CORPORATION LAW

Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

CORPORATION LAW

Sources/Legend:
 Codal Provisions
 Atty. Divina’s Highlights of the Revised Corporation
Code (Zoom lecture and book)
 Atty. Momongan’s slides and lectures;
 Re-arranged, simplified lines from various notes and
lectures from 2019 thru 2021.

Contents

Overview of the Revisions...............................................1

Types of Business Organizations....................................1
(1) Sole Proprietorships....................................................1
(2) Partnerships...............................................................1
(3) Corporation................................................................1
Elements/Attributes of a Corporation...........................2
Types of Business Organizations, Distinguished:..........2
Advantages, Disadvantages of a Business Corporation 3
Theories on the Formation of a Corporation..................3
Concession Theory.......................................................3
Corporate Enterprise Theory.........................................3
Genossenchaft Theory..................................................3
Classes of Corporations....................................................3
Tests To Determine Nationality of Corporations..............4
Parties Involved in a Corporation..................................4
Commencement of the Juridical Personality of a Corporation 5
Articles of Incorporation (AI)........................................5
Contents of an AI (Sec. 14)..........................................5
Three levels of Capital Structure...................................5
Liabilities of a Corporation...............................................5
Veil of Corporate Fiction..................................................6
Piercing the Veil of Corporate Entity..................................6
Instances of Piercing The Veil...........................................6
Relationships of a Corporation...........................................7
Introduction to Shares...................................................7
Classification of Shares..................................................9

R.A. No. 11232

An Act Providing for the Revised Corporation
Code of the Philippines

TITLE I.
GENERAL PROVISIONS, DEFINITIONS AND
CLASSIFICATIONS

Section 1. Title of the Code.

This Code shall be known as the “Revised Corporation
Code of the Philippines”.

Overview of the Revisions

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CORPORATION LAW
Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

Approved by Congress on Feb 20, 2019 and became
effective Feb 23, 2019. The law promotes ease of doing
business. That is why you have provisions such as:
1. One-person corporation (OPC) that allows
persons to put up corporate entities yet limited
liability insofar as your contribution to the
corporation is concerned.
2. The rule on perpetual existence so there is no
need to keep on renewing the term of the
corporation.
3. There is also no need to extend the term of the
corporation until the board of directors or
stockholders decide to end it.
4. RCC also dispensed with the requirements for
subscription and payment upon incorporation.
a. As you all know in the OCC, when you
incorporate you have to subscribe to at
least 25% of the authorized capital
stock and pay ¼ of the subscription.
That is not true anymore.
You can now put up the corporation
without being bothered with the
payment of subscription and pay the
capital. It’s only when you increase your
authorized capital stock that you have to
comply with the subscription and
payment requirement.
5. RCC also adopted best practices on good
corporate governance. That is why the RCC
requires that the notice of the meeting. The
agenda of the stockholders’ meeting must
contain certain information all aimed at fostering
transparency.
6. It afforded greater protection to minority
stockholders by widening the list of books and
records required to be kept by the corporation
available for examination and expanded the
remedies in case of violation of stockholders’
right to inspection.
a. Under the OCC, you only have two
remedies when your right of inspection
is denied by the corporation:
i. (1) you can file a complaint for
violation of right of inspection
and
ii. (2) you can file a petition to
inspect the covered books.
Under the RRC, they added a
third remedy:
iii. You can now report to the SEC
the inaction or denial by the
corporation. And within five
days from that report, the SEC
must conduct summary
investigation and ordered the
corporation to allow you to
inspect and examine the books
of the corporation.
6. It codified internationally accepted practices and
norms on conducting businesses that is why you
have the use of technology. You can provide
notices of meetings electronically and you can
participate in meetings electronically based on
the guidelines of the SEC.
7. And lastly, it strengthened the powers of the
SEC so that it can exercise venue and
jurisdiction over corporations.
a. Later on, we’ll discuss acts that SEC
considers as criminal in nature. Under
the old code, it only has one offense
and that is the violation of the right of
inspection. Under the RCC, there are so
many acts which are considered criminal
offense.
INTRODUCTION:
TYPES OF BUSINESS ORGANIZATIONS
(1) Sole Proprietorships
A form of business organization with only one
proprietary owner. It is when a person personally or a
single individual conducts business under his own name
or under a business name.
(2) Partnerships
By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to
a common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form
a partnership for the exercise of a profession.
(3) Corporation
Section 2. Corporation Defined.
A corporation is an artificial being created by operation
of law, having the right of succession, and the powers,
attributes, and properties expressly authorized by law or
incidental to its existence.
ELEMENTS/ATTRIBUTES OF A CORPORATION:
1. It is an artificial being.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attributes and properties expressly
authorized by law or incident to its existence.
Attribute of a Corporation #1
1. A corporation is an artificial being
Under the law, it is granted a separate and distinct
personality from that of its owners or stockholders.
Consequence as a Juridical Person
1. Corporation is separate and distinct personality
2. Properties owned by the corporation is owned by
the corporation alone and not of stockholders.
3. Any liabilities of the corporation belong only to
the corporation and not to the stockholders.
Attribute of a Corporation #2
It is created by operation of law.

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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

Concession Theory - espouses that a corporation is an Unauthorized Act: Acts of officers done beyond the
artificial creature without any existence until it has powers granted to them.
received the imprimatur of the state acting according to
law, through the SEC. (Tayag vs. Benguet Consolidated, Example of Unauthorized Act: The board of directors
Inc., 26 SCRA 242) decided to borrow money from a bank to finance a
particular project. If expressly authorized or if within the
Attribute of a Corporation #3 by-laws, then the act of the board is valid. The act of
It enjoys the Right of Succession borrowing is also part of the power of the corporation.
However, if it was discovered that the resolution is only
If a stockholder or a member dies, withdraws, is signed by the president and not by the board, then it
insolvent or suffers incapacity, the corporation will still can be considered an unauthorized act.
continue and not be dissolved.
Types of Business Organizations, Distinguished:
Important: The heirs will succeed. Death of a Sole
stockholder does not dissolve the corporation. Even so, Propriet Partnership Corporation
in an extreme possibility that all of the stockholders will orship
die, still, there is a right of succession. The heirs of all Upon
the stockholders, themselves, become the stockholders. Comme Upon By Operation
agreement of
And they will now assume the rights of the stockholders. ncement selling of Law
the parties
New Law:
Succession takes effect at the moment of death. There One Person
is no gap as there is an automatic new stockholder. In No. of
At least 2 Corporation
fact, stockholdings are transferrable. If you own a share, Incorpo- 1
persons is allowed
you can transfer or assign it. rators
Old:At least 5
incorporators
Situation: A group of young, newly married persons Comme
decided to organize a corporation. After a year of ncement No From the
existence it was able to realize huge profits so they Upon
of Juridical date of the
wanted to celebrate and spend their Christmas outside execution of
Juridical Personalit Certificate of
the Philippines. They also decided to hold their board the contract
Persona y Incorporation
meeting aboard a cruise ship. So the stockholders went -lity
together with their wives. The children were left behind.
Stockholders
Unfortunately, the vessel got lost in a typhoon and all
are liable
passengers perished. They left behind their children with
only to the
an average of 3 years old. What happens to the
extent of
corporation?
their
A: The corporation remains to exist and will not be
investments
dissolved. The interests of the stockholders will be Liable
as
transferred to their respective heirs. This is the right of personally
Liable up represented
succession of a corporation. So during a stockholders and
to the by the shares
meeting, since the heirs are children, then they have to subsidiarily
Liability extent of subscribed by
be represented by their guardians or by the respective for
personal them.
executor or administrator as the case may be. partnership
properties
Attribute of a Corporation #4 debts to 3rd
Important:
It has the powers, attributes and properties persons
Veil of
expressly authorized by law or incident to its Corporate
existence. Fiction
applies only
1. Express powers to a
Those found in the Corporation Code, the Corporation
articles of incorporation, and other laws Power to do
regarding corporations. Absence of
business is
any
Managed vested in the
2. Incidental powers agreement,
Manage- by the Board of
Powers which are necessary to carry out the every partner
ment sole Directors
express powers or for furtherance of the is an agent of
proprietor (BOT) or
purpose of the corporation itself. the
Board of
partnership.
Trustees.
Important: The acts of the corporation shall be within it Needs Does not
powers. Otherwise, if it goes beyond its powers, it shall Transfer
Transferra consent of all need prior
be considered an ultra vires act. ability
ble thru the partners consent of
of
asset sale (delectus the
Interest
personae) stockholders
Ulta vires vs unauthorized acts Right of There is
Ultra Vires Act: Acts of the corporation which are beyond Successi No Right of Succession Right of
the powers of the corporation on Succession.

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CORPORATION LAW
Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

ADVANTAGES VIS-À-VIS DISADVANTAGES OF A Corporate Enterprise Theory

BUSINESS CORPORATION
Advantages
1. A corporation has a
legal capacity to act and
contract as a distinct unit
in its own name
2. There is continuity of
existence because the
right of succession;
3. its credit is
strengthened by its
continuity of existence
4. centralized
management in the board
of directors.
Disadvantages
1. A corporation has
complicated in formation
and management
2. High cost of formation
and operations
3. Its credit is weakened
by the limited liability
feature
4. No delectus personae,
lack of personal element.
5. greater degree of
governmental supervision
The corporation is not merely an artificial being, but
more of an aggregation of persons doing business.
Genossenchaft Theory
Treats a corporation as the reality of the group as a
social and legal entity, independent of the state of
recognition and concession. (Opposite of Concession,
but rejected by the latter)
CLASSES OF CORPORATION
Section 3. Classes of Corporations.
Corporations formed or organized under this Code may
be stock or nonstock corporations. Stock corporations
are those which have capital stock divided into shares
and are authorized to distribute to the holders of such
shares, dividends, or allotments of the surplus profits on
the basis of the shares held. All other corporations are
nonstock corporations.

5. its creation, 6. management and

management,
organization and
dissolution are
standardized as they are
governed under one 7. Stockholders have little
general incorporation
law.
6. limited liability
7. shareholders are not
the general agents of the
business
8. transferability of
shares
1. As to organizers
control are separated
a. public – by State only; and
from ownership.
b.private – by private persons alone or with the State.
2. As to functions
a. public – Created to govern a portion of the State. Its
voice in the conduct of
purpose is for the general good and welfare (Sec. 3, Act
the business.
1456).
b. private – usually for profitmaking
8. Higher income tax
c. Publicly-listed corporations- Private corporations
liability
whose stocks are listed in the PSE (Philippine Stock
The profits of the
Exchange).
corporation is taxed
twice: corporate income
Examples:
tax and income tax on
(1) San Miguel Corporation
the stockholders for the
(2) Philippine Long Distance Telephone Company
dividends.
(3) SM Prime Holdings, Inc.

d. Quasi-public corporations- Private corporations

THEORIES ON THE FORMATION OF A performing public functions. (Example: VECO)
CORPORATION e. Government-Owned and Controlled
Corporations- Private corporations created by the
Congress through a special charter and the majority of
Concession Theory
its shareholdings are owned by the government. A GOCC
aka Fiat Theory, Gov’t Paternity Theory; Franchise
has a personality of its own, separate and distinct from
Theory.
that of the government.
A corporation is not a person. The law treats it as
Examples:
though it were a person by process of legal fiction or by
(1) Development Bank of the Philippines
regarding it as an artificial person distinct and separate
(2) Philippine Ports Authority
from its stockholders (SHs).
(3) Philippine Amusement and Gaming Corporation
(4) Land Bank of the Philippines
Espouses that a corporation is an artificial creature
without any existence until it has received the
The test to determine whether a GOCC or private
imprimatur of the state acting according to law, through
corporation: if a corporation is created by its own
the SEC. (Tayag vs. Benguet Consolidated, Inc., 26
charter for the exercise of a public function, then GOCC;
SCRA 242)
if by incorporation under the general corporation law,
then private corporation (Baluyot vs. Holganza, 2000)
Franchises of Corporations:
1. Primary Franchise: the franchise to exist as a
3. As to governing law
corporation, granted by the RCC, except those
a. public – Special Laws; and
with special charters.
b. private – Law on Private Corporations
2. Secondary Franchise: special authority given to
a corporation to engage in a specialized
4. As to legal status
business.
a. De jure corporation – organized in accordance with
the requirements of law.

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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021
b. De facto corporation – organized with a colorable
compliance with the requirements of a valid law. Its
existence cannot be inquired collaterally. Such inquiry
may be made by the Solicitor General in a quo warranto
proceeding. (Sec. 20)
c. Corporation by estoppel – group of persons that
assumes to act as a corporation knowing it to be without
authority to do so, and enters into a transaction with a
third person on the strength of such appearance. It
cannot be permitted to deny its existence in an action
under said transaction. (Sec. 21) It is neither de jure nor
de facto.
d. Corporation by prescription – one which has
exercised corporate powers for an indefinite period
without interference on the part of the sovereign power,
e.g. Roman Catholic Church.
5. As to existence of shares of stock
a. Stock corporation – a corporation
(1) whose capital stock is divided into shares and
(2) which is authorized to distribute to shareholders
dividends or allotments of the surplus profits on the
basis of the shares held. (Sec. 3)
b. Non-stock corporation – does not issue stocks nor
distribute dividends to their members.
6. As to place of incorporation
a. Domestic corporation- a corporation formed,
organized, or existing under Philippine laws.
B. Foreign corporation – a corporation formed,
organized, or existing under any laws other than those
of the Philippines. (Sec. 123)
Tests To Determine Nationality Of Corporations
1. INCORPORATION TEST – determined by the state of
incorporation, regardless of the nationality of the
stockholders.
2. DOMICILE TEST – determined by the state where it is
domiciled. The domicile of a corporation is the place
fixed by the law creating or recognizing it; in the
absence thereof, it shall be understood to be the place
where its legal representation is established or where it
exercise its principal functions. (Art. 51, NCC)
3. CONTROL TEST – determined by the nationality of the
controlling stockholders or members. This test is applied
in times of war. Also known as the WARTIME TEST.
Corporations Created by Special Laws or Charters
Section 4. Corporations Created by Special Laws
or Charters. – Corporations created by special laws or
charters shall be governed primarily by the provisions of
the special law or charter creating or applicable to them,
supplemented by the provisions of this Code, insofar as
they are applicable.
CORPORATORS AND INCORPORATORS,
STOCKHOLDERS AND MEMBERS
Section 5. Corporators and Incorporators,
Stockholders and Members.
Corporators are those who compose a corporation,
whether as stockholders or shareholders in a stock
corporation or as members in a nonstock corporation.
Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories thereof.
PARTIES INVOLVED IN A CORPORATION
Incorporators - They are those mentioned in the
Articles of Incorporation as originally forming and
composing the corporation, having signed the Articles
and acknowledged the same before a notary public.
They have no powers beyond those vested in them by
the statute.
Note: Under the New Code, juridical persons can now
be incorporators. Under the Old Code, only natural
persons can be incorporators.
Corporators – those who compose a corporation,
whether as stockholders or members.
 Stockholders – owners of shares of stock in a
stock corporation
 Members – corporators of a corporation which
has no capital stock
Board of Directors or Trustees- The Board of
Directors or Board of Trustees are the group of people
who manage the corporation.
Promoter - A person who, acting alone or with others,
takes initiative in founding and organizing the business
or enterprise of the issuer and receives consideration
therefor.
He is an agent of the incorporators but not of the
corporation. Contracts by the promoter for and in behalf
of a proposed corporation generally bind only him,
subject to and to the extent of his representations, and
not the corporation, unless and until after these
contracts are ratified, expressly or impliedly, by its Board
of Directors/Trustees.
Thus:
GR: The promoter binds himself personally and assumes
the responsibility of looking to the proposed corporation
for reimbursement.
XPNs:
1. Express or implied agreement to the contrary
2. Novation, not merely adoption or ratification, of the
contract
Subscriber – persons who have agreed to take and pay
for original, unissued shares of a corporation formed or
to be formed.
Underwriter – a person who guarantees on a firm
commitment and/ or declared best effort basis the
distribution and sale of securities of any king by another
company. (Sec. 3 R.A. 8799)
Underwriters are mostly banking companies. As
distinguished from promoters who have no commitment
since they simply promote, underwriters have
commitment such that they guarantee the sale of stocks
and if these were not sold, they will be the ones who will
buy the shares. The underwriters therefore assume
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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021
liability. Example: The underwriters commit that 60% of
the stocks will be bought. If they cannot sell such
committed shares, they will guarantee that they will buy
such stocks themselves.
Founders- The founders are those who came about the
idea – they are the think tanks of the corporation.
As a matter of fact, they are given privilege. They are
entitled to an exclusive right to vote and be voted for,
but limited for 5 years only from date of inception of the
Corporation. NO ONE ELSE have the right to nominate
and elect. This is used to guide the infant corporation.
Q: What is the purpose of having the exclusive
right to vote and be voted for?
A: To ensure that the corporation will eventually succeed
because they are the ones who envisioned the
Corporation.
Note: Exclusive right of founder’s shares to be elected
in the BoD shall not be allowed if its exercise will violate
Anti-Dummy Law, Foreign Investments Act and other
pertinent laws.
COMMENCEMENT OF THE JURIDICAL
PERSONALITY OF A CORPORATION
A juridical entity comes into existence after having
complied with the requirements of the law. In the case
of a corporation, it is the issuance of the Certificate of
Incorporation by the SEC.
Articles of Incorporation (AI)
It is the document prepared by the persons establishing
a corporation and filed with the SEC containing the
matters required by the Code.
It is an essential requirement for the existence of a
corporation, even a de facto one.
Contents of an AI (Sec. 14)
1. name of corporation;
2. purpose/s, indicating the primary and secondary
purposes;
3. place of principal office;
4. term of existence;
5. names, citizenship and residences of incorporators;
6. number, names, citizenship and residences of
directors or trustees;
7. names, nationalities, and residences of the persons
who shall act as directors or trustees until the first
regular ones are elected and qualified;
8. capital structure of the corporation.
Three levels of capital structure:
(1) Authorized Capital Stock (ACS) – the
maximum amount that a corporation intends to
invest on a business
(2) Subscribed Capital Stock (SCS) – the number
of shares a stockholder intends to invest in the
corporation which he commits himself to pay – it
is the committed investment of the stockholder
(3) Paid-Up Capital – stock actually paid for by
the stockholders; it is the initial amount that the
stockholders are obliged to pay. This is the initial
amount that shall be used in starting the
corporation.
Q: If you are a new corporation, how much should be
subscribed?
A:
GR: The Revised Corporation Code does not require a
minimum subscribed capital stock. Reason: To attract
the formation of more business organizations.
XPN: However, the the 25% subscribed capital stock is
compulsory when there is an increase in the capital
stock. Thus, it requires that at least 25% must be
subscribed, and 25% must be paid-up.
Note: Under the Old Corporation Code, newly formed
corporations were required to have 25% of their ACS
subscribed, of this subscribed capital stock, 25% must
be paid-up (paid-up capital stock). However, this
requirement has now been removed under the Revised
Corporation Code.
Note: You do not have to pay the subscription
immediately. The balance or may be due or payable
later.
LIABILITIES OF A CORPORATION
Doctrine of Separate Personality of a Corporation
The liability of the corporation is separate and distinct
from that of the stockholders. Whatever their liabilities
are, remains to be their own.
Consequences:
1. Liability for acts or contracts
Obligations incurred by a corporation, acting through its
authorized agents are its sole liabilities.
2. Right to bring actions
Corporations may bring civil and criminal actions in its
own name in the same manner as natural persons. (Art.
46, Civil Code)
3. Right to acquire and possess property
Property conveyed to or acquired by the corporation is in
law the property of the corporation itself as a distinct
legal entity and not that of the stockholders or
members. (Art. 44(3), Civil Code)
4. Acquisition of court of jurisdiction
Service of summons may be made on the president,
general manager, corporate secretary, treasurer or in-
house counsel. (Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership
Remains unchanged and unaffected in its identity by
changes in its individual membership. (The Corporation
Code of the Philippines Annotated, Hector de Leon, 2002
ed.)
6. Entitlement to constitutional guaranties:
a. Due process
b. Equal protection of the law
c. Protection against unreasonable searches and seizures
(Stonehill vs. Diokno).
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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021
7. Liability for Crimes
GR: Since a corporation is a mere legal fiction, it cannot
be held liable for a crime committed by its officers, since
it does not have the essential element of malice; in such
case the responsible officers would be criminally liable.
(People vs. Tan Boon Kong, 54 Phil.607)
XPNs:
(1) When the crime is punishable by a special law;
Note: The special law must specify that it imposes
penalties on the officers of the corporation. To be able
to punish the officers, the law should specifically provide
that in case the corporation becomes liable, the officers
shall be directly punishable for the commission of the act
or violation, and that they will suffer the penalty of
imprisonment. Otherwise, they cannot be held liable.
(2) When the penalty imposed is a fine; A corporation
can be made criminally liable by being made to pay a
fine. Fines are not civil obligations, but are penalties.
(3) When the corporation violates the Anti-Money
Laundering Act (AMLA)
Penalties in the AMLA include:
a. Suspension
b. Revocation of license
c. Fine
8. Liability for torts
A corporation is liable whenever a tortuous act is
committed by an officer or agent under the express
direction or authority of the stockholders or members
acting as a body, or, generally, from the directors as the
governing body (PNB vs CA, 83 SCRA 237).
But corporation is not entitled to moral damages
because it has no feelings, no emotions, no senses.
(ABS-CBN vs. Court of Appeals)
Illustration:
If the assets of the corporation is worth Php 10M,
and their credit is worth Php 15M, is it enough to
pay the liabilities?
A: No. The creditors of that corporation cannot fully
recover the amount they lent to the corporation. Here,
they can only recover Php 10M. To recover the
remaining or unpaid Php 5M, they could go after the
properties in the name of the corporation. If the
properties are still not enough, they cannot go after the
stockholders. It is, as to the creditors, a “game over”
situation.
Unlike in Partnership, wherein if in case its assets are
not enough to pay its liabilities, then the creditors can
go after the personal assets of the partners because, as
a general rule, it does not enjoy the Limited Liability
Rule enjoyed by a corporation.
VEIL OF CORPORATE FICTION
A corporation has a separate and distinct personality
from its shareholders, officers, and directors. Once said
corporate fiction is created, the veil hides the
stockholders such that when a corporation incurs
liability, the stockholders are shielded from liability. In so
far as the law is concerned, we are only dealing with the
corporation.
PIERCING THE VEIL OF CORPORATE ENTITY
Requires the court to see through the protective shroud
which exempts its stockholders from liabilities that they
ordinarily would be subject to, or distinguishes a
corporation from a seemingly separate one, were it not
for the existing corporate fiction. (Lim vs. CA, 323 SCRA
102)
Rules on Piercing the Veil
Rules: (Philippine Corporate Law, Cesar Villanueva, 2001
ed.)
1. has a res judicata effect
2. to prevent wrong or fraud and not available for other
purposes
3. judicial prerogative only
4. must be with necessary and with factual basis
INSTANCES OF PIERCING THE VEIL
When the corporate veil: (Memory Aid: WAP-Fraud)
1. Is used to defend a crime or is used to justify a
Wrong.
2. Alter Ego cases
3. Defeats Public convenience;
4. Perpetuates Fraud;
Effect: Stockholders may now be liable if the
corporation:
1. Is used to defend a crime or is used to justify a
wrong.
2. In Alter Ego Cases – when the corporate entity is
merely a farce since the corporation is an alter ego,
business conduit or instrumentality of a person or
another corporation.
This is in relation to the Anti-Dummy Law.
Rules:
a. It applies because of the direct violation of a central
corporate law principle of separating ownership from
management.
b. If the stockholders do not respect the separate entity,
others cannot also be expected to be bound by the
separate juridical entity.
c. Applies even when there are no monetary claims
sought to be enforced.
3. It defeats public convenience;
Illustration: The current networks involved are Globe
and Smart. The stockholders of Globe and Smart agreed
to create another corporation, with the intention to
break the monopoly. By doing this, they now DEFEAT
PUBLIC CONVENIENCE or violate the law on Anti-trust.
Thus, pursuant to piercing the veil doctrine, the public
can now lift the veil protecting the corporations in this
illustration because they are defeating public
convenience.
4. Is used to perpetuate fraud;
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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

There must have been fraud or evil motive in the

affected transaction and the mere proof of control of the
corporation by itself would not authorize piercing.
The main action should seek for the enforcement of
pecuniary claims pertaining to the corporation against
corporate officers or stockholders.
Illustration:
Corporation A defrauds its creditors by transferring its
assets to Corporation B. When the sheriff came to attach
the property of Corporation A, the sheriff was shown a
document that the assets are sold to Corporation B.
3. Between the Corporation and the State
A corporation is a creation of the law. In other words, it
is a privilege granted by the State. The term extended or
granted by the state is subject to the condition that the
corporation will comply with the reportorial requirements
and behave within the bounds of the law. Otherwise, the
State may revoke or cancel the license. It may also
suspend and/or charge a fine.
4. Between the Corporation and the Public.
The public here includes the clients.

Q: As counsel for the defrauded creditors, how INTRODUCTION TO SHARES

will you pursue their cause?
A: I’ll further their cause by proving that the assets were
actually owned by Corporation A through establishing What are “shares”?
that the stockholders of Corporation A are the same Shares represent the interest or the investment of a
stockholders of Corporation B. stockholder in a corporation.

RELATIONSHIPS OF A CORPORATION Note: The terms “share” or “stock” may be used

interchangeably to refer to shares of stock in a
corporation.
1. Between the Corporation and the
Shareholders
The share/stock represents:
The relationship between the corporation and the
stockholders is well established in the Articles of
1. The interest or right of the stockholder in the
Incorporation (AOI). The AOI is considered as the
management of the corporation through the
contract or agreement of the Corporation and the
exercise of the voting right;
Stockholders. Since this is their agreement, the AOI
binds their relationship and regulates their relationship.
2. The interest of right of the stockholder in the
earnings of the corporation in the form of the
Illustration:
dividends to be distributed; and
The primary purpose of the corporation is to maintain,
operate, run and manage a funeral parlor.
3. The interest or right of the stockholder in the
residual assets of the corporation upon
Q: May the corporation maintain, operate and manage a
dissolution.
hospital instead?
A: It cannot, because their agreement is to engage in a
So, the share of stock represents your share in the
funeral business.
corporation in the form of dividends. Shares of stocks
are therefore an asset on the part of the shareholder. It
Q: What can the stockholder do?
is an intangible asset representing its right and interest
A: Even if the Board of Directors (BOD) want to have a
in the corporation.
hospital, they cannot immediately do so if the Articles of
Incorporation is not amended. The stockholders must
Example: you have 1M capital divided into 1M shares,
ratify it, and there should be an amendment of the
that means that your capital is divided into 1M parts and
Articles of Incorporation.
each share represents 1 part.
The moment the corporation intends to pursue
another business, the stockholder may ask for an
amendment of the Articles of Incorporation to
reflect such changes. Otherwise, the contract will be
violated. Amending the Articles of Incorporation is
basically amending the contract between the
shareholders and the corporation.

2. Among Shareholders themselves

This can be found in their by-laws.

Contents of the By-Laws of the Corporation

(1) How many boards and officers will be elected
(2) Term of office
(3) Functions and Powers
(4) Manner of election
(5) When will the stockholders and/or board meet
(6) Definition of various types of shares

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CLASSIFICATION OF SHARES for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.

Section 6. Classification of Shares. – The classification of A corporation may further classify its shares for the
shares, their corresponding privileges, or restrictions, purpose of ensuring compliance with constitutional or
and their stated par value, if any, must be indicated in legal requirements.
the articles of incorporation. Each share shall be equal in
all respects to every other share, except as otherwise Section 6 now includes “preneed companies” and “other
provided in the articles of incorporation and in the corporations authorized to obtain or access funds from
certificate of stock. the public, whether publicly listed or not” as among the
corporations which cannot issue no-par value shares.
The shares in stock corporations may divided into
classes or series of shares, or both. No share may be
deprived of voting rights except those classified and WHAT ARE THE CLASSIFICATIONS OF SHARES?
issued as “preferred” or “redeemable” shares, unless
otherwise provided in this Code: Provided, That there
A: Shares are classified as:
shall always be a class or series of shares with complete
voting rights.
(1) Common shares
(2) Preferred shares
Holders of nonvoting shares shall nevertheless be
(3) Par value shares
entitled to vote on the following matters:
(4) No-par value shares
(a) Amendment of the articles of incorporation;
(5) Founder’s shares
(b) Adoption and amendment of bylaws;
(6) Redeemable shares
(c) Sale, lease, exchange, mortgage, pledge, or other
(7) Treasury shares
disposition of all or substantially all of the corporate
(8) Convertible shares
property;
(9) Voting shares
(d) Incurring, creating, or increasing bonded
(10) Non-voting shares
indebtedness;
(e) Increase or decrease of authorized capital stock;
1;2:
(f) Merger or consolidation of the corporation with
another corporation or other corporations; COMMON VS. PREFERRED SHARES
(g) Investment of corporate funds in another corporation
or business in accordance with this Code; and
(h) Dissolution of the corporation. NOTE: Common and preferred shares are the 2 main
classes or forms of stock.
Except as provided in the immediately preceding
paragraph, the vote required under this Code to approve
a particular corporate act shall be deemed to refer only Common Shares Preferred Shares
to stocks with voting rights.
Definition
The shares or series of shares may or may not have a
par value: Provided, That banks, trust, insurance, and Entitles the holders to a
preneed companies, public utilities, building and loan Shares having certain
pro rata share in the
associations, and other corporations authorized to obtain rights and privileges not
profits of the corporation
or access funds from the public whether publicly listed available to holders of
without preference over
or not, shall not be permitted to issue no-par value common shares.
the other stockholders.
shares of stock.
Stocks which are given
Preferred shares of stock issued by a corporation may be preference by the issuing
given preference in the distribution of dividends and in corporation in:
the distribution of corporate assets in case of liquidation, (1) Distribution of
or such other preferences: Provided, That preferred dividends;
shares of stock may be issued only with a stated par (2) Distribution of the
value. The board of directors, where authorized in the assets of the corporation
articles of incorporation, may fix the terms and in case of liquidation; or
conditions of preferred shares of stock or any series (3) Such other
thereof: Provided, further, That such terms and preferences as may be
conditions shall be effective upon filing of a certificate stated in the AOI which
thereof with the Securities and Exchange Commission, do not violate the Code.
hereinafter referred to as the "Commission".
Stockholders’ Rights and their limitations
Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of
such shares shall not be liable to the corporation or to Stockholders in common Also has the same voting
its creditors in respect thereto: Provided, That no-par shares are given voting right, unless the right to
value shares must be issued for a consideration of at rights. vote is clearly withheld.
least Five pesos (₱5.00) per share: Provided, further,
That the entire consideration received by the corporation

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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

The most common type However: c. Sale, lease, exchange, mortgage,

of shares, which enjoy no 1. Preferred shares can pledge, or other disposition of all or
preference, but the only be issued with par substantially all of the corporate
owners thereof are value property;
entitled to: d. Incurring, creating, or increasing
2. Preferred shares must bonded indebtedness;
1. Management of be stated in the AOI and e. Increase or decrease of authorized
the corporation in the COS. capital stock;
(via the exclusive f. Merger or consolidation of the
right to vote); 3. The BOD may fix the corporation with another corporation or
and terms and conditions only other corporations;
when so authorized by g. Investment of corporate funds in
2. Equal pro-rata the AOI, and such terms another corporation or business in
division of profits and conditions shall be accordance with this Code; and
after preference. effective upon the filing h. Dissolution of the corporation.
of a certificate with the 4. Preference in the distribution of dividends;
SEC. 5. Preference in the distribution of assets, in case
Users/Holders of liquidation;
6. May be issued only with a stated par value.
Suitable for parties that Preference shares are a
wish to exert some useful investment tool for
control (voting), parties with the following KINDS OF PREFERRED SHARES
participate in earning objectives:
dividends, and growth of a. As to assets
the company 1. For investors who Share which the holder thereof has preference in the
don’t require distribution of the assets of the corporation in case of
voting rights and liquidation.
control of the
company;  It has been held that preferred stock, standing
2. For those opting alone, creates a preference only to dividends
for medium risks and not to assets in case of liquidation.
and returns.
Payment of Dividends b. As to dividends
Share the holder of which is entitled to receive dividends
Ordinary shareholders They receive dividends
on said share to the extent agreed upon before any
receive dividends after first in priority ahead of
dividends at all are paid to the holders of common stock.
preference shareholders common/ordinary
are paid. shareholders.
 The preference simply means that holders of
common stock may receive dividends only after
the satisfaction of the prior claims on dividends
of preferred stockholders. There is no guaranty
that it will receive any dividends. The
corporation is not bound to pay dividends unless
the BOD declare them.

The following are the kinds of preferred shares as

to dividends:
1. Cumulative Preferred Shares
Features of Common Shares 2. Non-Cumulative Preferred Share
1. Automatically has voting rights; 3. Participating Preferred Shares
2. May be issued without par value 4. Non-Participating Preferred Shares
3. If issued without pay value:
a. It must not be lass than P5.00
b. Share is fully paid; Cumulative vs. Non-cumulative Preferred Share
c. Holder of such share is not liable to the
corporation or its creditors;
Cumulative Non-Cumulative
d. Shares are treated as part of the
Share which entitles the Share which entitles the
corporation’s capital;
holders thereof not only holder thereof to the
e. No dividends.
to the payment of current payment of current
dividends but also to dividends only in
Features of Preferred Shares
dividends in arrears. preference to commons
1. Does not automatically have voting rights;
stockholders.
2. It may be deprived of voting rights under the
What are Dividends in
AOI;
arrears? means that for The stockholder does not
3. Even if non-voting share, may still vote on:
every year that the have any right for the
a. Amendment of the articles of
company did not declare years that the corporation
incorporation;
dividends, each did not declare dividends
b. Adoption and amendment of bylaws;
cumulative preferred but only entitled to the

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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

shareholder will have an dividends declared in the accordance with the presumption established in Section
interest in those current year. 6 par.5 that shares are equal in all respects unless
undeclared dividends. otherwise stated in the articles of incorporation and in
the certificate of stocks.
Example: In 2017 and 3;4
2018 the corporation did
not declare dividend. In PAR VALUE AND NO PAR VALUE SHARES
2019 it declared dividend.
In this case, the
stockholder shall be Par Value No Par Value
entitled to the dividends Definition
in 2017, 2018, and 2019. One with a specific It is one without any
money value fixed in the stated value appearing on
Illustration: 1,000 shares; Stated in the AOI that articles of incorporation the face of the certificate
these are preferred shares entitled to cumulative and appearing in the of stock; a stock which
dividends at Php5/share per year. 2017 and 2018, no certificate of stock. does not state show
dividends declared. 2019 – corporation declares much money it
dividends. represents.

Entitled to how much dividends? Requirement as to its issuance:

Cumulative: 2017, 2018 and 2019, entitled to 5000/yr 1. A par value share 1. Shares of stock issued
Non-cumulative: 5000 only for the current year. cannot be issued without par value shall be
below par but can be deemed fully paid and
Participating vs. Non-Participating Shares issued more than par; non-assessable and the
and holder of such shares
shall not be liable to the
Q: What are non-participating preferred shares?
2. the excess thereof corporation or to its
A: The stockholder does not have any right for the years
shall form part of the creditors in respect
that the corporation did not declare dividends but only
paid-in capital, but it thereto.
entitled to the dividends declared in the current year.
is accounted for as a  The consideration
premium or as an given shall be
This is the kind of Share which entitles the holder
additional paid-in considered as the
thereof to receive the stipulated preferred dividends and
capital. full amount of
no more. The balance, if any, is given entirely to the
the issue price,
common stocks.
there can be no
subscription
Q: Participating preferred shares?
receivable.
A: The stockholder is not only entitled to his preferred
shares but also entitled in the distribution with the
2. The shares without par
common shareholders.
value may not be issued
for a consideration less
It gives the holder the ff:
than the value of Five
 the right to receive the stipulated dividends at
pesos (P5.00) per share.
the preferred rate;
 This is the
 to participate with the holders of common
minimum
shares in the remaining profits pro rata (or in
consideration
the proportion stated in the articles of
for a non par
incorporation) after the common shares have
value share
been paid the amount of the stipulated dividend
at the same preferred rate.
3. The entire
consideration received by
IOW, after the holders get their share of the dividends,
the corporation for its
they still participate in the sharing of dividends of the
non-par value shares
common stockholders.
shall be treated as capital
and shall not be available
Cumulative-participating - Share which is a
for distribution as
combination of the cumulative share and participating
dividends. (2nd to the
share. This means that the holder is entitled not only to
last paragraph, RCC)
dividends in arrears but also, after receiving his
preferred share of dividends, to participation with the
holders of common stock in the remaining profits 5. FOUNDER’S SHARES

Doctrine of Equality of Shares SECTION 7 – FOUNDER’S SHARES

If the articles of incorporation are silent,
preferred shares are presumed to be non-
cumulative and non-participating. In the absence of
an agreement, express or implied, dividends should be
deemed noncumulative and non-participating in
Section 7. Founders’ Shares. – Founders’ shares may be
given certain rights and privileges not enjoyed by the
owners of other stock. 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

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from the date of incorporation: Provided, That such
exclusive right shall not be allowed if its exercise will
violate Commonwealth Act No. 108, otherwise known as
the "Anti-Dummy Law"; Republic Act No. 7042,
otherwise known as the "Foreign Investments Act of
1991"; and otherwise known as "Foreign Investments
Act of 1991"; and other pertinent laws.
GR: Common shares cannot be deprived the right to
vote.
XPN: In the case of Founder’s Shares – for a limited
period of 5 years, owners of founders’ shares shall have
an exclusive right to vote and be voted. (Sec. 7)
1. What are the founder’s shares?
These are shares classified as such under the Articles of
Incorporation (AOI) and given certain rights and
privileges, such as the right to vote for board of
directors.
Duration of the effectivity of right to vote; when
reckoned?
It is effective for a period of five years from a period of
incorporation. It used to be five years from the approval
of SEC and now it’s five years from period of
incorporation.
Effect: After the lapse of 5 years the founder’s shares
will be treated and given the same rights as other
common shareholders.
What does this mean? It means that if the founder’s
shares will be included in the amendment of the AOI,
then the five years shall be reckoned not from the
amendment but from the incorporation of the
corporation. Unlike before where it is five years from the
period of approval of SEC.
2. The Founder’s shares cannot be used to
circumvent the rules and laws on public utility
and the laws related to foreign investment.
Illustration:
Under the constitution, 60% of the capital of the public
utility must be owned by Filipinos. Let’s say, in
Corporation X, there are ten directors, and foreigners
hold 40% of the public utility corporation. That means
they can be represented in the board up to 40% of the
ten directors because the right to participate and the
right to be elected as directors is proportionate to their
shareholdings in the corporation. Let’s say we have 40%
of the equity of the public corporation, they can get four
seats.
Q: What if two foreigners have founder’s shares, can
those two foreigners get to be voted as directors
on top of the 40% vote for directors?
A: NO. It is not allowed. It will circumvent the anti-
dummy law and the Foreign Investment Act.
Second, we said if the privilege granted to the holders of
the founder’s shares is the right to vote and be voted
valid for five years, what about this one: Let’s say the
AOI provides that for every one share, the holder of the
founders’ shares gets 10 votes. One share, ten votes.
Q: Is that subject to the five-year limitation under the
SEC?
A: SEC said NO. The only right subject to the five-year
limitation is the right to vote and be voted as directors.
All other rights and privileges are not subject to the five
year limitation period. It depends on the term provided
in the AOI.
Another, let’s say the holder of founder’s shares is given
the right to receive dividends ahead of the right to
preferred shareholders. And it does not contain any
limit.
Q: So, can they get dividends ahead of the preferred or
common shareholders?
A: Yes. Again, the five year limit only applies to the right
to vote and be voted as directors.
Is the 1-10 voting rights ratio for founder’s
shares subject to a limited period not to exceed
five (5) years provided under Sec. 7 of RCC?
The 1-10 voting rights ratio for Founder’s shares is not
subject to the limited period not to exceed five (5) years
provided under Sec. 7 RCC since the provision only
applies to the exclusive right to vote and be voted for in
the election of directors. (Close Holding Corporation:
Founder’s Shares, SEC OGC Opinion No. 02-10 (January
15, 2010)
Situation:
ABC Corporation is a public utility corporation,
60% owned by Filipinos and 40% by Foreigners.
It has 10 directors as specified in the Articles of
Incorporation. X and Z are foreigners who hold
founders shares with the right to be voted as
directors of the corporation for a period of five
years.
Q: Can X and Y be voted as directors together
with 4 other foreigners whose collective shares
are enough to be assured of four board seats?
A: No, the right granted to founders’ shares cannot be
exercised if it will violate the Anti-Dummy Law.
Foreigners can be elected to the board of directors of
corporations engaged in partially nationalized activities
only in proportion to their actual foreign equity in the
corporation. Foreigners are allowed to own 40% of the
equity of a public utility corporation. Therefore, they can
only have four seats in the board of directors. The right
granted to X and Y to be voted as directors cannot be
exercised if it will result in the foreigners having more
than the number of seats allowed by law, in violation of
the Anti-Dummy Law and the Foreign Investment Act.
Thus, pursuant to Sec. 7, as revised:
1. The RCC made it clear that the exclusive rights
of the holders of the founders shares to vote
and be voted as directors shall not be allowed if
its exercise will violate Commonwealth Act No.
108 otherwise known as the Anti-Dummy Law,
RA 7042 or the Foreign Investments Act of 1991
and other pertinent laws
2. The five-year limitation is counted from date of
incorporation and not from SEC’s approval.
6. REDEEMABLE SHARES
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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021
Section 8. Redeemable Shares
Section 8. Redeemable Shares. - Redeemable shares
may be issued by the corporation when expressly
provided in the articles of incorporation. They are shares
which may be purchased by the corporation. They are
shares which may be purchased by the corporation from
the holders of such shares 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 stated in the
articles of incorporation and the certificate of stock
representing the shares, subject to rules and regulations
issued by the Commission.
What are redeemable shares?
They are shares which may be purchased by the
corporation.
They are shares which may be purchased by the
corporation from the holders of such shares 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
stated in the articles of incorporation and the certificate
of stock representing the shares, subject to rules and
regulations issued by the Commission.
What is the purpose of redeemable shares?
A: They are issued for the purpose of attracting capital.
What are the Rules in Redemption?
(1) Redeemable shares may be issued only when
expressly provided for in the AOI.
(2) The terms and conditions affecting said shares
must be stated both in the AOI and in the COS.
(3) Redeemable shares may be deprived of voting
rights in the AOI.
(4) The corporation is required to maintain a sinking
fund to answer for redemption price if the
corporation is required to redeem.
(5) The redeemable shares are deemed retired upon
redemption unless otherwise provided in the AOI.
(6) Unrestricted RE is not necessary before shares
can be redeemed, but there must be sufficient
assets to pay the creditors and to answer for
operations (Republic Planters Banks vs. Agana, G.R.
No. 51765, 1997)
(7) Redemption cannot be made if such redemption
will result in insolvency or inability of the corporation
to meet its obligations.
Who can redeem?
Corporation/ shareholder.
When to redeem?
It depends:
1. As a matter of right - when the redemption date
comes, the stockholder can compel redemption as a
matter of right;
2. As a matter of agreement - redemption date comes
and the corporation does not redeem and the
stockholders do not compel redemption, it is now a
matter of agreement between the two.
Illustration:
If the stockholder dili ganahan magpa redeem sa
iyahang shares , then the corporation and the
stockholder can just agree that we’ll just amend our AOI
to put in there that it’s no longer redeemable. But if the
redemption date arrives and the stockholders and
corporation does not say anything and after a few years
the stockholders now say “uy, redeem or shares”, it’s
now a matter on how the redemption date was
worded:
Ex: 1. “Redemption can take place anytime after March
30”
Effect: Redemption can still be done.
Ex. 2. “Redemption shall only be until March 30”
Effect: They can no longer redeem.
7. TREASURY SHARES
Sec. 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.
What are treasury shares?
This refers to the shares wherein it is fully issued and
paid but is subsequently reacquired by the corporation
who issued such shares through redemption, donation
or any other means.
8. CONVERTIBLE SHARES
What are convertible shares?
These are shares which are convertible or changeable by
the stockholder from one class to another class (such as
from preferred to common) at a certain price and within
a certain period.
2-Step Process of Converting Shares:
1. Provide Convertibility Feature in your AOI.
 If your articles do not provide for
Convertibility, you need to amend the
articles first to allow for the conversion.
2. Then WIPE OUT OR DELETE THE CONVERTIBLE
SHARE.
Example:
Preferred shares to be converted to Common
shares-
1. Amend your articles to provide for the Convertibility
Feature. (Preferred to Common)
2. Do a 2nd Amendment to wipe out the Convertible
preferred and they are now all Common Shares.
The two amendments can be filled simultaneously with
the SEC because they will not allow you to change
without going though conversion. So what you will do is
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Sources: Atty. Divina’s Lecture; “Commentaries on the Revised Corporation Code” by Villanueva; Lectures of ATTY. MOMONGAN, A.Y. 2020-2021

to apply for the convertibility feature and at the same without amendment of the AOI or approval of the
time you need to apply for the ACTUAL CONVERSION. shareholders.

Note: Generally it needs 2 amendments unless the (2) Subscribed Capital Stock
Convertibility feature is already there. You only need to It is the amount of capital stock subscribed (purchased),
amend for the actual conversion. whether fully paid or not.

 It connotes an original subscription contract for

the acquisition by a subscriber of unissued
shares in a corporation and would, therefore,
9. VOTING SHARES preclude the acquisition of shares by reason of
subsequent transfer from a stockholder or resale
10. NON-VOTING SHARES of treasury shares.

(3) Outstanding Capital Stock

A. Voting Share: a share with a right to vote;
B. Non-Voting Share: no right to vote.
Requirements for Issuance of Non-Voting Shares:
1. Only preferred or redeemable shares may be
made non-voting shares.
2. There must remain other shares with full voting
rights
Conditions for the issuance of non-voting shares
1. If the stock is originally issued as voting stock, it may
not thereafter be deprived of the right to vote without
the consent of the holder.
2. Under the Code, no share may be deprived of voting
rights except those classified and issued as "preferred"
or "redeemable" shares, unless otherwise provided in
the Code.
3.Where non-voting shares are provided for, the Code
requires that there shall always be a class or series of
shares which have complete voting rights.
4. Under Section 6 (par. 1), only preferred or
redeemable shares may be denied the right to vote. The
issuance of common stock with a feature that voting
rights thereof shall be exercised by a trustee violates the
rule that common shares cannot be deprived of voting
rights. The automatic assignment of voting rights in an
indirect violation of Section 6.
It is the portion of the capital stock which is issued and
held by persons other than the corporation itself.
(4) Paid-up Capital Stock
The portion of the subscribed/outstanding capital stock
that has been fully paid.
(5) Unissued Capital Stock
That portion of the capital stock that is not issued or
subscribed. It cannot vote, and draws no dividends.
(6) Legal Capital
It is the amount equal to the aggregate part value
and/or issued value of the outstanding capital stock.
When par value shares are issued above par, the share
premium or excess is not considered as a part of the
legal capital. In the case of no-par value shares, the
entire consideration received forms part of the legal
capital, and shall not be available for distribution as
dividends.
(7) Shareholder’s Equity (Subscribed Capital)
That portion of the capital of the corporation that is
composed of all the investments that the subscribers put
in (meaning, for stock corporations issuing par value
shares at a price above par, the share premium is
included). It is also known as the subscribed capital of
the corporation.

5. In case any amendment of the articles of

incorporation has the effect of changing or restricting
the rights of any stockholder, the latter shall have the
right to dissent and demand payment of the fair value of
his shares.

Note: The rule is that a corporation must always have

voting shares there can be no valid agreement where a
corporation has all non-voting share. Any agreement
that will take away the right to vote of all the shares of a
corporation is not valid.

OTHER IMPORTANT PRINCIPLES TO REMEMBER;

TYPES OF CAPITAL STOCK

(1) Authorized Capital Stock

Refers to the amount of capital stock as specified in the
AOI. Additional shares may not be issued unless the AOI
is amended by the vote of the stockholders. However,
unissued authorized shares may be issued at a later date

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