SEC 6.

Classification of Shares
WHAT
Primary classification of shares
a. Common
b. Preferred
Note: Shares of stock usually differ with
1. Voting rights
2. Dividend rights
3. Right to corporate assets
Rule: a corporation must have at least (1) one class of stock with voting rights.

WHEN
1. Incorporators – the classes and number of shares which a corporation shall issue are
first determined by the incorporators as stated in the articles of incorporation
2. BOD and stockholders – after the corporation comes into existence, it may be
altered by the BOD and the stockholders by amending the articles of incorporation
pursuant to SEC 16.

WHY
Reasons:
1. Compliance with constitutional and legal requirements
a. Such as those which prescribe the minimum percentage of capital stock
ownership of Filipino citizens in corporations
b. Set maximum limits for stockholdings in corporations declared by law to
be vested with public interest

2. Expediency, primarily for monitoring purposes – par value or number of one class of
shares may be more than the others, even if classifying common shares into Class A
or B have never been obligatory, it is to monitor foreign ownership so that they won’t
have to keep checking on their foreign shareholders.

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 enjoy equal rights and
privileges.
CLASSIFICATIONS
1. Capital Stock – is the amount fixed in the articles of incorporation, to be subscribed
and paid in by the shareholders of a corporation either in:
i. Money
ii. Property
iii. Labor or services

a. Authorized:
▪ Synonymous with capital stock where the shares of the
corporation have par value.
b. Subscribed
▪ Is the amount of the capital stock subscribed whether fully paid or
not.
c. Outstanding
▪ Is the portion of the capital stock which is issued and held by
persons other than the corporation itself.
d. Paid up
▪ Is the portion of the subscribed or outstanding capital stock that is
paid
e. Unissued
▪ Is the portion of the capital stock that is not issued or subscribed, it
does not vote nor draws dividends.

2. Legal capital – is the amount equal to the aggregate par value and/or issued value
of the outstanding capital stock. If the shares are issued above par value, the
premium or excess is not part of the legal capital.

CAPITAL VS CAPITAL STOCK

Capital is the actual corporate property, therefore a concrete thing
- Fluctuates or varies from day to day as there is profits or losses or appreciation or
depreciation
- Belongs to the corporation, may be real or personal property
Capital stock is an amount therefore something abstract
- Amount is fixed in the articles of incorporation and is unaffected by profits or
losses
- Belongs to the shareholder and is always personal
Stock or share of stock
- Is one of the units into which the capital stock is divided
- It represents the interest or right which the owner has:
▪ Right to vote (election and removal of directors)
▪ Portion of the corporate earnings in the form of dividends
▪ Remaining corporate assets

Nature of share of stock

a. Represents a distinct undivided share or interest in the common property of the
corporation
b. Constitute property distinct from the capital or tangible property of the corporation
and belong to the different owners. Incorporeal in nature but the shares are personal
property
c. Do not constitute indebtedness of the corporation to the shareholder
d. Only represents an undivided part of the corporation’s property.

Certificate of Stock – is a written acknowledgement by the corporation of the interest, right,

and participation of a person in the management, profits, and assets of the corporation.

CLASSES OF SHARES IN GENERAL:

A. Par value or no par value
B. Voting or non voting
C. Common or preferred (voting, convertible or redeemable)
a. Preferred as to assets
b. Preferred as to dividends
i. Cumulative or non cumulative
ii. Participating or non participating
D. Promotion share
E. Share in escrow
F. Convertible stock
G. Founders’ share
H. Redeemable share
I. Treasury share
Definitions:

• Par Value shares – is one with a specific money value fixed in the articles of
incorporation and appearing in the certificate of stock
a. To fix the minimum issue price of the shares assuring the creditors that the
corporation would receive a minimum amount for its stock

Advantages:
a. Par value shares are easily sold as the public is more attracted to buy this
kind of shares
b. There is greater protection to creditors
c. There is unlikelihood of sale of subsequently issued shares at a lower price
d. There is unlikelihood of the distribution of dividends that are only ostensible
profits
Disadvantages:
a. The subscribers are liable to corporate creditors for their unpaid subscriptions
b. The stated face value of the share is not an accurate criterion of its true value

• No Par value shares – is one without any stated or par value appearing on the face of
the certificate of stock.
a. It has always an issued value
b. Corporation may issue no par value shares only or together with par value shares
c. No par value stockholders have the same rights as holders of par value stock
d. Does not represent any proportionate interest in the capital stock measured by
value

Limitations:
e. Banks, trust companies, insurance companies and building and loan
associations shall not be permitted to issue
f. Preferred shares of stock may be issued only with a stated par value
g. Share issued without par shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to its
creditors
h. May not be issued for a consideration less than P5.00 per share
i. Entire consideration received by the corporation shall be treated as capital
and shall not be available for distribution as dividends

Advantages:
a. No par value shares are issued as fully paid and non-assessable
b. Their price is flexible
c. Low-priced stocks enjoy wider distribution
d. They tell no untruth concerning the value of the stockholder’s contribution
e. Stock dividends are more easily issued thereby simplifying the accounting
procedure
 Disadvantages:
a. They legalize large issues of stock for property
b. They conceal the money or property represented by the shares
c. They promote issuance of watered stock
d. There is lesser protection to creditors

• Voting Share – is share with right to vote

Rule: one share is one vote because representation in a corporation is
commensurate to extent of ownership

• Non Voting Share – is share without right to vote

a. Preferred stock
b. Redeemable share

• Common share – is stock which entitles the holder thereof to pro rata division of the
profits, if there are any, without any preference or advantage in that respect over
other stockholder or class of stockholder.

• Preferred Share – is stock which entitles the holder thereof to certain preferences
over the holders of common stock.
Consist:
1. Payment of dividends
2. Distribution of assets
Kinds of preferred shares
1. Preferred share as to assets – is share which gives the holder thereof
preference in the distribution of the assets of the corporation in case of
liquidation
2. Preferred share as to dividends – is share the holder of which is entitled to
receive dividends on said share at fixed rates before any dividends at all
are paid to common stockholders
a. Cumulative – is share which entitles the holder thereof not only to
the payment of current dividends but also to dividends in arrears.
b. Non cumulative – is share which entitles the holder thereof to the
payment of current dividends only in preference to common
stockholders.
c. Participating – is share which gives the holder thereof non only the
right to receive the stipulated dividends at the preferred rate but
also to participate with the holders of common shares in the
remaining profits after the common shares have been paid the
amount of the stipulated dividend.
d. Non participating – is share which entitles the holder thereof to
receive the stipulated preferred dividends and no more.
 e. Cumulative participating – is share which is a combination of the
cumulative share and participating share. Entitled to dividends in
arrears as well as participation with the remaining profits.
Limitations:
1. Preferred share are deprived of voting tights except on matters:
a. Amendment of the articles of incorporation
b. Adoption and amendment of by-laws
c. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property
d. Incurring, creating, or increasing bonded indebtedness
e. Increase or decrease in capital stock
f. Merger of consolidation of the corporation with another
corporation or other corporations
g. Investments of corporate funds in another corporation
h. Dissolution od the corporation
2. They must not be violative of the provisions of the ode
3. May be issued only with a stated par value
4. The BOD may fix the terms and conditions of preferred sharers when so
authorized by the articles of incorporation

• Promotion Share – is such share as I s issued to promoters or those in some way

interested in the company., for incorporating the company, or for services rendered
in launching or promoting the welfare of the company.

• Share in escrow – us share subject to an agreement by the virtue of which the share
is deposited by the grantor or his agent with a third person to be kept by depositary
until the performance of a certain condition or the happening of a certain event
contained in the agreement.
i. Is issuance of share is subjective to a suspensive condition

• Convertible Stock – is stock which is convertivle to changeable by the stockholder

from one class to another class. Such as:
a. Preferred to common

• Founders’ Share – shares issued to the organizers and promoters of a corporation in

consideration of some supposed right or property.

Sec 7. Founders’ shares may be given certain rights and privileges not
enjoyed by the owners of other stocks. There is an exclusive right to vote and
be voted for in the elections of directed if granted, and it must be for a limited
period not to exceed 5 years subject to the approval of SEC.

• Redeemable shares/callable shares – is share, usually preferred, which by its terms

is redeemable at a fixed date or at the option of either the issuing corporation or the
stockholder or both at a certain redemption price.
 • Treasury Shares – is share which has been lawfully issued by the corporation and
fully paid for and later reacquired by it either by purchase, redemption, donation,
forfeiture, or other lawful means.

a. Only surplus earnings may be used for the purchase of treasury

shares.
b. Treasury shares are not retired shares, they do not revert to the
unissued shares of the corporation but are regarded as property
acquired by the corporation which may be reissued or resold.
c. They do not have the status of an outstanding share
d. Not considered as part of earned or surplus profits, therefore not
distributable as dividends either in cash or in stock. However, it
may be distributed as property dividend.
e. No voting rights
f. Not entitled to dividends

Nature of par, book, and market value

1. Par – value indicated in the certificate of stock
2. Book – dividing the net value of the total corporate assets by the number of shares
issued or outstanding
3. Market – the price a willing seller would sell and a willing buyer would buy