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Sec Opinion 1

The document discusses the rules on the effect of redeemed preferred shares on unrestricted retained earnings. It states that redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, as long as the corporation still has sufficient assets to cover its debts and liabilities after redemption. The cost of treasury shares from redeemed redeemable shares does not need to be deducted from unrestricted retained earnings.

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ANGELINA RAMOS
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14 views1 page

Sec Opinion 1

The document discusses the rules on the effect of redeemed preferred shares on unrestricted retained earnings. It states that redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, as long as the corporation still has sufficient assets to cover its debts and liabilities after redemption. The cost of treasury shares from redeemed redeemable shares does not need to be deducted from unrestricted retained earnings.

Uploaded by

ANGELINA RAMOS
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

1. SEC-OGC Opinion No.

22-01: Redemption of Preferred Shares


Q: ACB Corporation has redeemable preferred shares in its outstanding
capital stock and its articles of incorporation and certificates of stock
provide for their redemption. However, it is their concern that upon
redemption, the amount of retained earnings equivalent to the cost of said
redeemable shares will be restricted under Section 4(1) of the SEC’s 1982
Rules Governing Redeemable and Treasury Shares (“1982 Rules”). What
are the rules on the effect of redeemed preferred shares on unrestricted
retained earnings?

A: As a rule, under Section 40 of the Revised Corporation Code, a


corporation cannot redeem, repurchase, or reacquire its own shares in the
absence of unrestricted retained earnings. An exception to this rule can be found
in Section 8 which provides that redeemable shares may be purchased by the
corporation from the holders thereof, regardless of the existence of unrestricted
retained earnings. Meanwhile, Section 5(5) of the 1982 Rules states that while
redeemable shares may be redeemed despite the absence of unrestricted
retained earnings, the corporation must still have, after such redemption,
sufficient assets in its books to cover its debts and liabilities inclusive of capital
stock. Redeemed preferred shares then become part of the corporation’s
treasury shares.
Under Section 4(1) of the 1982 Rules, “the amount of unrestricted retained
earnings equivalent to the cost of the treasury shares being held, other than
those acquired in accordance with the exceptions provided in Section 3(1) of
these rules, shall be restricted from being declared and issued as dividends.”
Treasury shares are generally deducted from the unrestricted earnings to arrive
at the ‘Retained Earnings Available for Dividend Declaration’. The earnings
equivalent to the cost of treasury shares are not considered part of the earned
surplus profits that may be distributed as dividends. As an exception to this rule,
Section 3(1) provides that redeemed redeemable shares, although part of
treasury shares are not subtracted from the unrestricted retained earnings to
determine the ‘Retained Earning Available for Dividend Declaration’. However,
this exception will only apply subject to the rule that the corporation must still
have sufficient assets in its books to cover debts and liabilities inclusive of capital
stock, after redemption of the redeemable preferred shares.
The exception in Section 4(1) of the 1982 Rules, such that the cost of the
treasury shares arising from the redemption of shares need not be deducted from
the unrestricted retained earnings, will apply provided there are sufficient assets
in the books of the corporation to cover its debts and liabilities inclusive of capital
stock.

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