1. Sources of Financing 3 main sources:
1. Contributions by stockholders (Equity)
2. Loans or advances from creditors (Borrrowing) 3. Profits that the business may earn
2. Classification of Shares (§6)
Shares of stock of stock corporations may be divided into classes or series of shares or both
Each class or series of shares may have rights, privileges, restrictions, stated in the AOI
No share may be deprived of voting rights, except:
o Preferred or
o Redeemable shares,
o unless otherwise provided by the Code
There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS
EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as otherwise provided in the AOI and as stated in the certificate of stock
2.1 Common
A stockholder, owner of at least one common share, has the following rights:
o right to vote at meetings o right to dividends
o right to examine corporate books
Most commonly issued
Entitles owner to equal pro-rata division of profits after preference
2.2 Preferred
Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which are not violative of the Corporation Code. (§6)
Limitations on preferred shares:
o Preferred shares can only be issued with par value
o Preferred shares must be:
a. Stated in the Articles of Incorporation and in the certificate of stock or
b. May be fixed by the BOD where authorized by the AOI, provided:
such terms and conditions shall be effective upon filing of a certificate thereof with the SEC.
Entitles holder to some preferences in dividends, distribution of assets upon liquidation or both:
o preference as to dividends – dividends are payable only when profits are earned and as a general rule, even if there are existing profits, BOD has discretion to declare dividends or not a. Participating – after getting their
fixed dividend preference ahead of CS, they share with the CS the rest of the dividends
UNLESS expressly provided, they are non-participating
b. Cumulative – dividends in arrears accrue, must be paid first before common stock dividends are paid.
c. Non cumulative – contract makes dividends depend upon existence of profits for the year
o as to voting rights – usually does not have voting rights; but unless clearly withheld, PS would have right to vote Note: even if deprived of voting rights, PS holders are entitled to vote on the matters enumerated under §6
o preference upon liquidation – in the absence of provision, participate pro rata with common stock
o not a creditor; there’s no assurance that you will get back investments but if the corporation profits, you participate in the profits
2.3 Par value
These are shares with a stated value set out in the AOI. This remains the same regardless of the profitability of the corporation. This gives rise to financial stability and is the reason why banks, trust corporations, insurance companies and building and loan associations must always be organized with par value shares.
One in the certificate of stock of which appears an amount in pesos as the nominal value of the shares
Can’t be issued at less than par value.
Otherwise, it would become a watered stock (§65, discussed in Chapter XII)
Par value is minimum issue price of such share in the AOI which must be stated in the certificate
2.4 No-par value
These are shares without a stated value.
The Corporation upon their issuance will set their value, which shall not be less than P5.
Shall be deemed fully paid and non-assessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto (§6)
Entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends (Ibid)
Cannot be issued as Preferred Shares (Ibid)
AOI must state the fact that corp issues no-par shares and the number of shares
Three ways of determining value of no par value shares (§62):
o By majority vote of the outstanding shares (issued shares) in a meeting called for the purpose
o By BOD pursuant to authority conferred upon it by the AOI
o By amendment of the AOI
Corporations which cannot issue no-par value shares (§6):
o Banks
o Insurance Companies o Trust Companies
o Building and Loan Associations o Public utilities
2.5 Founder‘s (§7)
Those shares, classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks. (§7)
Where exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not to exceed 5 years subject to approval by SEC. 5 year period shall commence from date of approval by SEC. (Ibid)
2.6 Redeemable
Those shares, expressly so provided in the AOI, which may be purchased or taken up by the corporation upon the expiration of a fixed period regardless of the existence of unrestricted retained earnings in the books of the corporation and upon such terms and conditions stated in the AOI and in the certificate of stock (§8)
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. (CIR v CA, 1999)
While redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to
cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. (Republic Planters Bank v Agana, 1997)
2.7 Treasury
These are shares of stock which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD. (§9)
Note: delinquent stocks, which are stocks that have not been fully paid, may become treasury stocks upon bid of the corporation in absence of other bidders (§68)
May be sold at less than par, regarded as corporate property
In this manner, stocks can be retired gradually, even those which aren’t redeemable
No limit as to how many shares can be retired
2.8 Convertible
A type of preferred stock that the holder can exchange for a predetermined number of the corporation’s common shares at a specified time 2.9 Non-voting shares (§6)
Shares which have, generally, no voting rights; except in the following circumstances:
o Amendment of the AOI
o Adoption and amendment of by-laws o Sale, lease, exchange, other disposition
of all or substantially all of the corporate property
o Incurring, creating or increasing bonded indebtedness
o Increase or decrease of capital stock o Merger and consolidation
o Investment of corporate funds in another corporation or business
o Dissolution of the corporation CLASSES OF SHARES
A. Common
No-par Par
Multiple par value Single par value
B. Preferred
Liquidation Dividends
Cumulative/non-cumulative Participating/non-participating
C. Redeemable
With floating coupon rate With guaranteed coupon rate
D. Convertibles E. Combo of B+C+D F. Founder’s shares G. Treasury Shares
3. Nature of Subscription Contract
3.1 Subscription Contract
Any contract for the acquisition of unissued stock in an existing or a corporation still to be formed shall be deemed a subscription contract, notwithstanding the fact that the parties may refer to it as a purchase or some other contract. (§60)
Transfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of fully paid shares by a stockholder to a third person is a sale. But it seems that assignment by a subscriber of his unpaid subscription would require that the requisites for valid release from subscription must be complied with
Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application
Not necessarily required to be in writing
Once subscription contract is perfected, SH becomes the debtor of the corporation. He is liable to pay any unpaid portion of the subscription. He can also be made personally liable to the creditors of the corporation to the extent of his unpaid subscription
General Rule: SH is not liable to pay interest on his unpaid subscription.
Exception: if required by the by-laws (§66) 3.2 Pre-incorporation subscription (§61)
Pre-incorporation subscription is a subscription for shares of stock of a corporation still to be formed.
It shall be irrevocable for a period of at least six (6) months from the date of subscription.
It can only be revoked, when:
o when all of the other subscribers consent to the revocation, or
o when the incorporation of the corporation fails to materialize within six (6) months or within a longer period as my be stipulated in the contract of subscription.
After the submission of the AOI to the SEC, no pre-incorporation subscription may be revoked.
4. Pre-emptive Right to Shares (Cf
§39, 102)
4.1 Definition of pre-emptive rights – option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corp before the same can be disposed of in
favor of the others; includes all issues and disposition of shares of any class
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 AOI or an amendment thereto
This is to prevent dilution in shareholding
Includes not only new shares in pursuance of an increase of capital stock but would cover the issue of previously unissued