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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
CAPITAL STOCK & SHARES OF STOCK I. Power of the Corporation
to Issue Shares of Stock
The power to issue shares of stock in a corporation is lodged in
the board of directors and no stockholders meeting is required to
consider it because additional issuances of shares of stock does
not need approval of the stockholders what is only required is the
board resolution approving the additional issuance of shares.
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461
(2011).
Recall: Pre-emptive rights o The board has the discretion to
decide to issue new
shares, but the shares must be offered to the current
stockholders first in accordance with their pre-emptive rights,
UNLESS such has been denied from the stockholders in the articles
of incorporation.
II. Concept of Capital Stock (Section 137) Section 137.
Outstanding capital stock defined. The term "outstanding capital
stock", as used in this Code, means the total shares of stock
issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except
treasury shares. (n)
The outstanding capital stock is defined under Section 137 of
the Corporation Code as the total shares of stock issued to
subscribers or stockholders whether or not fully or partially paid
(as long as there is binding subscription agreement) except
treasury shares. Thus, quorum is based on the totality of the
shares which have been subscribed and issued, whether it be
founders shares or common shares. Lanuza v. Court of Appeals, 454
SCRA 54 (2005).
By express provision of Section 13 of Corporation Code, paid-up
capital is that portion of the authorized capital stock which has
been both subscribed and paidNot all funds or assets received by
the corporation can be considered paid-up capital, for this term
has a technical signification in Corporation Law. Such must form
part of the authorized capital stock of the corporation, subscribed
and then actually paid up. MSCI-NACUSIP v. National Wages and
Productivity Comm., 269 SCRA 173 (1997).
The definition of capital stock clearly shows that its composed
of two items, namely:1
o The portion which have been paid by the stockholders,
represented by the account "Paid-up Capital"; and
o The portion which is to be paid on the subscriptions,
represented by the account "Subscription Receivables."
The capital stock of a corporation cannot be subject to levy by
corporate creditors as to allow them to operate the affairs of the
corporation. The capital stock of the corporation represents the
interest and is the property of stockholders in the corporation,
who can only be deprived thereof in the manner provided by
law.2
1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store. 2 J.R.S. Business Corp. v. Imperial Insurance, Inc., 11 SCRA
634, 639 (1964), citing Therebee v. Baker, 35 N.E. Eq. [8 Stew.]
501, 505; In re Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited
in 6 WORDS AND PHRASES, 109.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
The term capital and other terms used to describe the capital
structure of a corporation are of universal acceptance, and their
usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the
capital that persons (subscribers or shareholders) have agreed to
take and pay for, which need not necessarily be, and can be more
than, the par value of the shares. In fine, it is the amount that
the corporation receives, inclusive of the premium if any, in
consideration of the original issuance of the shares. NTC v. Court
of Appeals, 311 SCRA 508 (1999).
An investment, being in the nature of equity, is an expenditure
to acquire property or other assets in order to produce revenue. It
is the placing of capital or laying out of money in a way intended
to secure income or profit from its employment. Unlike a deposit of
money or a loan that earns interest, cannot be assured of a
dividend or an interest on the amount invested, for dividends on
investments are granted only after profits or gains are generated.
President of PDIC v. Reyes, 460 SCRA 473 (2005).
Advances for Future Subscription is a receivable account and
does not form part of the capital stock of the corporation since it
does not correspond to any particular issuance of shares of stock.
Central Textile Mills v. National Wage and Productivity Comm., 260
SCRA 368 (1996). Consequently there is no liability for the payment
of the documentary stamp tax on such deposit for future
subscription for the reason that there is yet no subscription that
creates rights and obligations between the subscriber and the
corporation. Commissioner of Internal
Revenue v. First Express Pawnshop Co., Inc., 589 SCRA 253
(2009).
III. Classification of Shares (Section 6) Section 6.
Classification of shares. The shares of stock of stock corporations
may be divided into classes or series of shares, or both, any of
which classes or series of shares may have such rights, privileges
or restrictions as may be stated in the articles of incorporation:
Provided, That no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares,
unless otherwise provided in this Code: Provided, further, That
there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided
for in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to issue
no-par value shares of stock. Preferred shares of stock issued by
any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be
stated in the articles of incorporation which are not violative of
the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The board of
directors, where authorized in the articles of incorporation, may
fix the terms and conditions of preferred shares of stock or any
series thereof: Provided, That such terms and conditions shall be
effective
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
upon the filing of a certificate thereof with the Securities and
Exchange Commission. Shares of capital stock issued without par
value shall be deemed fully paid and non-assessable and the holder
of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par
value may not be issued for a consideration less than the value of
five (P5.00) pesos per share: Provided, further, That the 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. A corporation may, furthermore, classify
its shares for the purpose of insuring compliance with
constitutional or legal requirements. Except as otherwise provided
in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other
share. Where the articles of incorporation provide for non-voting
shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following
matters: 1. Amendment of the articles of incorporation; 2. Adoption
and amendment of by-laws; 3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness; 5.
Increase or decrease of capital stock; 6. Merger or consolidation
of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and 8. Dissolution of the
corporation. Except as provided in the immediately preceding
paragraph, the vote necessary to approve a particular corporate act
as provided in this Code shall be deemed to refer only to stocks
with voting rights.
It is not correct to say that holders of the preferred shares
lose all their voting rights, since Section 6 of the Corporation
Code provides for the situations where non-voting shares like
preferred shares are granted voting rights. Philippine Coconut
Producers Federation. v. Republic, 600 SCRA 102 (2009).
A. Policies on Classification of Shares:
The Corporation Code provides three (3) basic policies on share
classification:
1. Firstly, it expressly recognizes the freedom and power of a
corporation to classify shares.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
2. Secondly, the Code expressly adopts the presumption of
equality of the rights and features of shares when nothing is
expressly provided to the contrary.
o Although a corporation has the power to classify its shares of
stock, provide for preferences and other conditions, when nothing
has been provided for in the articles of incorporation, no
presumption should exist to distinguish one share from another.
o The Securities and Exchange Commission has ruled that the mere
classification of shares into preferred shares does not necessarily
deprive them of voting rights. In the absence of any restrictions
in the articles of incorporation or by-laws of the corporation,
preferred shares would be voting shares having the same rights as
common shares, since under Section 6 of the Corporation Code, all
shares shall equal rights except when otherwise provided in the
articles of incorporation and state in the certificate of stock.
Consequently, where the articles of incorporation and the
certificates of stock are silent on the matter of voting rights,
all issued shares, regardless of their class nomenclature, shall be
considered to have equal voting rights.1
3. Thirdly, the Code provides for voting rights for all types of
shares on matters it considers as fundamental measures. Under
1 SECURITIES AND EXCHANGE COMMISSION Opinion, 16 July 1996, XXX
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 22 (No. 2,
Dec. 1996).
Section 6, there shall always be a class or series of shares
which have complete voting rights.
B. Common Shares
A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits. Commissioner of
Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
C. Preferred Shares: Republic Planters Bank v. Agana, 269 SCRA 1
(1997):
Republic Planters Bank v. Agana
Facts: Robes-Francisco Realty & Development Corporation
(RFRDC) secured a loan from the Republic Planters Bank which were
partly in the form of cash and partly in the form of stock
certificates. The stock certificates were preferred shares in the
names of Adalia F. Robes and Carlos F. Robes who subsequently,
however, endorsed his shares in favor of Adalia. The terms for
certificates of stocks include the right to receive quarterly
dividends and such shares may be redeemed at the option of the
Corporation 2 years from date of issue. RFRDC and Robes proceeded
against the Bank and filed a Complaint anchored on their alleged
rights to collect dividends under the preferred shares in question
and to have petitioner redeem the same under the terms and
conditions of the stock certificates. Issue: Whether the bank can
be compelled to redeem the preferred
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
shares issued to RFRDC and Robes. Held: NO. While the stock
certificate does allow redemption, the option to do so was clearly
vested in the bank. The redemption therefore is clearly the type
known as "optional". Thus, except as otherwise provided in the
stock certificate, the redemption rests entirely with the
corporation and the stockholder is without right to either compel
or refuse the redemption of its stock. Furthermore, payment of
dividends to a stockholder is not a matter of right but a matter of
consensus as the Corporation Code prohibits the issuance of any
stock dividend without the prior approval of the stockholders.
Doctrine: A preferred share of stock, on one hand, is one which
entitles the holder thereof to certain preferences over the holders
of common stock. These are designed to induce persons to subscribe
for shares of a corporation. The most common forms may be
classified into two: (1) preferred shares as to assets; and (2)
preferred shares as to dividends. There is no guaranty, however,
that the share will receive any dividends. The present Corporation
Code provides that the board of directors of a stock corporation
may declare dividends only out of unrestricted retained earnings.
Thus, the declaration of dividends is dependent upon the
availability of surplus profit or unrestricted retained earnings,
as the case may be. Preferences granted to preferred stockholders,
moreover, do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right
of the former being always subordinate to the latter. Dividends are
thus payable only when there are profits earned by the corporation
and as a general rule, even if there are existing profits, the
board of directors has the discretion to determine whether or not
dividends are to be declared.
1. Participating and Non-participating1
a. Participating preferred shares that entitle the holders to
participate with the holders of common shares in the retained
earnings after the amount of stipulated dividend has been paid to
the preferred shares.
b. Non-participating preferred shares are those that entitle
holders of preferred shares only to the stipulated preferred
dividends and no more.
2. Cumulative and Non-cumulative2 a. Cumulative preferred shares
entitle the holders
thereof to payment not only of current dividends but also of
back dividends not previously paid, when and if dividends are
declared, to the extent agreed upon, before holders of common
shares are paid. The fundamental characteristic of cumulative stock
is that if the preferred dividend is not paid in full in any year,
whether or not earned, the deficiency must be made up before any
dividend may be paid on the common stock.
b. Non-cumulative preferred shares entitle the holders merely to
the payment of current dividends that are paid, to the extent
agreed upon before the holders of common shares are paid.
3. Par Value and No Par Value
1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store. 2 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
a. The Supreme Court characterized no-par value shares thus:
"[a] no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but
only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the
certificate itself that he is only an aliquot sharer in the assets
of the corporation. But this character of proportionate interest is
not hidden beneath a false appearance of a given sum of in money,
as in the case of par value shares. The capital stock of a
corporation issuing only no-par value shares is not set forth by a
stated amount of money, but instead is expressed to be divided into
a stated number of shares, such as 1,0000 shares. This indicates
that a shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to
the extent of 100/1,000 or 1/10. Thus, by removing the par value of
shares, the attention of persons interested in the financial
condition of a corporation is focused upon the value of assets and
the amount of its debts."1
Preferred stocks are those which entitle the shareholder to some
priority on dividends and asset distribution. CIR v. Court of
Appeals, 301 SCRA 152 (1999).
1 Delpher Trades Corp. v. Intermediate Appellate Court, 157 SCRA
349, 353-354 [1988], quoting directly from AGBAYANI, COMMENTARIES
AND JURISPRUDENCE ON THE COMMERCIAL LAWS OF THE PHILIPPINES, Vol.
III, 1980 Ed., p. 107).
o Preferred shares as to assets gives the holder thereof
preference in the distribution of the assets of the corporation in
case of liquidation.2
o Preferred shares as to dividends give the holder the right to
receive dividends on said shares to the extent agreed upon before
any dividends at all are paid to the holders of common stock.3
The contractual rights and preferences of an issue of preferred
stock must be provided for in the articles of incorporation.4
o Under Section 6 of the Corporation Code, preferred shares
issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which
are not violative of the provisions of the Corporation Code.5
o Under the policy of the Corporation Code that does not grant
benefits to a share unless expressly provided for in the articles
of incorporation, the naming of shares as "preferred" without
indicating what preferential rights they are accorded, would not
give such preferred shares
2 Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997).
3 Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997). 4
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store. 5 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
any right in addition to those enjoyed by common shares.1
In the absence of provisions in the articles of incorporation
denying voting rights to preferred shares, preferred shares have
the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived
of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely
investors in the corporation for income in the same manner as
bondholders. In fact, under the Corporation Code only preferred or
redeemable shares can be deprived of the right to vote. Common
shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid.
Gamboa v. Teves, 652 SCRA 690 (2011); affirmed in Heirs of Gamboa
v. Teves, 682 SCRA 397 (2012).
Gamboa v. Teves
Facts: Prime Holdings Inc. (PHI) owned 46% of the outstanding
capital stock of the Philippine Telecommunications Investment
Corporation (PTIC). PTIC owned 26% of the outstanding common shares
of PLDT. The shares held by PHI were sequestered by the PCGG and
declared to be ill-gotten wealth of the Marcos. This being the
case, the Inter-Agency Privatization Council (IPC) of the
Philippine Government sold the shares to Metro Pacific Assets
Holdings, Inc. (MPAH), an affiliate of First Pacific
1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store.
Company Limited (First Pacific), a Hong Kong-based investment
management and holding company and a shareholder of the Philippine
Long Distance Telephone Company (PLDT). (Note: First Pacific had a
right of first refusal in accordance with the Articles of
Incorporation of PTIC thats why the shares were sold to their
affiliate company). The petitioner questioned the sale on the
ground that it also involved an indirect sale of 12 million shares
(or about 6.3 percent of the outstanding common shares) of PLDT
owned by PTIC to First Pacific. With the this sale, First Pacifics
common shareholdings in PLDT increased from 30.7 percent to 37
percent, thereby increasing the total common shareholdings of
foreigners in PLDT to about 81.47%. This, according to the
petitioner, violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a
public utility to not more than 40%. Issue: Whether or not the term
capital in Section 11, Article XII of the Constitution refers to
the total common shares only, or to the total outstanding capital
stock (combined total of common and non-voting preferred shares) of
PLDT, a public utility. Held: YES. The Court partly granted the
petition and held that the term capital in Section 11, Article XII
of the Constitution refers only to shares of stock entitled to vote
in the election of directors of a public utility, i.e., to the
total common shares in PLDT. Holders of PLDT preferred shares are
explicitly denied of the right to vote in the election of
directors. On the other hand, holders of common shares are granted
the exclusive right to vote in the election of
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
directors. To summarize, (1) foreigners own 64.27% of the common
shares of PLDT, which class of shares exercises the sole right to
vote in the election of directors, and thus exercise control over
PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned by
Filipinos, have no voting rights; (4) preferred shares earn only
1/70 of the dividends that common shares earn; (5) preferred shares
have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and
common shares only 22.15%. This kind of ownership and control of a
public utility is a mockery of the Constitution. Doctrine:
Considering that common shares have voting rights which translate
to control, as opposed to preferred shares which usually have no
voting rights, the term capital in Section 11, Article XII of the
Constitution refers only to common shares. However, if the
preferred shares also have the right to vote in the election of
directors, then the term capital shall include such preferred
shares because the right to participate in the control or
management of the corporation is exercised through the right to
vote in the election of directors. In short, the term capital in
Section 11, Article XII of the Constitution refers only to shares
of stock that can vote in the election of directors.
Heirs of Gamboa v. Teves Facts: Contesting the ruling in Gamboa
v. Teves (2011), Pangilinan et al. claims that Securities and
Exchange Commission and DOJ have always interpreted capital to
refer to total outstanding shares of stock whether
voting or not, and claims that the term capital in section 11,
article XII of the constitution has long been settled and defined
to refer to the total outstanding shares of stock, whether voting
or non-voting. Issue: Whether or not the contention of Pangilinan
et al. is correct. Held: NO. The Supreme Court has never yet
interpreted the meaning of capital in the context of section 11,
article XII of the Constitution. For more than 75 years since the
1935 Constitution, the court has not interpreted or defined the
term capital found in various economic provisions of the 1935, 1973
and 1987 constitutions. There has never been a judicial precedent
interpreting the term capital in the 1935, 1973 and 1987
constitutions, until now. Hence, it is patently wrong and utterly
baseless to claim that the court in defining the term capital in
its 28 June 2011 decision modified, reversed, or set aside the
purported long-standing definition of the term capital, which
supposedly refers to the total outstanding shares of stock, whether
voting or non-voting. Doctrine: Capital refers only to those shares
which have voting rights, and not the total outstanding shares of
stock. D. Redeemable Shares (Section 8; Republic Planters Bank v.
Agana, 269 SCRA 1 [1997])
Section 8. Redeemable shares. Redeemable shares may be issued by
the corporation when expressly so provided in the articles of
incorporation. They 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
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
books of the corporation, and upon such other terms and
conditions as may be stated in the articles of incorporation, which
terms and conditions must also be stated in the certificate of
stock representing said shares.
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. Commissioner of
Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
o The Securities and Exchange Commission Rules Governing
Redeemable and Treasury Shares,1 expressly define "redeemable
shares" as shares of stock issued by a corporation which the
corporation can purchase or take up from their holders as expressly
provided for in its articles of incorporation and certificates of
stock representing said shares.
The express provisions of Section 8 which allows redemption
"regardless of the existence of unrestricted retained earnings"
1 Issued by the SECURITIES AND EXCHANGE COMMISSION on 26 April
1982. See SECURITIES AND EXCHANGE COMMISSION Rules and Regulations
(1986 ed.), at p. 256.
would now constitute a clear exception to the trust fund
doctrine.2
o Nevertheless, the consistency of policy of protecting
corporate creditors is still there in the sense that creditors will
not be misled since it is required that the redemption feature must
be stated both in the articles of incorporation and the
certificates of stock.
o The Rules provide that all corporations which have issued
redeemable shares with mandatory redemption features are required
to set up and maintain a sinking fund, which shall be deposited
with a trustee bank and not be invested in risky or speculative
ventures. The Rules also provide that redeemable shares may be
redeemed, regardless of the existence of unrestricted retained
earnings, "provided that the corporation has, after such
redemption, sufficient assets in its books to cover debts and
liabilities inclusive of capital stock."
o In addition, the Securities and Exchange Commission Rules
provide that redeemable shares reacquired shall be considered
retired and no longer issuable, unless otherwise provided in the
articles of incorporation of the redeeming corporation.
It has been held that when the certificates of stock recognizes
redemption, but the option to do so is clearly vested in the
corporation, the redemption is clearly the type known as optional
and rest entirely with the corporation and the
2 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
stockholder is without right to either compel or refuse the
redemption of its stock.1
E. Founder Shares (Section 7)2
Section 7. Founders' shares. Founders' shares classified as such
in the articles of incorporation may be given certain rights and
privileges not enjoyed by the owners of other stocks, provided that
where the exclusive right to vote and be voted for in the election
of directors is granted, it must be for a limited period not to
exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the
date of the aforesaid approval by the Securities and Exchange
Commission.
What Constitutes Founders Share? Perhaps the most obvious
feature of founders share is that they are issued basically to the
founders or initial organizers of the corporation, but nothing in
the language of Section 7 expressly so provides. We must presume
that what makes shares as founders shares would be that they are
given the exclusive rights not given to other stockholders, and
specially the right to vote and be voted for in the election of
directors. The existence of founders shares must necessarily
include the fact that there are other shares that do
1 Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997).
2 In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position
that when the articles of incorporation provide expressly a class
of shares to have the exclusive right to vote and be voted for into
the Board of Directors, that such shares would essentially be
founders share was raised but not resolved by the Court.
not enjoy such rights, and would necessarily include the
existence of common shares, which ordinarily would have the right
to vote and be voted into the board of directors. That would have
to be the rationale basis for the restriction provided in Section 7
that such exclusive rights shall not exceed five (5) years and
subject to the approval of the Securities and Exchange Commission.
It would then also be reasonable to conclude that a class of
shares, even when not given the nomenclature of founders share,
would necessarily fall within the provision of Section 7 (and
therefore be classified as founders share) whenever such class of
shares are given the exclusive right to vote and be voted for in
the election of directors, and necessarily such exclusive rights
shall have a limited period of five (5) years.3
Effect When Exclusivity Period Expires: The Securities and
Exchange Commission has opined that upon the expiration of the
period within which the founders shares can exercise their
exclusive right to vote and be voted for in the election of
directors, such exclusive right would only be transferred to common
shareholders who are supposed to exercise such right had there been
no founders share. Other classes of shares, such as preferred
shares, are not affected.4
3 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store. 4 SECURITIES AND EXCHANGE COMMISSION Opinion, 10 August
1995, XXX SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 5
(No. 1, June 1996); SECURITIES AND EXCHANGE COMMISSION Opinion, 27
September 1989, XXIV SECURITIES AND EXCHANGE COMMISSION QUARTERLY
BULLETIN 23 (No. 1, March 1990).
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
F. Treasury Shares (Section 9; Commissioner v. Manning, 66 SCRA
14 [1975]). Section 9. Treasury shares. Treasury shares are shares
of stock which have been issued and fully paid for, but
subsequently reacquired 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
board of directors.
A treasury share, which may be common or preferred, may be
used for a variety of corporate purposes, such as for a stock
bonus plan for management and employees, or for acquiring another
company. It may be held indefinitely, resold or retired. While held
in the companys treasury, the stock earns no dividends and has no
vote in company affairs. Philippine Coconut Producers Federation,
Inc. v. Republic, 600 SCRA 102 (2009).
The Securities and Exchange Commission has opined that treasury
shares have no effect on the stated capital of the corporation
unless and until they are cancelled or retired, in which event the
stated capital is reduced by the amount then representing the
shares. Treasury shares must be distinguished from the authorized
but unissued shares: the acquisition of treasury shares does not
reduce the number of issued shares or the amount of stated capital
and their sale does not increase
the number of issues shares or the amount of the stated
capital.1
Treasury shares may be declared as property dividend to be
issued out of the retained earnings previously used to support
their acquisition, provided that the amount of the said retained
earnings has not been subsequently impaired by losses.2 Any
declaration and issuance of treasury shares as property dividend
shall be disclosed and properly designated as property dividend in
the books of the corporation and in its financial statements.3
Rule on Treasury Shares for Banks No bank shall purchase or
acquire shares of its own capital stock or accept its own shares as
a security for a loan, except when authorized by the Monetary
Board; and in every case the stock so purchase or acquired shall,
within six (6) months from the time of its purchase or acquisition,
be sold or disposed of at a public or private sale.4
G. Stock Warrants
Under the Securities and Exchange Commission Amended Rules
Governing Warrants, 5 a "warrant" is defined as "a type of security
which entitles the holder the right to subscribe to, the
1 SECURITIES AND EXCHANGE COMMISSION Opinion, 18 March 1987,
Securities and Exchange Commission QUARTERLY BULLETIN (No. 1, March
1987), at pp. 19-20. 2 Securities and Exchange Commission. 5(3),
SECURITIES AND EXCHANGE COMMISSION Rules Governing Redeemable and
Treasury Shares (1982). 3 Securities and Exchange Commission. 5(3),
SECURITIES AND EXCHANGE COMMISSION Rules Governing Redeemable and
Treasury Shares (1982). 4 Securities and Exchange Commission. 10,
The General Banking Law of 2000 [RA 8791]. 5 XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
unissued capital stock of a corporation or to purchase issued
shares in the future, evidenced by a Warrant Certificate, whether
detachable or not, which may be sold or offered for sale to the
public but does not apply to a right granted under an Option Plan
duly approved by the [Securities and Exchange Commission] for the
benefit of employees, officers and/or directors of the issuing
corporation."1
The Securities and Exchange Commission Amended Rules now
recognize two (2) types of Issuers of warrants, namely:2
a. A duly registered domestic corporation which issues or
proposes to issue Subscription Warrants; or
b. A person or a group of persons who issue(s) or propose(s) to
issue Covered Warrants.
The Rules allow for two (2) types of warrants, namely:3 a.
"Subscription Warrant" which entitles the holder
thereof the right to subscribe to a pre-determined number of
shares out of the unissued capital stock of the Issuer;
b. "Covered Warrant" which entitles the holder thereof the right
to purchase from the Issuer a pre-determined number of existing
shares.
The Securities and Exchange Commission Amended Rules define a
warrant certificate as the certificate representing the right to a
warrant which may be detachable or not, duly issued by
1 Securities and Exchange Commission. 1(1), XXVIII SECURITIES
AND EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). 2
Securities and Exchange Commission. 1(11), XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
3Securities and Exchange Commission. 1(2), XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
the Issuer to the warrantholder.4 There are therefore two (2)
types of warrant certificates, namely:
a. Detachable warrant which may be sold, transferred or assigned
to any person by the warrantholder separate from, and independent
of, the corresponding Beneficiary Securities;5 and
b. Non-detachable warrant which cannot be sold, transferred or
assigned to any person by the warrantholder separate from, or
independent of the Beneficiary Securities.6
Warrantholders may exercise their right granted under a warrant
within the period approved by the Securities and Exchange
Commission which shall not be less than one (1) year, nor more than
five (5) years from the date of the issue of the warrants.7 An
Issuer of warrants must provide for a Warrants Registry Book
maintained by the warrants registrar independent
4Securities and Exchange Commission. 1(3), XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
5Securities and Exchange Commission. 1(8), XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). In
case of detachable warrants, the Covered Warrant Certificate must
state on its face that the Covered Warrant does NOT represent
shares of stock, but a mere right to purchase an indicated class or
type of stock owned by the Issuer under the terms and condition
stated therein. Securities and Exchange Commission. 7, XXVIII
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2,
June 1994). 6 Secs. 1(9) and 12, XXVIII SECURITIES AND EXCHANGE
COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). 7 Securities
and Exchange Commission. 1(12), XXVIII SECURITIES AND EXCHANGE
COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
of the Issuer.1 Any sale, transfer, or assignment of a warrant
must be duly recorded in the Warrants Registry Book, and unless
recorded in therein, the transfer of warrants shall not be binding
on the Issuer.2
H. Stock Options
The Securities and Exchange Commission has issued the Rules
Governing the Grants of Stock Options, which defines a stock option
as "a privilege granted to a party to subscribe to a certain
portion of the unissued capital stock of a corporation within a
specified period and under the terms and conditions of the grant,
exercisable by the grantee at any time within the period
granted."3
The Rules provide that no corporation shall grant any stock
option unless approval by the Securities and Exchange Commission is
first obtained. 4 Aside from a formal board resolution authorizing
the grant of the option, the Rules require that the application
with Securities and Exchange Commission should contain a detailed
statement as to the plan or scheme by which the option shall be
exercised.
No exercise of the right of the option shall be valid unless
accompanied by the payment of not less than 40% of the total
1 Securities and Exchange Commission. 11, XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). 2
Securities and Exchange Commission. 12, XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). 3
Securities and Exchange Commission. 1, Rules Governing the Grants
of Stock Options (1977). 4 Securities and Exchange Commission. 1,
Rules Governing the Grants of Stock Options (1977).
price of the shares so purchased, which payment shall be
properly receipted for by the corporate treasurer, except where the
grantee is an employee or officer who is not a director of the
corporation in which case only 25% of the total price shall be
required, or allow a planned payroll deduction scheme.5 If the
option shall be for compensation or payment of services already
rendered, then the initial payment shall not be required.6
The Rules also provide for the following guidelines: a. Stock
options may be granted on the basis of
proportionate interests of stockholders in the capital
stock;
b. Stock options granted to employees or officers who are not
members of the board may also be allowed after a review of the
scheme since it would be in consonance with the policy of the
government to widen corporate base and to distribute corporate
profits wider and more equitably;
c. Stock options granted to non-stockholders may be granted only
upon showing that the board has been duly authorized to grant same
by its charter or by a resolution of the stockholders owning at
least two-thirds (2/3) of the outstanding capital stock of the
corporation, both voting and non-voting;
5 Securities and Exchange Commission. 2(g), Rules Governing the
Grants of Stock Options (1997). 6 Securities and Exchange
Commission. 2(g), Rules Governing the Grants of Stock Options
(1997).
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
d. Options granted to directors, managing groups and corporate
officers must be approved in a stockholders' meeting by
stockholders owning at least two-thirds (2/3) of all the
outstanding capital stock, voting or non-voting;
e. The options must be exercised within a period of three (3)
years from the approval thereof by the Securities and Exchange
Commission, or upon extension thereof duly approved by the
Securities and Exchange Commission; and
f. No transfer of the right to an option shall be made without
the approval of the Securities and Exchange Commission.1
The Rules anticipates circumvention thereof through favorable
subscriptions which really are stock options. Therefore the Rules
provide that when a person has been allowed to subscribe to so many
shares as would make him a stockholder to at least 5% of the total
subscribed capital stock of the corporation at a price below the
current market price, even when the subscription is above par, such
subscription shall be considered and treated as stock option and
the subscriber must be required to tender payment thereof to the
corporation of at least 75% of the total price of the
subscription.2
Such subscriptions shall not also be transferable until full
payment thereof. If the shares are to be disposed of or sold,
the
1 Securities and Exchange Commission. 3, Rules Governing the
Grants of Stock Options (1997). 2 Securities and Exchange
Commission. 6, Rules Governing the Grants of Stock Options
(1997).
price should not be lower than par or less than 80% of the
market price at the time of the exercise, or if there is no
transaction at the time of exercise, then the last asked price
whichever is higher; provided that if the shares are not listed,
the 80% referred to shall be based on book value.3
I. Re-Classification of Shares
Reclassification of shares does not always bring any substantial
alteration in the subscribers proportional interest. But the
exchange is differentthere would be a shifting of the balance of
stock features like priority in dividend declarations or absence of
voting rights. Yet neither the reclassification nor exchange per se
yields income for tax purposes. . . In this case, the exchange of
shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscribers rights
and privilegeswhich is not a flow of wealth for tax purposes. The
issue of taxable dividend may arise only once a subscriber disposes
of his entire interests and not when there is still maintenance of
proprietary interest. CIR v. Court of Appeals, 301 SCRA 152
(1999).
The conversion of common shares into preferred shares, pursued
to the amendment of the SMC articles of incorporation, is a
legitimate exercise of corporate powers under the Corporation Code.
The conversion does not amount to SMC using its funds to effect
conversion, but would amount merely to a reconfiguration of said
(common) shares into preferred
3 Securities and Exchange Commission. 6, Rules Governing the
Grants of Stock Options (1997).
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
shares. Philippine Coconut Producers Federation, Inc. v.
Republic, 600 SCRA 102 (2009).
IV. Hybrid Securities: Government v. Phil. Sugar Estates, 38
Phil. 15 (1918).
Government v. Phil. Sugar Estates Facts: An action of quo
warrant was brought by the Attorney-General in behalf of the
Republic of the Philippines against Philippine Sugar for its
dissolution on the ground that the latter had misused its corporate
authority and had engaged in the business of buying and selling
real estate which was not part of its franchise.
Philippine Sugar entered into a contract with the Tayabas Land
Company for the purpose of engaging in the business of purchasing
lands along the right of way of the Manila Railroad Company through
the Province of Tayabas with a view to reselling the same to the
Manila Railroad Company at a profit.
Issue: Whether or not Philippine Sugar should be dissolved.
Held: YES. The judgment of the lower court should be modified. It
is hereby ordered and decreed that the franchise heretofore granted
to the defendant by which it was permitted to exist and do business
as a corporation in the Philippine Islands, be withdrawn and
annulled and that it be disallowed to do and to continue doing
business in the Philippine Islands, unless it shall within a period
of six months after final decision, liquidate, dissolve and
separate absolutely in every respect and in all of its relations,
complained of in the petition, with The
Tayabas Land Company, without any findings to costs.
Doctrine:
In Government v. Philippine Sugar Estates Co. 38 Phil. 15
(1918), the Supreme Court, in determining whether the arrangement
between two corporations was a contract of partnership or a loan
arrangement,1 noted the following features in the contract in
ruling that it is partnership (i.e., equity) arrangement:
a. There was no period fixed in the contract for the repayment
of the money, except that the first return from sale of the land
was to be devoted to the payment of the capital, and there was no
date fixed for such payment;
b. The entire amount of the "credit" was not to be turned over
at once but was to be used by the "borrowing" company as it was
needed;
c. The return on the capital was not by a fixed rate of interest
but 25% of the profits earned by the "borrowing" company in "todos
los negocios;"
d. The "lending" company agreed to pay 25% of all general
expenditures true and necessary that the "borrowing"
1 The issue arose from an alleged violation of then Section 13
of the old Corporation Law which provided that no corporation shall
be authorized to conduct the business of buying and selling real
estate or be permitted to hold or own real estate except such as
may reasonably necessary to enable it to carry out the purposes for
which it has been created; however, the section authorized a
corporation to loan funds upon real estate, security, and purchase
of real estate when necessary for the collection of loans, but it
shall dispose of real estate so obtained within five years after
receiving the title.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
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NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
company must make for the development of its business;
e. The consent of the "lending" company was necessary when the
"borrowing" company desired to sell the land at below an agreed
market price, but was not required if the selling price was over
the benchmark figure; and
f. The "lending" company acted as treasurer of the entire
enterprise.
The foregoing terms and conditions of the contract between the
two corporations indicated that although denominated as a loan
agreement, the arrangement between the companies was actually one
of partnership, with the amount "loaned" constituting actual equity
investment in the venture. The Court held: "It is difficult to
understand how this contract can be considered a loan. There was no
date fixed for the return of the money and there was no fixed
return to be made for the use of the money. The return was
dependent solely upon the profits of the business. It is possible
for the defendant to receive a return from the business even after
all of the `capital' has been returned. The capital was to be
returned as soon as the land was sold and apparentlythere were to
be no profits until this capital was returned. The defendant was
not to receive anything for the use of said sum until after the
capital had been fully repaid, which is not consistent with the
idea of loan. It is not impossible to provide that the capital be
repaid first but the usual method is to pay the interest first. .
."
The other practical consideration for investors in choosing
between equity or loan investments in a corporation boils down to
tax considerations: the interests returns on loans or credit
investments are taxable to the lending company, whereas dividend
returns on equity investments are subject to zero rate of income
tax.1
V. Quasi-Reorganization A. Reduction of Capital Stock (Section
38) Section 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. No corporation shall
increase or decrease its capital stock or incur, create or increase
any bonded indebtedness unless approved by a majority vote of the
board of directors and, at a stockholder's meeting duly called for
the purpose, two-thirds (2/3) of the outstanding capital stock
shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or diminution of the
capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's
meeting at which the proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation and
deposited to the addressee in the
1 Under the 1997 National Internal Revenue Code, although
dividends received by a domestic corporation from another domestic
corporation are exempt from income tax (Securities and Exchange
Commission. 27[D][4]), beginning 1 January 1998, dividends declared
from profits earned from that date to individuals are subject to a
final tax of 10% (Securities and Exchange Commission.
24[B][2]).
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
post office with postage prepaid, or served personally. A
certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman and
the secretary of the stockholders' meeting, setting forth: 1. That
the requirements of this section have been complied with; 2. The
amount of the increase or diminution of the capital stock; 3. If an
increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in cash or
property, or the amount of capital stock or number of shares of
no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
4. Any bonded indebtedness to be incurred, created or increased; 5.
The actual indebtedness of the corporation on the day of the
meeting; 6. The amount of stock represented at the meeting; and 7.
The vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission. One of
the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities
and Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of
the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is
equal to twenty-five (25%) percent of the subscription: Provided,
further, That no decrease of the capital stock shall be approved by
the Commission if its effect shall prejudice the rights of
corporate creditors. Non-stock corporations may incur or create
bonded indebtedness, or increase the same, with the approval by a
majority vote of the board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called for the purpose.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the authority
to determine the sufficiency of the terms thereof. (17a)
Reduction of capital stock cannot be employed to avoid the
corporations obligations under the Labor Code. Madrigal & Co.
v. Zamora, 151 SCRA 355 (1987).
B. Stock Splits
In a stock split, each of the issued and outstanding shares is
simply broken up into a greater number of shares, each representing
a proportionately smaller interest in the corporation. The usual
purpose of a stock split is to lower the price per share to a more
marketable price and thus increase the number of the potential
shareholders. They encourage investment.1
Under Accounting Standards, when the number of additional shares
issued as a stock dividend is so great that it has, or may
reasonably be expected to have, the effect of materially reducing
the share market value, the transaction partakes of the nature of a
stock split. An issuance of additional shares of 20% or more of the
number of previously outstanding shares is regarded as a stock
split.2
C. Stock Consolidations
1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store. 2 Statement of Financial Accounting Standards No. 18, par.
10.
On the other hand, in stock consolidations, new shares are
issued in replacement of old shares with a higher par or issued
value, without affecting the total value of the issued shares.
Stock consolidations are resorted to make each share have a higher
par or issued value and thereby make them more expensive in
acquiring and to bring the stock within higher end of the
market.3
VI. Shareholders Not Corporate Creditors. Garcia v. Lim Chu
Sing, 59 Phil. 562 (1934).
Garcia v. Lim Chu Sing Facts: Lim Cuan Sy delivered to
Mercantile Bank of China a promissory note guaranteed by Lim Chu
Sing as surety and also secured by a chattel mortgage. It also has
a stipulation that in case of default, the whole amount will become
due and demandable. Lim Cuan Sy failed to comply with his
obligation and so the bank required Lim Chu Sing as surety to
deliver the promissory note (P19, 605.17) with interest at 6% p.a.
Lim Chu Sing had been paying the monthly installments with interest
on thereon, leaving a balance of P9,105.17, after which he
defaulted in the payment of the installments which made the
promissory note due and demandable. The Mercantile Bank of China
then foreclosed the chattel mortgage and privately sold the
property without the knowledge of Lim Chu Sing. Lim Chu Sing is
also the owner of shares of stock at the
3 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
Mercantile Bank amounting to P10,000. Mercantile Bank seeks to
apply the amount of P10,000 representing the value of his shares of
stock to defendants indebtedness of P9,105.17. Issue: Whether or
not it is proper to compensate the indebtedness with the value of
the shares of stock Held: NO. The defendant-appellant Lim Chu Sing
not being a creditor of the Mercantile Bank of China, although the
latter is a creditor of the former, there is no sufficient ground
to justify a compensation. Doctrine: The shares of a banking
corporation do not constitute an indebtedness of the corporation to
the stockholder and, therefore, the latter is not a creditor of the
former for such shares. The indebtedness of a shareholder to a
banking corporation cannot be compensated with the amount of his
shares therein, there being no relation of creditor and debtor with
respect to such shares.
Shares of stock in a corporation constitute personal property of
the stockholder, which he can contract with as in any other form of
property, like assignment by way of disposition, or pledge by way
of encumbrance. Shares of stock therefore are properties and have
intrinsic pecuniary value to the stockholders.1
Shares of stock, however, do not represent proprietary rights of
stockholders to the assets or properties of the corporation.
Although shares of stock represent aliquot parts of the
1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store.
corporation's capital, or the right to share in the proceeds
when the remaining assets of the corporation are distributed
according to law and equity, its holders do not own any part of the
assets represented by the capital of the corporation; nor are the
stockholders entitled to the possession of any definite portion of
the corporation's assets or properties.2 Shares of stock do not
legally represent a proprietary claim of co-ownership or
tenancy-in-common in the assets and properties of the
corporation.3
The Supreme Court in Magsaysay-Labrador v. Court of Appeals,4
has characterized a stockholder's interest in corporate contracts,
transactions and properties, "if it exists at all, . . . is
indirect, contingent, remote, conjectural, consequential and
collateral. At the very least, their interest is purely inchoate,
or in sheer expectancy of a right in the management of the
corporation and to share in the profits thereof and in the
properties and assets thereof on dissolution, after payment of the
corporate debts and obligations."
VII. Subscription Contract (Sections. 60 and 72; overturned
Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]).
The subscription agreement underpins the relationship between
the stockholder and the corporation. The subscription
2 Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992). 3
Magsaysay-Labrador v. Court of Appeals, 180 SCRA 266, 271-272
(1989); Stockholders of F. Guanzon and Sons, Inc. v. Register of
Deeds of Manila, 6 SCRA 373 (1962); Pascual v. Del Sanz Orozco, 19
Phil. 82, 86 (1911). 4 180 SCRA 266, 271 (1989).
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
agreement therefore is a special contract in Corporate Law;
although it is governed by the Law on Contracts, specifically as a
species of sale contracts, a subscription agreement has special
features that go beyond such discipline, and delve into the very
heart of Corporate Law.
Section 60. Subscription contract. Any contract for the
acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that the
parties refer to it as a purchase or some other contract. (n)
Section 72. Rights of unpaid shares. Holders of subscribed shares
not fully paid which are not delinquent shall have all the rights
of a stockholder. (n)
It is subscription to shares of stock that creates the legal
relationship between the stockholder and the corporation; it is
subscription, and not the payment of such subscription, that grants
to the stockholder the statutory and common rights granted to
stockholders.1
A. When Shares Deemed Subscribed2
Therefore, a subscription agreement exists upon the meeting of
the minds of the corporation and the subscriber as to the number
and subscription value of shares. And since a
1 Fua Cun v. Summers, 44 Phil. 705 (1923). 2 Villanueva, C. L.,
& Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
subscription agreement shall exist upon meeting of the minds,
i.e., consent, it would necessarily mean that the covered shares
have therefore been issued by the corporation at that point in
time, since subscription and issuance as to a particular share of
stock happen exactly at same point in time, being merely opposite
sides of the same coin.
What can be drawn from the provisions of Sections 60, 63, and 72
is that the entering into any contract for the acquisition of
unissued stock, which shall be deemed as subscription agreement,
would constitute itself the tradition by which the subscriber
becomes a stockholder of the corporation, and through which he
becomes the owners of the shares of stock subscribed and exercise
acts of ownership, subject to the limiting provisions under the
Corporation Code, such as the lien which the corporation has over
not fully paid shares under the second paragraph of Section 63. In
other words, unlike the species sale, which constitutes merely a
title and not a mode by which ownership of the subject matter is
transferred, a subscription agreement constitutes the very mode by
which the covered shares are thereby issued and then owned by the
subscriber.
B. Purchase Agreement: Bayla v. Silang Traffic Co., Inc., 73
Phil. 557 (1942).
Bayla v. Silang Traffic Co., Inc.
Facts: Sofronio Bayla and other petitioners instituted this
action in the CFI of Cavite against Silang Traffic Corporation in
order to recover a sum
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
of money they paid to the corporation on account of shares of
stock they each agreed to take and pay for under the condition that
if the subscriber fails to pay any of the installments when due, or
if they are levied upon by the creditors of the said subscriber,
the shares were to revert to the seller and the payments already
made will also be forfeited to the seller, and that the latter may
take possession without court proceedings. The agreement was later
rescinded, although the Board of Directors claim that such
rescission is not applicable to Bayla and the others because their
failure to pay installments thereon had already caused their shares
and previous installments to be forfeited. Issue: Whether or not
the contract is a contract of subscription Held: NO. The said
agreement is entitled Agreement for Installment Sale of Shares in
the Silang Traffic Co, and while the purchaser is designated as the
subscriber and the corporation seller, the agreement was entered
into in 1935 long after the incorporation and organization of the
corporation which took place in 1927. The purchase was to be
payable in quarterly installments for five years. The lower court
failed to see the distinction between a subscription and a
purchase. Given that this is a sale, the rescission of such is
valid. Doctrine: A subscription, properly speaking, is the mutual
agreement of the subscribers to take and pay for the stock of a
corporation, while a purchase is an independent agreement between
the individual and the corporation to buy shares of stock from it
at stipulated price. NOTE: This case was decided under the old
corporation law thats why there were distinctions between a
subscription contract and a purchase
contract over unissued shares of stocks. Section 60 of the
present code removed said distinctions and presently provides all
agreements pertaining to the purchase of unissued shares would be
considered as subscription agreements.
Characteristics of Subscription Agreements. There can be a
subscription only with reference to shares of stock which have
never been issued, in the following cases:
o The original issuance from authorized capital stock at the
time of incorporation;
o The opening, during the life of the corporation, of the
portion of the original authorized capital stock previously
unissued; or
o The increase of authorized capital stock achieved through a
formal amendment of the articles of incorporation and registration
thereof with the Securities and Exchange Commission.
Any transaction covering issued shares of stock is not a
subscription agreement, and therefore is governed by the Law on
Sales on assignment.1
o Bayla v. Silang Traffic Co., Inc., which was decided under the
Corporation Law, laid down the distinctions between a subscription
contract and a purchase agreement. However, since the distinctions
between a subscription agreement and purchase of stock led to
various frauds being committed against stockholders
1 See Chapter XIV of the CLBs book LAW ON SALES (Rex Book Store,
1998 ed.), on the characteristics of assignment of intangibles,
like shares of stock, as a species of sale.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
and creditors of the corporation, Section 60 of the Corporation
Code removed such distinctions and now provides that all agreements
pertaining to the purchase of unissued shares of stock of a
corporation would be considered as subscription agreements and
governed by the principles of Corporate Law.
C. Pre-Incorporation Subscription (Section 61)
Section 61. Pre-incorporation subscription. A subscription for
shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date
of subscription, unless all of the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails
to materialize within said period or within a longer period as may
be stipulated in the contract of subscription: Provided, That no
pre-incorporation subscription may be revoked after the submission
of the articles of incorporation to the Securities and Exchange
Commission. (n)
Section 61 of the Corporation Code recognized that the
subscription agreement is a contract between the subscriber and the
corporation. Although the corporation is still non-existent since
it is still in the process of incorporation, it is still bound,
under the pre-incorporation agreement. The pre-
incorporation agreement is replaced by the promoter's contract,
although this is merely an expectancy.1
It also recognizes the contractual relationship among all the
subscribers. Whether it is a pre-incorporation agreement or an
ordinary subscription agreement, a subscription is essentially an
agreement among the stockholders. This is the second relationship
and the reason why it is provided in Section 61 that a subscriber
can only withdraw from the contract or agreement when there is
consent of all subscribers. Under this concept, a subscription
agreement is in a sense a contract among the several subscribers,
and no one of the subscribers can thus withdraw from the contract
without the consent of all the others and thereby diminish, without
the universal consent of all the others, the common fund in which
all have acquired an interest.2
When properties were assigned pursuant to a pre-incorporation
subscription agreement, but the corporation fails to issue the
covered shares, the return of such properties to the subscriber is
a direct consequence of rescission and does not amount to corporate
distribution of assets prior to dissolution. On Yong v. Tiu, 375
SCRA 614 (2002).
On Yong v. Tiu Facts: The Tiu family members are the owners of
First Landlink Asia
1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store. 2 SECURITIES AND EXCHANGE COMMISSION Opinion, 30 Oct. 1989,
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 50-52 (1
March 1990).
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
Development Corporation (FLADC). One of the corporations
projects is the construction of Masagana Citimall in Pasay City.
However, due to financial difficulties (they were indebted to PNB
for P190 million), the Tius feared that the construction would not
be finished. So to prevent the foreclosure of the mortgage on the
two lots where the mall was being built, they invited the Ongs to
invest in FLADC. The two parties entered into a Presubscription
Agreement whereby each of them would hold 1,000,000 shares each and
be entitled to nominate certain officers. The Tius contributed a
building and two lots, while the Ongs contributed P100M. Two years
later, the Tuis filed for rescission of the Presubscription
Agremement because the Ongs refused to issue them their shares of
stock and from assuming positions of VP and Treasurer to which they
were entitled to nominate. The Ongs contended that they could not
issue the new shares to the Tius because the latter did not pay the
capital gains tax and the documentary stamp tax of the lots. And
because of this, the Securities and Exchange Commission would not
approve the valuation of the property contribution of the Tius. The
Court of Appeals ordered liquidation of FLADC to enforce rescission
of the contract which was granted only to prevent squabbles and
numerous litigations between the parties. Issue: Whether or not the
order of the Court of Appeals for the return of the parties'
contribution (distribution of FLADC assets, in the words of the
Ongs) violates Section 122 of the Corporation Code. Held: NO. The
Court of Appeals clarified in its Resolution promulgated on August
17, 2000 that "in ordering liquidation, the Court does not
mean its dissolution as provided in the Corporation Code." The
prohibition, therefore, under Section 122 against distribution of
assets or properties of the corporation does not apply. The Court
of Appeals correctly confirmed the rescission of the
Pre-Subscription Agreement on the basis of Art. 1191 of the Civil
Code. Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him. As a legal consequence of rescission,
the order of the Court of Appeals to return the cash and property
contribution of the parties is based on law, hence, cannot be
considered an act of misappropriation. Doctrine: When properties
were assigned pursuant to a pre-incorporation agreement, but the
corporation fails to issue the covered shares, the return of such
properties to the subscriber is a direct consequence of rescission
and does not amount to corporate distribution of assets prior to
dissolution. NOTE: On 2003, The SC reversed itself on motion for
reconsideration by the Ongs which held: The rescission of the
Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is
not one of the instances when distribution of capital assets and
property of the corporation is allowed. Rescission will, in the
final analysis, result in the premature liquidation of the
corporation without the benefit of prior dissolution in accordance
with Sections 117, 118, 119 and 120 of the Corporation Code.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
D. Release from Subscription Obligation: Tan v. Sycip, 499 SCRA
216 (2006).1
Tan v. Sycip Facts: Grace Christian High School (GCHS) is a
nonstock, non-profit educational corporation with fifteen (15)
regular members, who also constitute the board of trustees. During
the annual members meeting held on April 6, 1998, there were only
eleven (11) living member-trustees, as four (4) had already died.
Out of the eleven, seven (7) attended the meeting through their
respective proxies. The meeting was convened and chaired by Atty.
Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis,
who argued that there was no quorum. In the meeting, Petitioners
Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted
to replace the four deceased member-trustees. Held: NO. Under
Section 52 of the Corporation Code, the majority of the members
representing the actual number of voting rights, not the number or
numerical constant that may originally be specified in the articles
of incorporation, constitutes the quorum. Under the By-Laws of
GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. The dead members who are
dropped from the membership roster in the manner and for the cause
provided for in the By-Laws of GCHS are not to be counted in
determining the requisite vote in corporate matters or the
requisite quorum for the annual members meeting. With 11
remaining
1 Velasco v. Poizat, 37 Phil. 802 (1918); PNB v. Bituloc
Sawmill, Inc., 23 SCRA 1366 (1968); National Exchange Co. v.
Dexter, 51 Phil. 601 (1928).
members, the quorum in the present case should be 6. Therefore,
there being a quorum, the annual members meeting, conducted with
six members present, was valid (as to other resolutions). HOWEVER,
the election of the four trustees cannot be legally upheld for the
obvious reason that it was held in an annual meeting of the members
(where a majority of the Board were present), not of the board of
trustees. We cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled
up by the remaining trustees who must sit as a board in order to
validly elect the new ones. Doctrine: Membership in and all rights
arising from a non-stock corporation are personal and
non-transferable, unless the articles of incorporation or the
bylaws of the corporation provide otherwise. The determination of
whether or not dead members are entitled to exercise their voting
rights (through their executor or administrator) depends on the
articles of incorporation or bylaws.
One of the implications of considering the subscription contract
to be one entered into among stockholders is that it is beyond the
powers of the board of directors to release the subscribers since
the consent of all subscribers is necessary.2 And even if the all
the subscribers would approve the release of a particular
subscriber it is still not possible if the creditors would be
prejudiced, under the trust fund doctrine.3
2 Velasco v. Poizat, 37 Phil. 802 (1918) 3 Villanueva, C. L.,
& Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
E. Condition of Payment Provided in By-laws. De Silva v. Aboitiz
& Co., 44 Phil. 755 (1923).
De Silva v. Aboitiz & Co.1 Facts: De Silva subscribed for
650 shares of stock. He has paid only 200 shares. Subsequently, the
Board of said corporation declared, by resolution, the unpaid
subscription to be due and demandable; and non-payment of which on
the date fixed would amount to a sale of said shares. De Silva
questioned said authority of the Board, as the corporation's
by-laws provided that the Board may deduct an amount from the net
profit to be applied to unpaid subscriptions. He contended that the
Board cannot prescribe another manner of collecting unpaid
subscriptions when one has already been provided in the by-laws.
Held: The Court ruled that the Board of Directors has absolute
discretion to choose which remedy it deems proper in order to
collect on the unpaid subscriptions. If it does not which to make
use of the authority given to it in the by-law, it still has two
other remedies. It may put up the unpaid stock for sale as provided
in Sections 38 to 48 of the Corporation Law or by action in court.
VIII. CONSIDERATION (Section 62): Section 62. Considering for
stocks.
1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book
Store.
Stocks shall not be issued for a consideration less than the par
or issued price thereof. Consideration for the issuance of stock
may be any or a combination of any two or more of the following: 1.
Actual cash paid to the corporation; 2. Property, tangible or
intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued; 3. Labor
performed for or services actually rendered to the corporation; 4.
Previously incurred indebtedness of the corporation; 5. Amounts
transferred from unrestricted retained earnings to stated capital;
and 6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion. Where the consideration is other
than actual cash, or consists of intangible property such as
patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject
to approval by the Securities and Exchange Commission. Shares of
stock shall not be issued in exchange for promissory notes or
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CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G.
HOFILEA
NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
future service. The same considerations provided for in this
section, insofar as they may be applicable, may be used for the
issuance of bonds by the corporation. The issued price of no-par
value shares may be fixed in the articles of incorporation or by
the board of directors pursuant to authority conferred upon it by
the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of
the outstanding capital stock at a meeting duly called for the
purpose. (5 and 16)
Atty. Hofilea while youre free to choose how you pay for
your shares, the company must always receive the value for the
shares they are parting with.
Stock dividends are in the nature of shares of stock, the
consideration for which is the amount of unrestricted retained
earnings converted into equity in the corporations books. Lincoln
Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).1
A. Cash2
In spite of the wordings of Section 62 of cash actually paid to
the corporation, it is not required that there be actual
payment
1 The basis for determining the documentary stamps due on stock
dividends declared would be their book value as indicated in the
latest audited financial statements of the corporation, and not the
par value thereof. Commissioner of Internal Revenue v. Lincoln
Phil. Life Insurance Co., 379 SCRA 423 (2002). 2 V