Definition and Composition of Paid-Up Capital under the Retail Trade Liberalization Act of 2000, As Amended (SEC OGC Opinion No. 24-39)

Pursuant to the Retail Trade Liberalization Act of 2000 (“2000 RTLA”) and its Implementing Rules and Regulations (“2000 IRR”), the Board of Investments (“BOI”) issued a Certificate of Compliance with Pre-qualification Requirements (the “Certificate”) to Electrolux Philippines, Inc. (“Electrolux”) to allow it to engage in retail trade.

Electrolux now intends to amend its Articles of Incorporation (“AOI”) to allow retail activities in its primary purpose by filing the necessary application with the Security and Exchange Commission (“SEC”). Electrolux’s General Information Sheet (“GIS”) shows that it has an authorized capital stock of 102,000 shares with par value of PHP 100.00 each, all of which issued and fully paid. Also, Electrolux’s Audited Financial Statements (“AFS”) reflects a capital of PHP 125,000,000.00 inclusive of share premium – PHP 10,200,000.00 as share capital and PHP 114,800,000.00 as share premium. 

Electrolux asked the SEC whether paid up capital includes additional paid-in capital (“APIC”). Electrolux is of the position that the “paid-up capital” under the 2000 RTLA (now 2021 RTLA) should include share premium or APIC for purposes of determining compliance with the minimum paid-up capital requirement, because:

1. The par value, together with the share premium or APIC, comprises the total investment into the corporation, in accordance with the definition of paid-up capital in the 2000 IRR (now 2022 IRR) of the 2000 RTLA; and
2. The standard GIS prescribed by the SEC, on the page for “capital structure” and under the portion for “paid-up capital” contains two (2) different columns – both “par/stated value” and “amount,” implying that share premium is considered as paid-up capital.

The SEC confirmed that share premium or APIC is included in determining the minimum paid-up capital under the RTLA. It looked into different laws, the legislative intent, several IRRs, and certain Supreme Court Decisions to support its conclusion. 

Definition of Paid-Up Capital under the relevant IRRs of the RTLA vis-a-vis the Corporation Code

First, into the difference of the definitions of paid-in capital between the Section 1 (l) of the 2000 IRR and Section 1 (j) of the 2022 IRR.

In the 2000 IRR, paid-up capital is the total investment in a business that has been paid-in a corporation or partnership or invested in a single proprietorship, which may be in cash or in property. It shall also refer to assigned capital in the case of foreign corporations.

On the other hand, in the 2022 IRR, paid-up capital is the total investment in a business that has been paid-in in a corporation; or working capital for partnerships and single proprietorships; or assigned capital in the case of foreign corporations or its branch offices.

While the 2019 Revised Corporation Code (“RCC”) provides that a minimum paid-up capital is no longer required upon incorporation, the term and concept “paid-up capital” survives and is still applicable under the fourth paragraph of Section 37 of the RCC relative to increase of capital stock. Thus, paid-up capital under the RCC refers to that portion of the authorized capital stock which has been subscribed and paid. On the other hand, APIC, previously referred to as additional paid-in capital surplus, had long gained a separate and distinct definition from paid-up capital.

In an Opinion dated April 15, 1991, the SEC opined that when shares with par value are sold, the proceeds should be credited to the capital stock accounts to the extent of the par value of the shares with any excess being reflected as additional paid-in capital. In another Opinion dated April 23, 1991, the SEC reiterated that “paid-in capital” should be construed as to include payments on subscriptions in excess of par.

From the foregoing, as to the definition of paid-up capital, there is a marked and fundamental difference between the 2000 and 2022 IRR of the RTLA, and the Code. 

Legislative History of the RTLA and the Intent of the Legislature

The legislative intent of the 2000 RTLA is to attract and promote investments in the Philippines that would bring down the price of goods or services for Filipinos by means of allowing foreign participation and encouraging market competition.

The legislative intent to encourage and allow foreign participation was made all the more certain when the 2000 RTLA and the 2000 IRR were amended in 2021 and 2022, respectively, and the legislature made no change to the definition of paid-up capital within the context of the RTLA as the relevant IRRs still expressly and unequivocally state total investment. Verily, in what is now Section 1 (j) of the 2022 IRR of the RTLA, paid-up capital still encapsulates the total investment in a business that has been paid-in in a corporation.

The legislative branch intended to lower the barrier for entry in retail trade as seen in Section 2 of the 2021 RTLA, where it lowered the minimum paid-up capital needed for foreign-owned retail enterprises and correspondingly removed the categories for pre-qualification.

Interpretation of Paid-Up Capital under the context of the RTLA

Both the 2000 and 2021 RTLA do not have any definition of paid-up capital. It is only in the 2000 IRR (and subsequently in the 2022 IRR) where paid-up capital was defined. This definition includes share premium or APIC in order to comply with the requirements for foreign investors to engage in retail trade. Thus, it can be presumed that the legislature saw no inconsistency between the 2000 RTLA and the 2000 IRR that would make it necessary to define paid-up capital in the 2021 RTLA. It, therefore, allows leeway for a definition that permits a lower barrier of entry for competition to participate in retail trade and thereby allowing Filipinos more options of products as well as favorable prices therefor. 

This intent was also reinforced when the legislature sought to lower the amount of paid-up capital in the 2021 RTLA. Hence, while the term paid-up capital has been used to have a technical meaning in the context of retail trade, the technical meaning of the word no longer obtains in order to achieve the policy set out by the legislature as earlier discussed. In short, the definition of paid-up capital in the IRR’s is less restrictive and thus in keeping with the intent of the law.

Jurisprudence provides that if the law does not define what a term is, then other laws and judicial decisions can be used. Thus, a perusal of other economic statutes, such as the Financing Companies Act of 1998 (“FCA”), the Foreign Investments Act of 1991 (“FIA”), as amended, and their IRRs follow the same definition of paid-up capital as in the 2000 and 2022 IRR of the RTLA.

Conclusion

Prescinding from the foregoing, the definition of paid-up capital contemplated under the 2000 and 2021 RTLA clearly envisions the total investment put into a corporation or business where share premium and APIC must be taken into consideration.