By Euney Marie Mata-Perez on June 15,2023

THE outstanding capital stock of a corporation shall constitute a trust fund held by the corporation for the benefit of its creditors. It shall not be returned to the stockholders by repurchase of shares, except in the manner as provided for under the Revised Corporation Code, and the rules prescribed by the Securities and Exchange Commission (SEC).

No corporation shall redeem, repurchase or reacquire its own shares, unless it has an adequate amount of unrestricted retained earnings to support the cost of the said shares, except:

– When the shares are reacquired in the redemption of redeemable shares of the corporation or pursuant to the conversion right of convertible shares of the corporation;

– When the shares are reacquired to effect a duly approved decrease in its capital stock; or

– When the shares are reacquired by a close corporation pursuant to the order of the SEC.

The reacquired redeemable shares shall be considered retired and no longer issuable, unless otherwise provided in the corporation’s articles of incorporation.

Corporations, however, are also authorized to acquire its shares through treasury shares. Treasury shares are shares of stock, which have been issued and fully paid for but subsequently reacquired by the issuing corporation through lawful means. These treasury shares are regarded as property of the corporation, which can opt to retire said shares, sell them or distribute them as property dividends.

The treasury shares may be treated by the corporation as part of the issued shares as long as they are not canceled, although they are no longer considered outstanding. They do not revert to the unissued shares of a corporation. This is so because the amount paid for the acquisition of treasury shares is an investment out of retained earnings and does not represent return of capital to the stockholders. They also may be reissued or sold by the corporation at a price to be fixed by the board of directors.

The SEC has prescribed that the amount of unrestricted retained earnings equivalent to the cost of the treasury shares being held shall be restricted from being declared and issued as dividends. This dividend restriction shall be lifted after the treasury shares causing the restriction are reissued or retained.

The requirement of restricting retained earnings is based on the trust fund doctrine, which means that capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. Creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. Accordingly, there can be no distribution of assets among the stockholders without first paying corporate creditors.

Because of their different nature, treasury share acquisition is taxed differently from redemption or retirement of shares.

On the part of the stockholder, treasury shares acquired by the issuer are taxed like a sale or transfer of shares in any domestic corporation, subject to the 15-percent final capital gains tax on net capital gains derived from the acquisition, if the share is not traded in, or the acquisition is done outside the facilities of the Philippine Stock Exchange. If the shares are traded, the stock transaction tax of 6/10 of 1 percent applies. Redemption of shares, on the other hand, are taxed like liquidating dividends — any gain from the redemption are considered “capital gains” subject to the ordinary or regular income tax.

It is important to note, however, that a corporation reissuing treasury shares is not subject to tax. Any so-called gains on sales of treasury shares are credited to additional paid-in capital; they are not considered ordinary profits which would form part of retained earnings.

Because treasury shares are no longer outstanding, they are not entitled to the rights of a stockholder, and they decrease the number of outstanding shares in the open market. Thus, their voting rights are suspended.

Treasury shares are also not entitled to dividends, and thus, they are also not included in the calculation of earnings per share (EPS). All such rights are restored only once such shares are sold or reissued.

Treasury shares acquisition bring several benefits to all shareholders, as follows:

Higher EPS. Since treasury shares are not included in the distribution of dividends or the calculation of EPS, all shareholders potentially earn higher economic profits and shareholder value is thereby improved.

Higher value per share. Since the value of the company does not change when it acquires treasury shares, but only the number of outstanding shares decreases, the value of each share increases.

No voting dilution. Since treasury shares do not have voting rights, the minority shareholders are safeguarded.

In addition to the foregoing, a company buying back its shares sends a signal that it has excess cash, and thus, potentially improves the public’s perception of its finances.

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Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco. She is a corporate, M&A and tax lawyer, and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the chairman of the Tax Committee of the Management Association of the Philippines.

https://www.manilatimes.net/2023/06/15/business/top-business/the-benefits-of-treasury-shares/1896101