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Notes on additional paid-in capital

By Nica Marsha Gasapo on October 20,2022

IN Securities and Exchange Commission (SEC) OGC Opinion 22-12 dated Sept. 27, 2022, the requesting party asked whether a corporation may be allowed to issue shares of stock at a premium and whether a corporation was allowed to have more paid-up capital than its authorized capital stock.

The SEC answered both queries in the affirmative and discussed the terms “authorized capital stock,” “paid-up capital stock,” “paid-in capital stock” and “additional paid-in capital.” It said that “authorized capital stock” referred to the “amount fixed in the articles of incorporation to be subscribed and paid by the stockholders of the corporation,” while “paid-up capital” was the “portion of the authorized capital stock which has been subscribed and paid.”

In SEC Memorandum Circular (MC) 11, Series of 2008, meanwhile, the SEC defined “paid-in capital” as the “amount of capital stock and additional paid-in capital or premium over the value of shares,” while “additional paid-in capital” is the “contribution of stockholders over the value of shares.” It is also the “premium paid over and above the price of shares.”

Previously, the SEC clarified that the creation of additional paid-in capital need not be approved by the regulator. A corporation, however, at its option can still apply for SEC approval. Simply put, the creation of additional paid-in capital is a business judgment matter.

Infusion of property may also be treated as additional paid-in capital. In case property is used as such, an application for confirmation of valuation should be filed with the SEC, which has advised that the corporation should prepare the valuation with the assistance of an appraiser. This requirement is in consonance with a Revised Corporation Code provision stating that the SEC must confirm the valuation of consideration other than cash to prevent stock watering.

Also, the infusion of additional capital may be allowed even without a corresponding share issuance. As to whether additional paid-in capital may be considered in determining compliance with the foreign-to-Filipino ownership ratio in a corporation, the SEC has opined that it will not affect the ratio, the additional paid-in capital being a premium on the share price wherein the price is increased but no additional shares are issued.

The ownership ratio in a corporation should be the same before and after the creation of additional paid-in capital. Even if a foreign shareholder infuses additional paid-in capital, there will be no corresponding increase in foreign equity because there was no issuance of additional shares.

It should also be stressed that additional paid-in capital can no longer be declared as stock dividends as provided under SEC MC 11, Series of 2008. The SEC has confirmed that additional paid-in capital, being the premium paid over the shares, falls within the purview of the trust fund doctrine and that its subsequent conversion into subscribed capital will violate said doctrine. (SEC OGC Opinion 22-13 dated Sept. 30, 2022).

The Supreme Court, meanwhile, has ruled that the capital assets of a corporation may only be distributed in the following instances: amendment of the articles of incorporation to reduce the authorized capital stock; purchase of redeemable shares by the corporation (regardless of the existence of unrestricted retained earnings); and dissolution and eventual liquidation of the corporation.

The use of corporate capital assets (or trust fund) for purposes other than the ones previously enumerated will, in effect, be an unauthorized trust fund distribution. When additional paid-in capital is converted into subscribed capital such that it becomes payment for a stockholder’s additional subscription, the trust fund doctrine is violated.

Additional paid-in capital, provided it is already reflected in a corporation’s financial statements, may be used to eliminate negative equity and liquidate liabilities. In this regard, SEC approval is required via a request for equity restructuring. It must be emphasized that a corporation cannot, on its own, reclassify additional paid-in capital to absorb deficiency without SEC approval.

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Nica Marsha V. Gasapo is a junior associate II of Mata-Perez, Tamayo and Francisco (MTF Counsel).

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