1. To reduce or wipe out existing deficit where no creditors would thereby by affected;
2. When the capital is more than what is necessary to procreate the business or reduction of capital surplus;
3. To write down the value of its fixed assets to reflect their present actual value in case where there is a decline in the value of the fixed assets of the corporation.
TRUST FUND DOCTRINE: The subscriptions to capital stock of the
corporation constitute a fund which the creditors have a right to look up for the satisfaction of their claims. Accordingly, if the decrease would affect the rights of creditors, the same would not be approved by the SEC.
PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923) - Shortly after its incorporation, the stockholders of Cooperativa Naval Filipina, adopted a resolution to the effect that the capital should be reduced
by 50% and the subscribers be released from the obligation to pay their unpaid balance.
In the course of time, the company became insolvent and went into the hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy, and by it this action was instituted to recover ½ of the stock subscription of herein defendant who subscribed to 450 of the 1,000 authorized capital stock.
It does not appear that the formalities under the Corporation Code for the reduction of capital stock were observed and in particular it does not appear that any certificate was at any time filed in the Bureau of Commerce and Industry, showing such reduction.
Respondent judge ruled in favor of Philtrust and directed respondent to pay ½ of the subscription price of his shares.
ISSUE: WON the reduction is valid and proper?
HELD: No. A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the AOI. Moreover, strict compliance with the statutory regulations is necessary. In the case before us, the resolution releasing the shareholders from their obligation to pay 50% of their respective subscriptions was an attempted withdrawals of so much capital from the fund upon which the company’s creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual.
MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987) -
The Madrigal Central Office Employees Union sought for the renewal of its CBA, proposing a P200 wage increase and an allowance of P100 a month. Petitioner company requested for the deferment of its negotiation.
Meanwhile, the company effected two reductions of its capital stock by issuing marketable securities owned by petitioner in exchange for shareholders’ shares.
After the petitioner’s failure to sit down with the respondent union, the latter commenced a case with the NLRC for unfair labor practice. In due time, petitioner filed its position paper, alleging operating losses.
The Labor Arbiter rendered a decision in favor of respondent Union.
ISSUE: WON the decrease in capital stock is valid and binding?
HELD: No. What clearly emerges from the recorded facts is that the
petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increase, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. In the face of the petitioner company’s piling profits, the unionists had the right to demand for such salary adjustments.
That the petitioner made quite handsome profits is clear from the records. This court is convinced that the petitioner’s capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in it employee ranks, especially the union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice.
L. POWER TO DENY PRE-EMPTIVE RIGHT
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Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective holdings, subject only to the limitation imposed under Sec. 39, which provides:
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two- thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
BASIS OF RIGHT: The grant of this right is for the preservation, unimpaired
and undiluted, of the old stockholders’ relative and proportionate voting strength and control, that is, the existing ratio of their property interest and voting power in the corporation.
EXCEPTIONS (Under Sec. 39):
1. When shares to be issued is in compliance with laws requiring stock offerings or minimum stock ownership by the public; or
2. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock either:
a. In exchange for property needed for corporate purpose; or b. In payment of a previously contracted debt.
The exceptions will not apply to stockholders of close corporation whose pre- emptive right, is broader if not absolute. See Sec. 102.
The right may likewise be lost by waiver, express or implied or inability or failure to exercise it having been notified of the proposed disposition of shares.
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul Philippines – Al Islamia, Inc. was incorporated with P2,000,000 authorized capital stock divided into 20,000 shares, of which 460 belong to herein petitioner. In a stockholders meeting, an increase of the authorized capital stock to P1,000,000 was approved, where the previously unissued shares were all issued.
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC alleging that the additional issue of previously unissued shares was made in violation of his pre-emptive right and that the increase of capital stock was illegal considering that the stockholders on record were not notified, and that such issuance be cancelled.
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the original unsubscribed shares, but can exercise such right with regards the increase capitalization.
ISSUE: WON the above ruling is correct?
HELD: Yes. The issuance of the unsubscribed portion of the capital stock or
P110,980 is valid even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged in the bard of directors and no stockholders’ meeting is necessary to consider it because such issuance does not need approval of stockholders.
The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. This is on theory that when a corporation, at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are reoffered, he cannot therefore claim a dilution of interest.
With respect to the claim that the increase in the authorized capital stock was without consent, expressed or implied, of the stockholder, it was the finding
of the Commission that a meeting was called for the purpose. The petitioner had not sufficiently overcome the evidence of respondent that such meeting was in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time, attending the Mecca pilgrimage. Another thing that petitioner was able to disprove was the allegation that all stockholders who did not subscribe to the increase have waived their pre-emptive right. As far as petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings.
M. POWER TO SELL OR DISPOSE OF ASSETS
Sec. 40. Sale or other disposition of assets. - Subject to the provisions
of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is (1) necessary in the usual and regular course of
business of said corporation or (2) if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.
The conditions for the valid exercise of this power are thus as follows: 1. Resolution by a majority of the BOD/T;
2. Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members;
3. The ratification of the stockholders or member must be made at a meeting duly called for that purpose;
4. Prior written notice of the proposed action and of the time and place of meeting must be made addressed to all stockholders of record, either by mail or personal service;
5. The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies; and
6. Any dissenting stockholder shall have the option to exercise his appraisal right.
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The above requirements will not apply:
1. In case the sale is NOT covering all or substantially all of the assets of a corporation as to render it incapable of continuing the business
or accomplishing the purpose for which it was incorporated; or
if the proceeds are to be used to continue the conduct of the remaining business of the company;
2. If the sale is in the usual and regular course of business of the company.
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA 454;