12. Capital Stock and Shares of Stock

CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G. HOFILEA

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.



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



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.



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



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.



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.



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



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



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




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).



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).



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).



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).



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).



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.



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]).



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.



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




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


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).



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



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.



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).



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.



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.



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.


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



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

Documents

12. Capital Stock and Shares of Stock