 Purpose of classification:

1. To specify and define the rights and privileges of the stockholders.

2. For regulation and control of the issuance of sale of corporate securities for the protection
of purchasers and stockholders.
3. As a management control device.
4. To comply with statutory requirements.
5. To better insure return on investment.
6. For flexibility in price.

 Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.
Common and preferred shares

 Common stock – a stock which entitles its owner to an equal pro-rata division of profits, if
there be any, but without any preference or advantage in that respect over any other stockholder
or class of stockholders.

 Preferred stock – a stock that gives the holder a preference over the holder of common stocks
with respect to the payment of dividends and/or with respect to distribution of capital upon
liquidation.

 Limitations on preferred stock:

1. Must be issued with a stated par value; and
2. The preferences must be stated in the articles of incorporation and in the certificate of stock,
otherwise, each share shall be, in all respect, equal to every other share.
 The guarantee to preference as to dividends does not create a relation of debtor and creditor
between the corporation and the holders of such stock. The board has the discretion to determine
whether or not to declare dividends.
 Preferred shares are presumed to be non-participating.

 Participating preferred shares – the holders thereof are still given the right to participate
with the common stockholders in dividends beyond their stated preference.

 Cumulative preferred share – those that entitle the owner thereof to payment not only of
current dividends but also back dividends not previously paid whether or not, during the past
years, dividends were declared or paid.

 In absence of express stipulation, preferred shares are presumed to be non-cumulative.

 Non-cumulative preferred shares – those which grant the holders of such shares only to the
payment of current dividends but not back dividends, when and if dividends are paid, to the
extent agreed upon before any other stockholders are paid the same.

 Types of non-cumulative preferred shares:

1. Discretionary dividend type – gives the holder of such shares the right to have dividends paid
thereon in a particular year depending on the judgment or discretion of the board of directors.
2. Mandatory if earned type – impose a positive duty on directors to declare dividends every year
when profits are earned.
3. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in
dividends if there were profits earned during the previous years but dividends were not declared.

 Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote.

 Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal
footing with other shares.

Par and no par value shares

 Par value shares – those whose value are fixed in the articles of incorporation.
 Par value shares cannot be issued nor sold by the corporation at less than par.

 No par value shares – those whose issued price are not stated in the certificate of stock but
which may be fixed in the articles of incorporation, or by the board of directors when so
authorized by the said articles or by the by-laws, or in the absence thereof, by the stockholders
themselves.

 Limitations of no par value shares:

1. Such shares, once issued, are deemed fully paid and thus, non assessable;
2. The consideration for its issuance should not be less than P5.00;
3. The entire consideration for its issuance constitutes capital, hence, not available for dividend
declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public utilities and
building and loan associations.

 Advantages to the issuance of no par value shares:

1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock; and

 Non-voting shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.

 Except as provided in the penultimate paragraph of Sec. 6, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to st