How Are Family Business Shares Classified Under Absolute Community?
Introduction
Incorporating a family business during marriage requires more than choosing a corporate structure and issuing shares. The spouses must also determine whether the money used to acquire the shares belongs exclusively to one spouse or forms part of the spouses’ community property.
Under Philippine law, the default property regime of spouses who did not execute a valid marriage settlement is the system of absolute community of property. Consequently, shares purchased during the marriage may belong to the community even when the stock certificate is issued in only one spouse’s name. This affects ownership, voting, transfer, corporate records, and the authority of each spouse to deal with the shares.
Default Property Regime of Married Spouses
Future spouses may agree in their marriage settlements to adopt absolute community of property, conjugal partnership of gains, complete separation of property, or another lawful regime. In the absence of a valid marriage settlement, or when the agreed regime is void, absolute community of property governs. (Family Code of the Philippines, Executive Order No. 209, Article 75.)
Under absolute community, the community generally consists of all present and future property of the spouses, except property expressly excluded by law. The regime therefore covers property acquired before and during the marriage, subject to statutory exceptions. (Family Code of the Philippines, Executive Order No. 209, Articles 91 and 92.)
The classification of shares should be determined from the applicable property regime, the date and manner of acquisition, the source of the purchase funds, and any exclusion recognized by law.
Are Shares Purchased During Marriage Community Property?
Generally, yes. Shares purchased during the marriage using community funds are community property, even if the shares are registered in the name of only one spouse.
The Securities and Exchange Commission has recognized that shares of stock are personal property and are generally transferable. However, the ownership and transfer of shares between spouses remain subject to the Family Code and the Civil Code. Under absolute community, spouses are treated as co-owners of community shares. (SEC-OGC Opinion No. 19-09, 2019.)
This means that registration in one spouse’s name does not necessarily establish exclusive ownership. The stock certificate is evidence of registration, but the underlying property rights may still be governed by the spouses’ property regime.
Where spouses failed to agree on a different regime, individually held shares may be deemed community property and governed by co-ownership rules. The spouses may request that the corporate records reflect their joint ownership, subject to the corporation’s governing documents and applicable law. (SEC-OGC Opinion No. 19-09, 2019.)
Property Excluded from Absolute Community
Not every asset connected with a spouse belongs to the community. The Family Code excludes certain property, including property acquired during the marriage by gratuitous title, unless the donor, testator, or grantor expressly provides that it will form part of the community property.
Property for the personal and exclusive use of either spouse is also excluded, although jewelry forms part of the community property. Property acquired before the marriage by a spouse who has legitimate descendants from a former marriage is likewise excluded, together with its fruits and income. (Family Code of the Philippines, Executive Order No. 209, Article 92.)
Accordingly, shares acquired by inheritance or donation may remain exclusive property if the statutory requirements are satisfied. The source of the shares and the terms of the transfer should be documented carefully.
Shares Acquired Before Marriage
Shares owned before the marriage may also be affected by the applicable property regime. Under absolute community, property owned by either spouse before the marriage is generally brought into the community, except property excluded by law.
The analysis may differ where the spouses executed a valid marriage settlement adopting complete separation of property or another regime. A review of the marriage certificate, marriage settlement, stock acquisition documents, and proof of payment is therefore necessary before classifying the shares.
Who Owns and Manages the Shares?
Community shares are not automatically converted into separate shares owned independently by each spouse. The spouses’ interests are governed by the rules on absolute community and co-ownership, including the legal rules on administration and disposition of community property.
For corporate purposes, the corporation may recognize the registered shareholder as the person entitled to exercise shareholder rights, subject to proof of co-ownership, lawful authority, the corporation’s articles and bylaws, and applicable legal restrictions. The registered shareholder should not assume that registration alone authorizes a transaction that requires the consent or participation of the other spouse.
Before voting, pledging, selling, donating, or transferring shares, the spouses should determine whether the act concerns community property and whether the required consent and formalities are present.
Can One Spouse Sell Shares to the Other?
Spouses generally cannot sell property to each other during marriage, subject to the exceptions recognized by law. The Civil Code permits such a sale when separation of property was agreed upon in the marriage settlements or when there has been judicial separation of property under the applicable provision.
The prohibition is particularly important where the shares are community property. A purported sale between spouses may be invalid if it is intended to transfer community property outside the legally permitted exceptions. (Civil Code of the Philippines, Republic Act No. 386, Article 1490.)
Corporate officers should therefore avoid recording a transfer between spouses without reviewing the marriage settlement, the nature of the shares, the consideration, the required spousal authority, and the applicable legal exception.
Are Donations of Shares Between Spouses Valid?
Donations or grants of gratuitous advantage, whether direct or indirect, between spouses during marriage are generally void. The exception covers moderate gifts given on the occasion of a family rejoicing. The same prohibition applies to persons living together as husband and wife without a valid marriage.
A transfer described as a donation, assignment, waiver, or nominal sale may be challenged if its real purpose is to give one spouse a gratuitous benefit at the expense of the other spouse or the community. (Family Code of the Philippines, Executive Order No. 209, Article 87.)
Incorporating the Family Business
A family business may be organized as a stock corporation, subject to the requirements of the Revised Corporation Code and other applicable laws. The incorporation documents should identify the incorporators, subscribers, subscribed shares, paid-in capital, and the corporation’s purposes.
Each incorporator of a stock corporation must own or subscribe to at least one share. Incorporators may consist of natural persons, SEC-registered partnerships, domestic corporations or associations, and foreign corporations, subject to the relevant requirements. Natural-person incorporators must be of legal age and must sign the incorporation documents. (SEC Memorandum Circular No. 16, Series of 2019.)
The spouses should distinguish between three separate matters:
- the identity of the incorporator or subscriber;
- the person recorded as the shareholder in the corporate books; and
- the underlying ownership of the money and shares under the spouses’ property regime.
These matters may overlap, but they are not always identical. A spouse may be named as subscriber while the shares are legally community property. The corporate secretary should preserve documents showing the subscription, payment, issuance, and any declaration of joint or community ownership.
Recommended Corporate Documentation
To reduce future disputes, the spouses should maintain a complete file containing the following documents:
- the marriage certificate;
- the marriage settlement, if any;
- proof of the source of subscription funds;
- the subscription agreement and proof of payment;
- the stock certificate and stock and transfer book entries;
- the spouses’ written agreement on representation and voting, if legally permissible; and
- board and shareholder resolutions approving transactions involving the shares.
If the shares were acquired through inheritance or donation, the estate documents, deed of donation, donor’s instructions, and tax records should also be retained to support the claim that the shares are exclusive property.
Corporate Secretary’s Role
The corporate secretary’s duty to record a transfer of shares is generally ministerial when the transfer appears prima facie valid and the legal and corporate requirements have been met. This does not authorize the corporate secretary to disregard restrictions imposed by the Family Code or the Civil Code.
The corporate secretary should request clarification when the transfer involves spouses, community property, a donation, a sale between spouses, or a transaction that appears to lack the required consent. Registration should not be used to cure an invalid underlying transfer. (SEC-OGC Opinion No. 19-09, 2019.)
Common Family Business Scenarios
Shares Purchased With Salaries Earned During Marriage
Shares bought from salaries or business income earned during the marriage will generally be treated as community property under absolute community, even if only one spouse signed the subscription agreement.
Shares Bought With an Inheritance
Shares acquired by inheritance may remain the exclusive property of the inheriting spouse because property acquired by gratuitous title is generally excluded from the community. The inheritance documents should clearly identify the shares and should be preserved with the corporate records.
Shares Issued Only in the Husband’s or Wife’s Name
Issuance in one spouse’s name does not, by itself, conclusively establish exclusive ownership. If the shares were acquired during the marriage using community funds, the other spouse may assert a community-property interest.
Transfer of Shares From One Spouse to the Other
A transfer may be invalid if it is a prohibited sale or donation between spouses. The corporation should first determine whether a recognized legal exception applies and whether the transfer documents accurately state the transaction’s consideration and nature.
Family Business Shares Upon Separation or Death
The classification of shares becomes especially important upon dissolution of the marriage, judicial separation of property, legal separation, annulment, or death. The shares may have to be inventoried, valued, liquidated, or distributed according to the applicable property and succession rules.
Where the property regime is conjugal partnership of gains rather than absolute community, the analysis changes. Under that regime, property acquired during the marriage is generally presumed conjugal unless the contrary is proved, and the specific rules on conjugal property apply. (Family Code of the Philippines, Executive Order No. 209, Article 116.)
Courts have also recognized that the Family Code governs the property relations of spouses, except as to rights that had already vested under the prior law. The date of acquisition and the date of the marriage may therefore affect the applicable analysis. (Muñoz, Jr. v. Ramirez, et al., G.R. No. 156125, 2010.)
Practical Steps Before Incorporation
- Confirm the property regime. Obtain and review the marriage certificate and any marriage settlement.
- Trace the purchase funds. Determine whether the subscription will be paid from community income, inherited property, donated property, or another source.
- Identify the intended ownership. Decide whether the shares will be held jointly, recorded in one spouse’s name for administrative purposes, or subscribed by separate family members.
- Prepare consistent documents. Ensure that the subscription agreement, proof of payment, stock certificate, stock and transfer book, and corporate resolutions do not contradict the spouses’ actual property arrangement.
- Review restrictions before transfer. Obtain legal advice before selling, donating, pledging, or assigning shares between spouses or to relatives.
Conclusion
Shares purchased during marriage are generally community property when the spouses are governed by absolute community of property and the shares were acquired using community funds. Registration in one spouse’s name does not necessarily defeat the other spouse’s legal interest.
A family business should therefore be incorporated only after the spouses have confirmed their property regime, documented the source of the subscription funds, and aligned the corporate records with the underlying ownership. Particular care is required for inherited or donated shares, transfers between spouses, and transactions that may amount to a sale or donation prohibited by law.
Proper documentation at incorporation can prevent disputes over voting rights, dividends, transfer authority, valuation, succession, and the disposition of the business upon marital dissolution or death.
About Nicolas and De Vega Law Offices
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