It’s worthy to note that when a corporation offers its unissued shares to either its stockholders or to the public, an interested buyer informs the corporation that he wants to purchase or subscribe to a set number of shares. This is referred to as a buyer’s subscription.

Once the buyer or buying stockholder pays the amount of the subscription, the Corporation’s Secretary issues him a stock certificate. Aside from being a proof of his ownership of that particular set, he needs this certificate when he eventually sells his shares to another.

In order for the corporation to recognize a sale or transfer of shares, the stockholder has to surrender his stock certificate to the Corporate Secretary who will cancel it in exchange for a new stock certificate in the name of the transferee or buying stockholder.

The entire process above presupposes the necessity of a stock certificate. For this, Section 63 applies. It states that, “no certificate of stock shall be issued to a subscriber until the full amount of subscription together with interest and expenses, if any is due, has been paid.”

This provision implicitly sets forth the absolute Principle of Indivisibility of Subscription, as discussed in SEC Opinion No. 16-05 dated 31 March 2016 to wit:

“… A subscription is one, entire and indivisible contract. It cannot be divided into portions so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full payment of his subscription together with the interest and expenses if any is due.

The purpose of this principle is to prevent the partial disposition of subscription which is not fully paid, because if it is permitted, and the subscriber subsequently become delinquent in the payment of his subscription, the corporation may not be able to sell as many as his subscribed shares as would be necessary to cover the total amount due from him, which is authorized under Section 68.”

A stockholder is likewise prohibited to assign the balance of the subscription to someone else in a way that stock certificates will be issued to the stockholder for the paid portion and the balance to the third party who assumes the payment of the balance. Again, because of the Principle of Indivisibility of Subscription under Section 63, subscriptions cannot be divided into portions.

This reason behind the principle of disallowing transfer of not fully paid subscriptions to several transferees is that it would be difficult for the corporation to determine whether or not the partial payments given to it should be applied as full payment for the corresponding number of shares whit the pay can only cover or as proportional payment to each and all of the entire number of subscribed shares. Consequently, the corporation would have a hard time determining the unpaid balance that each transferee would assume (SEC Opinion dated 9 October 1995).

However, a stockholder may transfer his entire subscription if he only has one transferee even if he has not fully paid it yet, provided that the transferee assumes the unpaid balance. In SEC Opinion dated 23 April 2010, citing SEC Letter dated 6 January 1983, the Commission opined:

“An entire subscription, although not fully paid, may be transferred to a single transferee, who as a result of the transfer, must assume the unpaid balance. However, it is necessary that the consent of the corporation is secured since the transfer of subscription right contemplates a novation of the contract under Article 1293 of the Civil Code of the Philippines and cannot be made without consent of the creditor”.

This means, a stockholder may transfer his entire subscription provided that (1) there is only one transferee, (2) the transferee expressly assumes the payment of the balance, and (3) corporation approves it, usually through a board resolution.

When a transferee assumes the payment of the stockholder’s balance, he expresses that he wants to substitute the stockholder as debtor of the corporation for the unpaid balance. On the other hand, the stockholder delegates the obligation to pay the corporation to the transferee.

This, in effect, changes the original contract (in this case, the subscription agreement) because there are now three parties instead of two: the original parties (stockholder and corporation), and the delegated transferee. Hence, the stockholder must first secure the consent of the corporation, as his original creditor.

In turn, the subscription may be transferred to the transferee. Take note, however, that the SEC Opinion only provides a transfer of subscription, the transferee still needs to pay the entire balance before he may be issued with a stock certificate.