Tax Articles

Valuation of Services as Consideration for Stocks

By: Atty. Mabel L. Buted

The equity or capital of a corporation is divided into shares of stock which are owned by the so-called stockholders or shareholders. The stockholders realize the profits earned by the entity in the form of dividends distributed to them.

They elect the members of the Board of Directors, who must own at least one share of stock, to conduct the business and control the properties of the corporation. The Board of Directors may then appoint officers and hire employees who will manage the corporation and perform the functions as the Board may direct. These officers and employees may or may not sit in the Board, except for the President who must be a director.

The officers and employees may or may not therefore be shareholders. Thus, they will share in the profits and are entitled to dividends only when they have equity in the company. But they, especially those who hold key positions, are the ones who help run the day-to-day activities of the corporation, and it is no doubt that they significantly contribute to revenues and to the growth of a company.

So, to give value to their services, some companies offer them incentives and opportunities to become shareholders of the corporation. The usual practice is to grant them stock options in which the officers and employees may purchase shares at less than the fair market value of the stocks at a specific date or period.

However, not much has been said about giving them shares of stock in exchange of the services that they had already rendered. Our corporate law actually allows this. Stocks can be issued for a consideration not only in the form of actual cash paid or property received, but also in the form of labor performed for or services actually rendered to the corporation.

Even as far back as in the old Corporation Code, this provision in the law is already in place. The Securities and Exchange Commission ("SEC") confirmed this position in a few earlier opinions issued. The SEC allowed the issuance of bonus shares in favor of the incorporators and founders who continuously work in building up the company for at least three years from the time of incorporation without remuneration (SEC Opinion, August 23, 1990). In another opinion, the "accommodation" or "service" by a director and stockholder of a company in mortgaging his own real property to secure the loan obtained by the corporation was considered as a valid consideration in the issuance of shares of stock (SEC Opinion, February 10, 1982).

The labor performed or services rendered is accepted, but is not a common form of payment of shares of stock. I understand.

It is probably because of the difficulty involved in the determination of the pecuniary amount of such services. Like a property and any consideration paid other than cash, these services must also be given a monetary value which should not be less than the par value of the stocks. The law states that the valuation thereof is determined initially by the stockholders or the Board of Directors, subject to the approval of the SEC. Further, the services must have actually been performed for the corporation. Shares of stock cannot be issued for future service.

But how do we really value the services? Perhaps, the first procedure to do is to identify the nature and extent of the labor performed or the services actually rendered to the entity. Services, as a form of consideration, is already broad. They are also usually measured at their fair market value.

To my knowledge, even the SEC does not maintain a fixed and initial checklist of documents needed to ascertain the valuation of such services, unlike the other forms of consideration. It is easier to determine the price of the properties and other non-monetary forms of consideration.

The valuation of the service is a matter that is worth contemplating, if corporations will give value to the services actually contributed by their officers and employees by providing them a stake in the company.