May 5, 1986

Atty. Victor Africa

Telecoms Plaza, 316 Gil Puyat Ave.
Salcedo Vill., Makati, MM

Sir :
This relates to your letters, dated March 24 and April 1, 1986,
requesting the opinion of this Commission on the following queries: cdrep

1. Where a government agency is going to sequester the shares of

stock of a person/entity under the powers vested in it by
Executive Orders 1 and 2, what documents must be
presented to the corporate secretary for him to:
a) record the transfer;

b) register the government as stockholder; and

c) release the corresponding certificate of stock thereto?

2. If the shares to be sequestered and which the government seeks
to be transferred, (either to itself or other persons/entities,
neither of which 2 groups are incumbent stockholders), are of
a close corporation and subject to a right of first refusal by
the corporation and/or incumbent stockholders, what
documents should a corporate secretary seek for, prior to
recording such transfer?

"Sequestration" and Freeze Order" are dened by the Presidential

Commission on Good Government in its Rules and Regulations,
implementing Executive Order Nos. 1 and 2, dated April 11, 1986, a: follows:
"Sequestration means taking into custody or placing under the
Commission's control or possession any asset, fund or other property as well
as relevant records, papers and documents, in order to prevent their
concealment, destruction, impairment or dissipation pending determination
of the question whether the said asset, fund or property is ill-gotten wealth
under Executive Order Nos. 1 and 2." (Sec. 1 B)
"A 'freeze' order is an order intended to stop or prevent any act or
transaction which may aect the title, possession, status, condition, integrity
or value of the asset or property which is or might be the object of any
action or proceeding under Executive Order Nos. 1 and 2, with a view to
preserving and conserving the same or to preventing its transfer,
concealment, disposition, destruction or dissipation." (Sec. 1, C)
As the term is further dened, "Sequestration is the provisional seizure
or setting apart of specic property upon which a party to a suit has a claim
of ownership, or a right, lien or privilege, so as to preserve it pending the
litigation, in order that it may be subjected to any nal judgment or decree
that may be rendered in the cause." (70 Am. Jur., 2d, Sec. 1). It is a
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 "provisional remedy, or an auxiliary process, issued as an incident of a main
action, and not an original process, except where the statute specically,
provides that the writ may be issued even in the absence of a principal
demand pending before the court granting it." (Am. Jur. Supra., Sec. 2) cdrep

As a conservatory process, the writ of sequestration is intended to

preserve the sequestered property during the pendency of the main suit to
which the writ is auxiliary process. It operates to protect a property right,
resting on the property seized; it does not in any manner increase, or
diminish the rights of either of the parties to the action in which the property
is sequestered, but it simply preserves the sequestered property in status
quo. The writ of sequestration creates no lien or privilege in, or title to, the
property which is the subject of the sequestration proceedings, and it does
not divest the title of the owner, or otherwise aect the question of title.
(C.J.S. Supra., Sec. 2, C)
It is well settled that property of every description, anywhere within the
jurisdiction of the court is subject to sequestration. (Baldwin v. Block, 119
U.S. 643, 30 L Ed., 530, 73. Ct. 326, cited in 70 Am. Jur., 2d, sec. 13).
Sequestration may be issued among others, over choses in action,
negotiable instruments and shares of stock (Am. Jur. Supra., sec. 15).
Sequestration may also be issued with respect to dividends. (Am. Jur.,
Supra., citing Wife v. Husband, Del. Ch. A2d 256).
The levy of a writ of sequestration merely constitutes a judicial deposit,
of the property levied on, into the custody of the law, for the purpose of
keeping the seized property safely, pending the trial in which the writ is
issued, and to enable the court ultimately to dispose of the property (79
C.J.S, sec. 13, a). The levy of the writ does not constitute a conversion of the
property levied on, or eect the title to the property and creates no lien.
(C.J.S., sec. 13).
In our jurisdiction, shares of stock or an interest in stock or shares of
any corporation or company may be attached, by leaving with the president
or managing agent thereof a copy of the order and a notice stating that the
stock or interest of the party against whom the attachment is issued, is
attached in pursuance of such order. (Sec. 7, d, Rule 57, Rules of Court.) In
the same manner, it is submitted that shares of stock may be levied, under
a writ of sequestration, by leaving with certain corporate ocers or agents,
such as the president, corporate secretary, or general manager, a copy of
the writ and notice stating that the shares of stock or interest of the
defendant therein are sequestered. Appropriate notation relative to the
existence of the writ of sequestration should be eected by the corporate
secretary in the stock and transfer book of the corporation. Property
sequestered remains, during the pendency of the levy, in the custody of the
law, so to speak.
The plainti who has obtained property through a writ of sequestration
should prosecute his suit to final judgment. (C.J.S., sec. 20)
Thus under the Rules and Regulations of the PCGG, said Commission
may contact a hearing, after due notice to the party or parties concerned
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 within the purview of Executive Order Nos. 1 and 2, to ascertain whether any
particular asset, property or enterprise constitutes ill-gotten wealth and to
determine the appropriate action to be taken in order to carry out the
purposes of said Executive Orders. (Sec. 7). Based on the evidence adduced
the Commission shall determine whether there is reasonable ground to
believe that the asset, property or business enterprise in question
constitutes ill-gotten wealth as described in Executive Order Nos. 1 and 2. In
the event of armative nding, the Commission shall certify the case to the
Solicitor General for appropriate action in accordance with law. Businesses,
properties, funds, and other assets found to be lawfully acquired shall be
immediately released and the writ of sequestration, hold/freeze orders lifted
accordingly. (Sec. 10) Thus, pending the outcome of the main suit as may be
led by the Solicitor General, there should be no transfer of title of shares of
stock in the stock and transfer book. Sequestration as noted in the corporate
book, merely "operates to preserve property during the litigation in order
that it may be subjected to such orders or judgment as the court may make
or render." (70 Am. Jur., 2d. sec. 26, citing Jackson v. The Proctorians, Tax
Civ. App., 80 S.W. 2d 322). Sequestration does not divest the defendant of
all his interest in the property. (Am. Jur., Supra., citing Forest v. Forest, 22
N.Y. Sup. Ct. (9 Bosw) 686).
A judgment for the plainti in the main suit recognizing his lien and
privilege on the sequestered property entitles him to have the sequestered
property and sold to satisfy his judgment. (79 C.J.S., sec. 20)
Hence, anent the queries posed in number 1 hereof please be advised
that the decision of the appropriate authority entitling the Government
ownership of the sequestered shares of stock is a vital document before you
may register the Government as the record owner of said shares, and
correspondingly releasing certicates of stock evidencing its equity in the
corporation. Cdpr

Anent your second query, quoted hereunder are the pertinent

provisions of the Corporation Code on close corporations under Title XII
thereof, to wit:
SECTION 96. Denition and Applicability of Title. — A close
corporation within the meaning of this Code is one whose Articles of
Incorporation provide that: (1) all of the corporation's issued stock of
all classes exclusive of treasury shares, shall be held of record by not
more than a specied number of persons not exceeding twenty (20);
(2) all of the issued stock of all classes shall be subjected to one or
more specied restrictions on transfer permitted by this title; and (3)
the corporation shall not list in any stock exchange or make any
public offering of its stock of any class. . . . "
"SECTION 97. Articles of Incorporation. — The articles of
incorporation of a close corporation may provide:

1) For a classication of shares or rights and the qualications

for owning or holding the same, and restrictions on their
transfers as may be stated therein, subject to the
provisions of the following section;
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 2) . . . . "

"SECTION 98. Validity of restrictions on transfer of shares. —

Restrictions on the right to transfer shares must appear in the articles
of incorporation and in the by-laws as well as in the certicate of
stock; otherwise, the same shall not be binding on any purchase
thereof in good faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporations the option to
purchase the shares of the transferring stockholders with such
reasonable terms, conditions or period stated therein. If upon the
expiration of said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder
may sell his shares to any third person."
Considering the special circumstances attending a close corporation, it
is oftentimes justiable, and at times imperative, for its stockholders to
protect themselves from future conicts by placing restrictions on the right
of each one of them to transfer his share to an outsider. It is perhaps for this
reason that the Corporation Code explicitly allows such restriction in, and in
fact makes it an attribute of the close corporation. (Campos, Campos, the
Corporation Code, "Comments, Notes and Selected Cases", 1981 ed., p.
849). Hence, provisions in the charters, articles of incorporation or general
laws requiring stockholders desiring to sell their stock to oer it to the
corporation or the other stockholders before disposing of it to others are
valid. and a fortiori, such a provision contained in the contract of
subscription for shares, the articles of incorporation and the by-laws, and
which also appears on the face of the stock certicates, is valid. (12 Fletcher,
Cyc. Corps., 1957 Vol., sec. 5453. pp. 300-301). The reason for the rule is
that a corporate charter is a contract both between the corporation and the
state, and the corporation and its stockholders; that is to say, the relation
existing between the corporation and its stockholders is contractual (Ibid). It
has been said, however, that they do not apply to a sheri's sale on
execution against a stockholder. (Barrows v. National Rubber Co., 12 R.I.
173), nor to a sale of stock by a receiver pursuant to an order of the court.
(Stern v. Stern, 146 F (2d), 870 (DC); McDonald v. Farley & Loetscher Mfg.,
Co., 226, Iowa 53, 283 N.W. 261). Ordinarily, therefore, restrictions apply
only to voluntary transfers, not when the devolution or transmission of the
shares is inevitable. (Stern v. Stern, Supra.) They do not apply to judicial
sales. (McDonald v. Farley & Loetscher Mfg. Co., Supra) Even in common
law, the prevailing view is that unless specically so provided, the option
restriction applies only to voluntary transfers and not to judicial sales or
transfers by operation of law. (Campos, Campos, Supra., p. 855). cda

Considering the foregoing, if the shares to be sequestered and which

the Government seeks to be transferred, (either to itself or to other persons
or entities, neither of which 2 groups are incumbent stockholders), are of a
close corporation, the same documents as previously stated, number 1
above, need be presented to the corporate secretary for recordation.
Consequently, however, should the transfer of shares result in
converting the close corporation into an ordinary one, the provisions of
Section 103 of the Corporation Code must be complied with.
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 Please be advised accordingly.

Very truly yours,

(SGD.) JULIO A. SULIT, JR.

Acting Chairman

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