Except as provided in the immediately preceding para-graph, the vote necessary to approve a particular corpo-rate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a)
P o w e r to classify s h a r e s .
The shares of stock corporations "may be divided into classes or series of shares, or both, any of which classes or series of shares may have rights, privileges or restrictions as may be stated in the articles of incorporation" (Sec. 6, par. not merely in the laws. (Title V.) Unless restricted by the law or the provision of its articles of incorporation (see 14, a corporation has unrestricted freedom to issue such classes or of shares as the prospects and needs of its business may require to attract investors. A "series" refers to a subdivision of a class of shares.
The primary classification of shares is common and pre-ferred, each of which may be divided into other (infra.) Thus, shares of stock may differ with respect to voting rights, dividend rights, and, in case of liquidation, rights to corporate There must be at least one class of stock, and by Section 6 (par. a corporation must have at least one class of stock with voting rights.
A corporation may issue only one class or kind of share.
W h e n classification of s h a r e s m a y b e m a d e .
(1) By the incorporators. — The classes and number of shares which a corporation shall issue are first determined by the incor-porators as stated in the articles of incorporation filed with the Securities and Exchange Commission.
no difference in "rights, privileges or restrictions" is provided for as quired by Section 6, as where "the only difference between the series is that only Series shall be initially offered to the public and sold through the exchanges while B-2 Series shall be similarly offered and sold at a later date as the board of directors may de-termine," the classification should not be allowed. (SEC Opinion, March
72 THE CORPORATION OF THE PHILIPPINES 6
(2) By the board of directors and the stockholders. — After the corporation comes into existence, they may be altered by the board of directors and the stockholders by amending the articles of incorporation pursuant to Section 16. If the amendment changes or restricts the rights of any class of shares, or authorizes preferences in any respect superior to those of outstanding shares of any class, any stockholder shall have the right to dissent and demand payment of the fair value of his shares. (Sec. 81.)
Classification to comply with constitutional or legal
(1) A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements (Sec. 7, par. such as those which prescribe the minimum percentage of capital stock ownership of Filipino citi-zens in corporations engaged in any business or activity reserved for Filipino citizens (see Sec. or set the maximum limits for stockholdings in corporations declared by law to be vested with public (see Sec. 140, par. 2.) Thus, the articles of in-corporation may classify shares of stock into Class "A" and Class
" B " and provide that Class "A" shares shall be held exclusively by Filipino citizens only, while Class shares, by either Filipi-no citizens or In such case, aliens or foreign corpora-tions cannot own "A" shares; otherwise, it would be tantamount to amending the articles of incorporation contrary to Section 16.
The articles, however, may permit aliens to buy "A" shares.
the general perception that the country is dependent on foreign investments, many local investors invest in "B" shares, thereby creating a bigger demand for said shares which are limited. The lopsided market has developed a psychological advantage and a dual pricing scheme in favor of "B" shares at the expense of shares. The re-sulting premium for "B" shares has been under attack from foreign fund managers who questioned the wisdom of paying for a higher price than the shares which are, with exemption on foreign ownership, the same security with the same risks and yield. In many cases, the local investors are the ones maintaining the relative strong performance of "B" shares in the absence of foreign investors.
Without the classification, local investors will invest more in a particular issue not because foreigners are investing but because of good potentials and foreigners can buy more shares so long as they do not exceed the equity limit prescribed by the Constitu-tion and existing laws. This will require strict monitoring to make sure that the limits on foreign ownership will always be observed.
o f listed firms t o remain classified a s and
"B" shares, while requiring firms still planning to go public to declassify their shares.
6 I. GENERAL PROVISIONS
Definitions and Classifications 73
(2) Corporations classify shares for reasons of expediency, primarily for monitoring purposes. The par value or number of one class of shares may be more than the others. The classification of common shares of stocks into Class "A" and Class " B " shares have never been obligatory. Some corporations which engage in business where there is a cap on foreign ownership classify their shares with the number of B shares corresponding to the maximum percentage of foreign ownership allowed so that they won't have to keep checking on their foreign shareholders.
Since the Constitution does not distinguish between common and preferred shares, the latter kind of shares should be included in the computation of the foreign ownership limit for domestic corporations. This gives more room for additional foreign invest-ments.
S h a r e s p r e s u m e d t o b e e q u a l in all respects.
The law provides that "Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be in all respects equal to every other share." (Sec. 6, par. 5.) This is the doctrine of equality of shares. It means that in the absence of any provision in the articles of incorporation and in the certificate of stock to the contrary, all stocks, regardless of their class nomenclature, enjoy the same rights and privileges and subject to the same
(1) Authority of the board of directors to classify others. — The board of directors has no authority to classify shares of stock where the articles of incorporations are silent on the matter.
Hence, a corporation cannot, without express authority in the articles of incorporation, and without amendment thereof, issue preferred shares with superior rights and privileges than other
the absence of special provisions, the holders of preferred stock in a corporation are in precisely the same position, both with respect to the corporation itself and with respect to the creditors of the as the holders of the common stock, except only that they are entitled to receive dividends on their shares, the extent guaranteed or agreed upon, before any dividend can be paid to the holders of common stock. (SEC Opinion, July citing Fletcher Sec. 5290.)
74 THE CORPORATION CODE THE PHILIPPINES 6
shares. (Sec. 6, pars. Subscription contracts covering such shares are (see Art. 1409[1,
(2) Consent of stockholders to change of terms and preferences of — The articles of incorporation or the charter of a corpora-tion being considered as a contract between the corporacorpora-tion and stockholders (see Sec. the corporation is under obligation to observe the provisions thereof and it cannot without the consent of the stockholders, change the terms and preferences of classes of shares of stocks provided therein. Thus, any special agreement between a particular subscriber and the corporation by which he is allowed to subscribe for shares upon different terms from other subscribers is invalid. (SEC Opinion, April citing
Rev. p. 459.)
(3) Right to vote of all classes of shares. — If one class of shares has the right to vote, all other classes are presumed to have the same voting power. Stockholders have one vote for each share held by them, which excludes fractional (see Sec. 52.) Section 6 (par. 5.) is construed to mean that unless denied in the articles of incorporation, all shares regardless of class with par value and without par value, common and preferred) enjoy all the rights of a stockholder. Hence, said provision cannot be invoked as a basis for a proposed amendment of the articles of incorporation whereby Class shares shall be entitled to, say, four votes per share, and Class " B " shares, to one vote per share.
(SEC Opinion, Aug.
But the right to vote may be denied by implication as where the articles of incorporation provides that "only holders of com-mon stock shall have the right to vote."
(4) Authority of board of directors to fix terms and conditions of preferred shares. — The terms and conditions of preferred shares of stock may be fixed by the board of directors only when autho-rized in the articles of incorporation. par. 2.) In such case, the preference enjoyed by the preferred stock will not appear in the articles of incorporation.
Capital stock a n d capital e x p l a i n e d.
(1) Capital stock is the amount fixed in the articles of
ration, to be subscribed and paid in or agreed to be paid in by the
Sec. 6 TITLE I. GENERAL PROVISIONS
Definitions and Classifications 75
stockholders of a corporation, in money, property, services, or other means at the organization of the corporation or
and upon which it is to conduct its business (see 2 Fletcher, p.
such contribution being made either directly through stock subscription (see Sec. 60.) or indirectly through the declaration of stock dividends. (18 Am. Jur. 2d 735.)
The capital stock is the money value assigned a corporation's issued shares, constituting generally the legal capital (infra.) of the corporation. (E.L. Kohler, op. p. 84.) It represents the equity of the stockholders in the corporate assets. It limits the maximum amount or number of each class of shares that may be issued by the corporation without formal amendment of the articles of (see Sec. 16.) It remains the same even though the actual value of the shares as determined by the assets of the corporations is diminished or increased, unaffected by profits and losses.
(a) Authorized capital stock refers to the amount of capital stock as specified in the articles of incorporation. It is synony-mous with capital stock where the shares of the corporation have par (see 14[8], 15 If the shares of stock have no par value, the corporation has no authorized capital stock, but it has capital stock the amount of which is not specified in the articles of incorporation as it cannot be determined until all the shares have been issued. (Ibid.) In this case, the two terms are not synonymous.
Additional shares may not be issued unless the articles of incorporation are amended by vote of the (see 16, 38.) But unissued authorized shares may be issued at a later date without amendment of the articles of incorpo-ration or approval of the stockholders.
(b) Subscribed capital stock is the amount of the capital stock subscribed, whether fully paid or not. It connotes an original subscription contract for the acquisition by a sub-scriber of unissued shares in a corporation (see 60, 61.) and would, therefore, preclude the acquisition of shares by reason of subsequent transfer from a stockholder or resale of treasury shares. (Sec. 9.)
76 THE CORPORATION CODE OF THE PHILIPPINES 6
(c) Outstanding capital stock is the portion of the capital stock which is issued and held by persons other than the cor-poration itself. The Code defines the term as "the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscrip-tion agreement), except treasury shares." (Sec. 137.) It is thus broader than "subscribed capital stock."
The terms "subscribed capital stock" and "issued" or
"outstanding" capital stock are used synonymously since subscribed capital stock, as distinguished from the certificate of stock, can be issued even if not fully paid. But while every subscribed share (assuming there is a binding subscription agreement) is "outstanding," an issued share may not have the status of outstanding shares. This is true in the case of treasury shares. (Sec. 9.)
(d) Paid-up capital stock is that portion of the subscribed or outstanding capital stock that is actually (see Sec. 13.) The term actual capital stock is also used to refer to the amount of the capital stock actually subscribed and paid for.
(e) Unissued capital stock is that portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends.
(f) Legal capital is the amount equal to the aggregate par value issued value of the outstanding capital stock.
When par value shares are issued above par, the premium or excess is not to be considered as part of the legal (see Sec. 43.) In the case of no par value shares, the entire consid-eration received forms part of legal capital and shall not be available for distribution as (see Sec. 6, par. 3.)
approval of SEC is not necessary in case of increase of paid-up capital thru payment of unpaid provided such payment consists in (see Sec. 62, par. 2.) If the increase is by way of issuance of unissued shares of the authorized capi-tal stock, the corporation, whose shares of stock are not registered under the Securities Regulation Code must secure from SEC prior exemption from registra-tion requirements under said (see thereof.) If it is in connection with an increase of the authorized capital stock, the corporation must comply with the
ments laid down under Section 38. (SEC Opinion, March
6 TITLE I. GENERAL PROVISIONS
Definitions and Classifications 77
Under varying State laws, the term "stated capital" is used instead legal capital to refer to "the portion of the amount contributed by purchasers of no par value stock that is credited to the capital account." (E.L. Kohler, op. 446.) ILLUSTRATION:
Suppose the articles of incorporation of corporation X provides that the authorized capital stock of said corporation is P1,000,000.00 divided into 10,000 shares of the par value of P100.00 per share. At its incorporation, only P250,000.00 of the authorized capital stock was subscribed.
Under Section at least 25% of the subscription is required to be paid; thus, only P62,500.00 was paid to the treasurer of the corporation.
Therefore, the authorized capital stock of corporation X is P1,000,000.00, the subscribed, outstanding, or issued capital stock is P250,000.00, the paid-up capital stock is P62,500.00, and the unissued capital stock is P750,000.00. The legal capital is also P250,000.00.
(2) Capital is used broadly to indicate the entire property or assets of the corporation. It includes the amount invested by the stockholders plus the undistributed earnings less losses and expenses. In the strict sense, the term refers to that portion of the net assets paid by the stockholders as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation. It includes all balances or install-ments due the corporation for shares of stock sold by it and all unpaid subscription for shares.
In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the
"trust fund" (see Sec. 60.) for the payment of the debts of the corporation, to which the creditors may look for satisfaction.
(National Telecommunications Commission vs. Court of Appeals, 311 508 see 41, 22.)
The term is also used synonymously with the words "capital stock," as meaning the amount subscribed and paid-in and upon
78 THE CORPORATION OF THE PHILIPPINES 6
which the corporation is to conduct its (11 Fletcher Corp., p. 15 [1986 and it is immaterial how the stock is classified, whether as common or preferred.
Capital stock and capital distinguished.
(1) Capital is the actual corporate property. It is, therefore, a concrete thing. Capital stock is an amount. It is, therefore, some-thing abstract.
(2) Capital fluctuates or varies from day to day according as there are profits or losses or appreciation or depreciation of corporate assets. Capital stock is an amount fixed in the articles of incorporation (where shares are with par value) and is unaffected by profits and losses. Thus, capital may be greater or lesser than the amount of the capital stock.
(3) It is said that capital belongs to the corporation and capital stock when issued belongs to the stockholders, and that capital may be either real or personal property but capital stock is always personal. (18 Am. Jur. 2d 736.)
The term "capital," however, is frequently used loosely in the sense of capital stock.
Capital stock a n d legal capital distinguished.
Like capital stock, legal capital is merely an amount and remains unchanged except as outstanding shares are increased or reduced in number or amount. But while capital stock limits the maximum amount or number of shares that may be issued without formal amendment of the articles of incorporation (see Sec. legal capital sets the amount of the corporate assets which for the protection of corporate creditors, may not be lawfully distributed to stockholders.
term "capital" denotes the sum total of the shares subscribed and paid by the stockholders or agreed to be paid irrespective of their nomenclature. It therefore, be legal for foreigners to own more than 40% of the common shares but not more than the 40% constitutional limit of the outstanding capital stock which would include both common and non-voting preferred shares. (SEC Opinion, Feb.
6 TITLE I. GENERAL PROVISIONS
Definitions and Classifications 79
ILLUSTRATION:
In the previous illustration, the payment of the subscription of 2,500 shares in the amount of P250,000.00 whether in cash or property or any consideration allowed by law (see Sec. 62.) constitutes the original capital of corporation X.
If the corporation makes a profit of P50,000.00, the capital would become P300,000.00. On the other hand, the capital would be reduced to P200,000.00 if there is a loss of P50,000.00.
Suppose the corporation borrows from a bank.
The capital of the corporation would then be P450,000.00 or P350,000.00, according as there are profits or losses.
In any case, the capital stock of P1,000,000.00 and the legal capital of P250,000.00 remain constant unless, of course, the articles of incorporation is amended, either increasing or decreasing the capital stock, or the number or amount of outstanding shares is increased by the issuance of more shares out of the unissued authorized shares or decreased by the acquisition of previously issued (see 9, 41.)
A decrease of the capital stock may also result in the reduction of legal (see Sec. 38.)
S t o c k or s h a r e of stock d e f i n e d .
Stock or share of stock is one of the units into which the capi-tal stock is divided. It represents the interest or right which the owner has —
(1) in the management of the corporation in which he takes part through his right to (if voting rights are permitted for that class of stock by the articles of incorporation);
(2) in a portion of the corporate earnings, if and when segre-gated in the form of dividends; and
(3) upon its dissolution and winding up, in the property and assets of the corporation remaining after the payment of corpo-rate debts and liabilities to (see 11 Fletcher, p. 18 [1971
stockholders' right of management consists primarily of their privilege in the election and removal of directors. 24, 28.)
80 THE CORPORATION OF THE PHILIPPINES 6
Capital stock and share of stock distinguished.
As distinguished from capital the term "stock" or "share
As distinguished from capital the term "stock" or "share