On the reacquisition of shares | KPMG | PH

On the reacquisition of shares

On the reacquisition of shares

by Ana Margarita A. Mortel

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on the reacquisition of shares

It was in early 1923, in the case of Philippine Trust Co. vs. Rivera, when the Supreme Court articulated the trust fund doctrine in Corporation Law. Under the said doctrine, capital stock, property and other assets of a corporation constitute a fund from which creditors have a right to look for satisfaction of their claims. The doctrine finds its basis upon the need to preserve the assets and capital of the corporation for the protection of creditors, who are preferred over stockholders in the distribution of corporate assets.

Thus, corporate creditors have a right to assume that the assets of the corporation shall not be used to purchase its own shares, or dividends be declared when the corporation is insolvent.

The trust fund doctrine has found its way to today's Corporation Code, and finds particular application in the case of treasury shares. Be it recalled that one of the explicit powers granted by the law to the board of directors of a stock corporation is the power to acquire its own shares, subject to the existence of a legitimate corporate purpose and unrestricted retained earnings. One such kind of reacquired share is what we now know as treasury shares, otherwise described as those shares which have been issued and fully paid, but subsequently reacquired by the issuing corporation.

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