University of the Cordilleras

College of Accountancy

RFBT2(Law on Corporations, Partnerships and Cooperatives)

LESSON no. 5

Module 1

CORPORATIONS

STOCKS AND STOCKHOLDERS

A stockholder is an investor in the corporation. The investment is in the form of the

acquisition of shares from the corporation. Such shares are acquired through subscription
contracts. The return on their investment is in the form of the dividends or through the
transfer of their shares.

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. (Sec. 59, R.A. 11232)

Pre-Incorporation Subscription – subscription of shares in a corporation that is yet to be

formed. Such subscriptions are irrevocable for a period of not less than six (6) months.

Exception:
a. When all other subscribers agree to the revocation; or
b. When the corporation fails to incorporate within the six months or within the time
stated in the Articles of Incorporation. (Sec. 60, R.A. 11232)

Consideration for Stocks

The consideration for stocks must not be lower than its par value or issued value and can
be paid in money/cash or 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;

 6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion;

7. Shares of stock in another corporation; and/or

8. Other generally accepted form of consideration.

The valuation of intangible property, such as copyrights or patents, shall be determined

by the shareholders and the board subject to approval from the SEC.

Promissory notes or the promise of future service cannot be used as consideration for
shares of stocks.

No-par value stocks are valued depending on what is stated in the Articles of
Incorporation, if not there in the bylaws, and if not found in either in a meeting of the
majority of the stockholders holding the outstanding capital stock of the corporation.
(Sec. 61, R.A. 11232)

Unpaid Subscriptions

The balance in unpaid subscriptions will be paid according to the following rules:
1. If it is stipulated in the subscription contract that the unpaid balance shall be paid
at a certain time and date, then that should govern;
2. If there is no stipulation in the subscription contract that the unpaid balance shall
be paid at a certain time and date or after such time and date the balance
remains to be unpaid, the board of directors may call for the payment of the
unpaid subscription specifying the time and date of payment;
3. If the balance on the subscription remains to be unpaid after thirty (30) days from
the time of call of the board for payment or thirty (30) days after the date of
payment as determined then such unpaid shares shall be declared as delinquent.
(Sec. 66, R.A. 11232)

Delinquent shares

No delinquent stock shall be voted for, be entitled to vote, or be represented at

any stockholder’s meeting, nor shall the holder thereof be entitled to any of the
rights of a stockholder except the right to dividends in accordance with the
provisions of this Code, until and unless payment is made by the holder of such
delinquent stock for the amount due on the subscription with accrued interest,
and the costs and expenses of advertisement, if any. (Sec. 70, R.A. 11232)

Interest on Delinquent Shares

The unpaid balances shall be subject to ordinary interest at the rate agreed upon
if there is a stipulation thereof in the subscription contract or at the call made by
the board of directors, if no stipulation is found in the subscription contract the
unpaid balance shall still be subject to interest at the legal rate of interest of 6%
per annum, accruing from the date specified in the subscription contract or at the
 call until the time of full payment, further the unpaid balance that is subject to
ordinary interest shall also be subject to legal interest. (Sec. 65 and 66, R.A. 11232)

Delinquency Sale

Stocks that have been declares as delinquent shall be subject to a delinquency sale
made by a resolution of the board of directors. Such resolution shall state the number
and value of shares that are delinquent and the date and time of sale which should not
be less than 30 days but not more than 60 days from the time the resolution was issued.

A notice of delinquency shall be sent to the delinquent shareholders personally or by

registered mail and such notice shall be published in a newspaper of general circulation
in the place where the principal location of the corporation is located.

The delinquent shareholder can still pay for the delinquent shares by paying for the
unpaid balance, interest, cost of advertisement and cost of sale before the published
date of the delinquency sale.

If the delinquent shareholders fail to pay for such amount before the date of the
delinquency sale, the shares representing the unpaid subscriptions shall be sold at a
public auction where the winning bid shall be that which offers to pat for the full amount
of the balance on the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction of a share.

If only a portion of the shares are bought at the auction sale the remaining delinquent
shares the remaining delinquent shares shall be credited to the delinquent shareholder.

In case that there are no bidders or no winning bids, or when the delinquent shareholder
does not pay for the delinquent shares, the corporation may repurchase said delinquent
shares by bidding in the delinquency sale and thereafter the shares shall be considered
as Treasury Shares where the corporation may then resell or reissue. (Sec. 67, R.A. 11232)

No certificate of stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of delinquent shares), if any is
due, has been paid (Sec. 63, R.A. 11232). The Certificate of stock signed by the president
or vice president, countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the bylaws (Sec. 63, R.A.
11232).

Shares of Stock as opposed to Stock Certificate

Shares of Stock Stock Certificate

Unit of Interest in a Corporation
Intangible Personal Property
May be issued by the corporation even if
the subscription is not fully paid.
Evidence of the holder’s ownership of the
stock and of his rights as a shareholder.
Tangible personal property
May be issued only if the subscription is
fully paid.
(Domingo, 2019)

Transfer of Shares

Being personal property, shares of stock as evidenced by stock certificates, may be

transferred by delivery of the certificate or certificates indorsed by the owner, his
attorney-in-fact, or any other person legally authorized to make the transfer. However,
no transfer will be effective as against the transferee and the corporation until the same
has been is recorded in the books of the corporation showing the names of the parties
to the transaction, the date of the transfer, the number of the certificate or certificates,
and the number of shares transferred. (Sec. 63, R.A. 11232)

Requisites for valid Transfer of Shares:

1. There must be delivery of the stock certificate;
2. The certificate must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and
3. To be valid against third parties, the transfer must be recorded in the books of
the corporation. (Teng v. SEC & Ping Lay, G.R. No. 184332, February 17, 2016)

Endorsement and Delivery of Shares of Stock

It is the delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original
owner to the transferee. In a sale of shares of stock, physical delivery of a stock certificate
is one of the essential requisites for the transfer of ownership of the stocks purchased. The
delivery contemplated in Section 63, however, pertains to the delivery of the certificate
of shares by the transferor to the transferee, that is, from the original stockholder named
in the certificate to the person or entity the stockholder was transferring the shares to,
whether by sale or some other valid form of absolute conveyance of ownership. Shares
of stock may be transferred by delivery to the transferee of the certificate properly
indorsed. Title may be vested in the transferee by the delivery of the duly indorsed
certificate of stock. (Ibid.)

Recording of Transfer on the Books of the Corporation

To be valid against third parties and the corporation, the transfer must be recorded or
registered in the books of corporation.

Registration of the transfer of the shares of stock in the books of the corporation allows
for the following benefits, including but not limited to: to enable the transferee to exercise
all the rights of a stockholder; to inform the corporation of any change in share ownership
so that it can ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder; and to avoid fictitious or fraudulent transfers. (Ibid.)

Rights and Liabilities of Shareholders

Pre-emptive Right
All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their respective shareholdings,
unless such right is denied by the articles of incorporation or an amendment thereto.
(Sec. 38, R.A. 11232)

Appraisal Right

Any stockholder of a corporation shall have the right to dissent and demand payment
of the fair value of the shares in the following instances:
a) In case an amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition
of all or substantially all of the corporate property and assets as provided in this
Code;
c) In case of merger or consolidation; and
d) In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation. (Sec. 80, R.A. 11232)

There need not be unrestricted retained earnings must exist at the time of the demand.
Even if there are no retained earnings at the time the demand is made if there are
retained earnings later, the fair value of such stocks must be paid. The only restriction is
that there must be sufficient funds to cover the creditors after the dissenting stockholder
is paid. No such allegations have been made by the defendant. (Turner v. Lorenzo
Shipping Corporation, G.R. No. 157479, November 24, 2010)

The appraisal right must be exercised through a written demand for payment of the
shares within 30 days from the date that the vote was taken to take such corporate
action. (Sec. 81, R.A. 11232) The Dissenting stockholder must surrender the stocks to the
corporation for notation on the back of the shares that they are dissenting shares. (Sec.
85, R.A. 11232) The written demand for payment cannot be withdrawn without the
consent of the corporation. (Sec. 83, R.A. 11232)

• If the appraisal right is not exercised within the period stated above then it is
deemed to be WAIVED by the stockholder.

• If the action dissented to by the stockholder has already been implemented, the
corporation must

Valuation of Shares

The value of the shares must be agreed upon by the stockholder and the corporation
within 60 days from the written demand. If they cannot agree on such value within the
period given, the shares shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another by the corporation,
and the third by the two (2) thus chosen. The findings of the majority of the appraisers
shall be final, and their award shall be paid by the corporation within thirty (30) days after
such award is made. (Ibid.)

The costs and expenses of appraisal shall be borne by the Corporation as general rule
and when an action in court was filed by the stockholder for the collection of the fair
value. (Sec. 84, R.A. 11232)

The Stockholder shall bear the costs and expenses when:

a. The fair value of the shares as determined by the appraisers is approximately the
same as the initial offer of the corporation; or
b. An action in court for the payment of the fair value of the shares is filed due to the
refusal of the stockholder to accept payment. (Ibid.)

Rights of Dissenting Stockholder

All rights arising out of the shares of a dissenting stockholder are SUSPENDED, except the
right to be paid the fair value thereof. However, if the dissenting stockholder is not paid
the award within 30 days therefrom, all rights which were suspended shall be immediately
restored thereafter. (Sec. 82, R.A. 11232)

In the following instances the right to be paid will be extinguished, all other rights shall be
restored, and if there are any accrued dividends from the time of demand it shall be paid
to the stockholder:
a. The demand is withdrawn with the consent of the corporation;
b. The proposed corporate action is abandoned;
c. The proposed corporate action is rescinded by the corporation;
d. The proposed corporate action is disapproved, if approval is necessary, by the
SEC; or
e. The SEC determines that the stockholder is not entitled to appraisal rights.

Transfer of Shares of Dissenting Stockholder

The shares of a dissenting stockholder that have been already notated may still be
transferred by the shareholder, and if consequently cancelled, the transferee shall be
shall have all the rights of a shareholder of the corporation and if there are any accrued
dividends from the time of demand it shall be paid to the transferee. (Sec. 85, R.A. 11232)

Other Rights and Liabilities of Stockholders

Management Rights
1. To Attend and vote in person or by proxy at stockholder’s meeting
2. To elect and remove directors
3. To approve certain corporate acts
 4. To adopt and amend or repeal the by-laws or adopt new by-laws
5. To compel the calling of the meetings
6. To enter into a voting trust agreement
7. To have the corporation voluntarily dissolved
Proprietary Rights
1. To transfer stock in the corporate book
2. To receive dividends when declared
3. To compel issuance of certificate of stock
4. To participate in the distribution of corporate assets upon dissolution
5. To exercise preemption in the issuance of new shares
Remedial Rights
1. To inspect corporate books
2. To recover stock unlawfully sold for delinquent payment of subscription
3. To be furnished with the most recent financial statements
4. To bring suits/court actions
5. To demand Payment in the exercise of appraisal right
(Domingo, 2019)

Liabilities
1. Liability for the unpaid subscription
2. Liability for interest on unpaid subscription
3. Liability to creditors of the corporation on the unpaid subscription
4. Liability for watered stocks
5. Liability for dividends unlawfully paid
(Ibid.)

Derivative Suit

A derivative suit is an action filed by stockholders to enforce a corporate action. It is an

exception to the general rule that the corporation’s power to sue is exercised only by the
board of directors or trustees.

Individual stockholders may be allowed to sue on behalf of the corporation whenever

the directors or officers of the corporation refuse to sue to vindicate the rights of the
corporation or are the ones to be sued and are in control of the corporation. It is allowed
when the directors or officers are guilty of breach of trust, and not of mere error of
judgment. (Villamor v. Umale, G.R. Nos. 172843 & 172881, September 24, 2014)

Three kinds of actions that a Stockholder/Stockholders may file:

1. Individual Suit – an action brought in court by an individual enforcing their own

individual rights.

Individual suits are filed when the cause of action belongs to the individual
stockholder personally, and not to the stockholders as a group or to the
corporation, e.g., denial of right to inspection and denial of dividends to a
stockholder. (Ibid.)
 2. Class/Representative suit - When the subject matter of the controversy is one of
common or general interest to many persons so numerous that it is impracticable
to join all as parties, a number of them which the court finds to be sufficiently
numerous and representative as to fully protect the interests of all concerned may
sue or defend for the benefit of all. Any party in interest shall have the right to
intervene to protect his individual interest. (Rule 3, Sec. 12, Rules of Court)

3. Derivative Suit - A derivative suit is an action brought by a stockholder on behalf

of the corporation to enforce corporate rights against the corporation’s
directors, officers or other insiders. (Ang v. Roberto and Ang, G.R. No. 201675,
June 19, 2013)

Individual suits are filed when the cause of action belongs to the individual stockholder
personally, and not to the stockholders as a group or to the corporation, e.g., denial of
right to inspection and denial of dividends to a stockholder. If the cause of action belongs
to a group of stockholders, such as when the rights violated belong to preferred
stockholders, a class or representative suit may be filed to protect the stockholders in the
group. (Florete et al. v. Florete et al., G.R. Nos. 174909 & 177275, January 20, 2016)

Requirements for a valid derivative suit:

1. The petitioner was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;

2. The petitioner exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;

3. No appraisal rights are available for the act or acts complained of;

4. The suit is not a nuisance or harassment suit; and

5. The action brought by the stockholder or member must be in the name of the
corporation or association. (Villamor v. Umale, G.R. Nos. 172843 & 172881,
September 24, 2014)

REFERENCES:

Republic Act 11232

Domingo, A. (2019). Business Laws and Regulations: partnership, Revised Corporation,

Cooperative Law, Laws, Principles, and Jurisprudence (2019 Edition). Itogon, Benguet:
Coaching for Results Publishing.
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