinion on the following:

1. May Company A treat the treasury shares as part of issued shares?

2. Because of its buyback program, did Company A violate Section 13 of the Corporation Code on minimum stock subscription?

3. Considering that Company A is planning to make available for subscription/sale said treasury shares, can it sell the same directly without having to ask the SEC for exemption from the registration requirement of the Revised Securities Code?

4. Can Company A merely amend its audited financial statements (particularly its balance sheet) and indicate therein the treasury shares?

In response, Camilo S. Correa, SEC general counsel, said treasury shares remain “part of the issued shares as long as they are not cancelled or retired.” As such, “they do not revert to the unissued shares of a corporation but are regarded as property acquired by the corporation which may be reissued or resold by the corporation…”

As to the Antonino group’s query on “minimum stock subscription, “the 25 percent of authorized and 25 percent of subscribed” is a “pre-incorporation requirement only. This is mandatory only during (1) incorporation period, and (2) when the corporation undertakes to increase its authorized capital.”

According to Correa, the reacquisition of shares by a company “does not reduce the number of issued shares or the amount of stated capital. He added that neither does the sale of treasury shares increase the number of issued shares or the amount of stated capital.”

Responding to the third query, Correa cited Section 8.1 of the Securities Regulation Code, which provides that “securities shall not be sold or offered for sale or distribution within the Philippines without a registration statement.”

However, Correa added, “while the reissuance of treasury shares is not exempt per se…, the same may be exempted from registration requirements considering that said transaction is of limited character as the corporation does not normally acquire its own shares of stock and the number of shares to be disposed of is usually minimal.”

Said exemption, however, is not automatic, according to Correa. “The corporation is still required to secure exemption from the Commission prior to such reissuance” in accordance with the pertinent provisions of the Revised Securities Act.

As a rule, treasury shares are properly disclosed in financial filings of listed companies. This was omitted by the unnamed Antonino-owned company in its financial filing, which Correa said, should be corrected by including them in audited financial statement.

“The Commission has opined that any declaration and issuance of treasury shares as property dividend shall be disclosed and properly designated as property in the books of the corporation and its financial statements,” Correa said.

The above report was based on an SEC legal opinion, which I presume would be of interest to the public who trade on listed stocks. Someday they might encounter listed companies that would sell back to them the same shares, which had been bought back from them.

In most cases, when a listed company resells treasury shares, it prices them much higher than acquisition cost. In this way, it recovers the cost of money that it had spent in the stock reacquisition.

Not all listed companies keep treasury shares in their books. This does not necessarily mean they had not bought back their own shares in the open market. Either, they have never engaged in share buyback or have bought them back but decided to retire them as treasury shares.



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