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February 20, 1995

Atty. Merle P. Cunanan

Chief SEC Cebu Office
4th Flr. Danaque Bldg., Osmea Blvd.
Cebu City


This refers to your letter of February 3, 1995 requesting for comments on the
validity of the following proposed amendments to the articles of incorporation of
Pacific Traders & Manufacturing Corporation: cdphil

"ARTICLE II-a. No shares in the Corporation may be transferred to

any third party without the written consent of the existing stockholders except
as provided herein;

ARTICLE 13. That no shareholder shall, without the consent in

writing of the other shareholders, mortgage, pledge or otherwise encumber the
whole or any part of his shareholdings in the corporation."

Shares of stock in a corporation are personal property, and it is well settled that
the owner, as in the case of other personal property, has an inherent right as incident
of his ownership, to sell and transfer; the same at will. This right is expressly
recognized by the Corporation Code which provides in part:

"SECTION 63. Certificate of stock and transfer of shares. The

capital stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. . . ." (Emphasis supplied)

As such, the facility of transferring them must not be unduly hampered by

imposing restrictions as would amount to restraint on free alienation of property. The
Commission, however, as a matter of policy, allows restrictions on transfer of shares
in the articles of incorporation if the same is necessary and convenient to the
attainment of the objective for which the company was incorporated, unless palpably

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unreasonable under the circumstances. The underlying test as to whether the
restriction is valid and enforceable is whether the restriction is sufficiently reasonable
as to justify the restriction overriding the general policy against restraint on alienation
of personal property. The Commission had occasion to rule that the period of one
month is deemed reasonably sufficient for the existing stockholders of corporation
within which to signify their desire to buy the shares of stock being offered for sale
by any stockholder before the same may be offered to third parties. (SEC Letter to
Ozaeta, Gibbs and Ozaeta dated October 13, 1964(1)) In the present case, however, it
would appear that the transfer restriction clause is not valid and enforceable as it
absolutely prohibits the sale of stock without the consent of the existing stockholders,
thereby violating the general law on free alienability of shares of stock as personal
property. This position conforms with Supreme Court ruling Re: Fleishcer vs. Botica
Nolasco Co., Inc., G.R. No. 23241, March 14, 1925, 47 Phil 583, which states that a
by-law provision restricting the transfer of shares is ultra vires, violative of property
rights of shareholders, and in restraint of trade. llcd

Very truly yours,


Associate Commissioner

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SEC Letter, dated October 13, 1964, was not available at the time of publication.

Copyright 1994-2016 CD Technologies Asia, Inc. Securities and Exchange Commission 2015 3