TITLE VII STOCKS AND STOCKHOLDERS SEC. 59. 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. NOTES 1. Acquisition of Share, A person may become & stockholder in a corporation by voluntarily acquiring share. Voluntary onerous acquisition of shares can be by (1) purchase of Q) through subscription. Purchase may be from the corporation itself or from other shareholders. a. The differences between the two modes of becoming a shareholder (subscription and purchase) are the following: (1) As to the time when they are entered into, subscription can be made before or after incorporation while purchase is, made only after incorporation; (0) If there is no agreement as to the time of paym: the subscriber in a subscription agreement need not pay ae sees there is a call, while sale is reciprocal and the purchaser nder a deed of absolute assignment or sale must fully pay the ‘he shares are transferred; purchase price at the time # be released from his obligation hile a stockholder who sells his f the purchaser to pay; and ent, (3) The subscriber cannot to pay the subscription price, wl shares can condone the obligation o' (4) The Statute of Frauds does not apply to subscription contracts while the same applies to purchase if the price is not less than P500.00. 697 Scanned with CamScanner1sPRUDENCE ON AND PORATION CODE ENTARIES 1 ORPORA’ 598 CONE REVISED PHILIPPINES ; / ° ose ownershi are registorgq he i Jo, only persons er yered stockholders of reg,,° bs Aare ot gl a Coe ee ey of his nee the stock and tra! San be recogni: The rights of a shareholder 477 oon wants 10 ame the books of the corpo F ing his owners, i ding by having ershi, re his stabs.) Consequently, a stockholder, he must fre corporate books. ree prseeee of shares recorded a ‘as a stockholder by mes - ion of rd ed. cannot a eee if his ownership is not recor’ / dividend coup : jon in the General Information Sheet (Gis) c. Mere inclusie” insufficient. The information in the qj submitted to the SE ate records. As between the Gig should be correlated wit ee ia pete? and the corporate records, i original subscribers, they become shareholders from Ue tints of the issuance of ut Certificate of Incorporation by the SEC. Even if the corposae jrelaty failed to reflect such fact in the Stock and Transfer Book, the original subscribers whose names appear in the Articles of Incorporation are already stockholders who are entitled to all the rights as such,’ e. One can likewise become the owner of shares through the other modes of acquiring ownership under the New Civil Code particularly succession and donation.® Transfer can also be gratuitous like in the case of transfer by donation. In assignment of shares, the transfer of ownership is through tradition or delivery. The applicable provisions on assignment are the provisions on assignment of incorporeal right (governed by the law on sales) under the New Civil Code.® Tradition or delivery is also the mode of acquiring ownership of shares in subscription of shares. However, as will be discussed hereunder, different rules are provided for under the RCCP on subscription contracts, which is the primary law on the matter. JURI 2. Subscription Contract, A fan . : * subscription contract is dsined oof chatract by which the'subseriber agrees to take a certain er of shares of the capital stock of a corporation, paying the 'SEC Opinion ai "bid. ‘Lao y, Lao, G.] lated September 1, 1995, R. No, 17 ‘Castillo, et al, S586, October 6, 2008, v. Balingh, SCRA 442, “ehasay, etal, GR, No, 160976, October 18, 2004, 440 "Article 712, New Civil i a il Cod “Article 1624, New Civil Code Scanned with CamScanneroe ate mS AND STOCKHOLDERS 599 onsideration nate oe expressly or impliedly promising to pay for the same.’ A subscription contract is also defined as any contract isition of unissued stocks j isti i ” the acquisit stocks in an existin; orporation still to be formed.® ee 2.01. Perfection of Subscription Contract. A subscription contract is formed by an offer by one of the parties, the corporation or the subscriber, as the case may be, and an acceptance of this offer by the other. There is a binding contract of subscription as soon as the offer to take shares made by a person toa corporation is accepted by the corporation, or as soon as the person to whom the offer is made accepts an offer of shares by a corporation. PROBLEM: Q@ QCollege, Inc. offered 200 shares to Ms. DC for a subscription price of 20,000.00. The offer is stated in a subscription letter form that states that initial payment should be made and the subsequent payment should be in accordance with the terms and conditions of the college. Later, Ms. DC, instead of sending the subscription form, sent a letter to the Board of Trustees of Q College which states: “Please enter my subscription to dalawang daan (200) shares of your capital stock with a par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng isda) pesos as my initial payment and the balance payable in accordance with law and the rules and regulations of the Quezon College. I hereby agree to shoulder the expenses connected with said shares of stock. I further submit myself to all lawful demands, decisions or directives of the Board of Q College and all its duly constituted officers or authorities (ang nasa itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking nalalaman).” No reply was sent by Q College to Ms. DC. Ms, DC died without having paid any portion of the subscription price. Thereafter, Q College presented a claim in Ms. DC's testate proceeding, for the collection of the sum of P20,000, representing the value of the subscription to the capital stock, Will the claim prosper? A: No, the claim will not prosper. There was no perfected subscription contract. Q College did not accept the term of payment suggested by Ms. DC during her lifetime. As Ms. DC's letter is at variance with the terms evidenced in the form, there was no absolute necessity on *Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., GR. Nos, 172045-46, June 16, 2009. ee Be hop C I azy, _Commissi al Revenue v. First Express Pawnshop Company, Inc., wai SEC Opinion aia Ataaet od. 1092, citing Fletcher, Section 1963; Section 69, P, *SEC Opinion dated March 7, 1994. Scanned with CamScannerREVISED © HILIPP 600 THE PHI . lad reoment to DC's offer ino, nverselYs gate the Q College under pe Ce immediately oon after she had causeq °° res! the part of the college to oe to bind the latter. Cony be unfair to! ey atl : i worm to pay te Pree of the mm relation between DC and Q Coit bel caught In other words, ete een DC and Q os Lo a the pre of acceptance by the © had only thus sepa aaa in the present case ¥ the g contract in the f DC. ‘ollege of the counter offer of a College 4d for express acceptance on ete past of th Q Coleg Indeed, the need fo erative, in view of the fact ath proposes becomes the more Peale of the subscription after she as harvested DC was to pay the v dition that was dependent upon De 8 sole wil fish. There was @ con nature, rendering the obligation ett tative in and, therefor, ove Code (Trillana v. Quezon College, Inc, CLR, No -5003, June 27, 1953). 2.02. Mode of Acquiring Ownership in Subscription. No formality is necessary for the perfection, validity or enforceability of the subscription contract. The subscriber becomes a shareholder when the contract takes effect (or when the corporation’s life commences in pre-incorporation subscription agreements). The title in subscription is the subscription contract and the mode is tradition or delivery. Title and mode that are required to transfer ownership are fused into one act of perfecting the contract.!° a. Tradition or delivery of the right as shareholder in effect occurs when the contract takes effect thereby also making the contract effective and enforceable. It is submitted that the rule eae the RCCP and the New Civil Code can be harmonized by are lering delivgty tn subscription contract as one that falls undet ncept of “quasi-tradition,” which ig delivery of an incorporeal right 4 ae ase Es pew Yendee of his rights.”" "The subscriber® is “used” takes effect because the Hens “used” the moment the contract it] +s Decause t] is always h the Acquisition of weer is al pice “Under the Th concurr cory of Mode i 2014 Bd,” FU and tte, gee Part iy ownership is not acquired with" "Article 1601, New Civitg 0 of Aquino, Reviewer on Civil Lat Scanned with CamScannerTIT! arr ‘LE VIL STOCKS AND STOCKHOLDERS eOL 3, Stock Options and . seowities that should be distinguish erate "There are hybrid These include stock options and warrants, a. a Saat 158 Privilege granted to a party to subscribe to a certair va ‘ of the unissued capital stock of a corporation within a specified period and under the terms and conditions of the grant, exercisable by the grantee at any time within the period granted." b, Awarrantis a type of security which enti the right to subscribe to the unissued capital anand aon or to purchase issued shares in the future, evidenced by a warrant certificate, whether detachable or not, which may be sold or offered for sale to the public but does not apply to a right granted under an option plan duly approved by the SEC for the benefit of the employees, officers and/or directors of the issuing corporation."? The period to subscribe is not less than one year but not more than five years. c, The different types of warrants and other related terms are defined in the regulations issued by the SEC: (1) Subscription warrants — it entitles the holder to the right to subscribe to a pre-determined number of shares out of the unissued capital stock of the issuer; (2) Covered warrant — it entitles the holder to the right to purchase from the Issuer a pre-determined number of shares that are already issued; (8) Warrant Certificate — means the certificate representing the right to a Warrant, which may be detachable or not, duly issued by the Issuer to the Warrant holder;* (4) Warrant Instrument — means the written document or deed containing the terms and conditions of the issue and exercise of a Warrant, which terms and conditions shall include: (a) the maximum underlying shares that can be purchased upon exercise; (b) the exercise period; and (c) such other terms and conditions as the SEC may require;"* Section 1, SEC Rules Governing the Grants of Stock Options, Section 1, SEC Amended Rules Governing Warrants. “Ibid. Amended Implementing Rules and Regul! Code (Amended IRR-SRO). ations of the Securities Regulations Scanned with CamScannerD JURIS PR CODE. aN TION 602 By on a Warrant Je Warrant — means a W rant 7 ty Detachable 7rd to any P : (6) .d or assign’ dent of, the correspon: be sold, transferee ast indepen = te from, holder separate fr Beneficiary Securit @) Nondetachable a be sold, transfer? ce vara arate from, the Warrant holder ee Beneficiary Securities; : cingi aie ch iary Securities — mé 1 a a ete ca and other i 38 entitlement in a Warrant; 2 De s the unissued shares derlying Shares — means a enor thet may be purchased by the Warrant holder upon the exercise of the right granted under the Warrant,» ties; Warrant — means a Warrant th i at, yr assigned to any Person d 2 and independent of, 2 4. Parties. The parties in a subscription contract are the subscriber and the corporation itself. A subscription contract necessarily involves the corporation as one of the contracting parties because the corporation owns the subject matter of the transaction— its shares of stock. It is not a mere contract between the subscribers even if the other subscribers entered into an agreement prior to incorporation.” Consequently, the subscribers are not real parties. in-interest in a case for rescission of the subscription contract of another subscriber because they are not Parties thereto. a. However, in a sense, the subscripti idle a contract among subscribers, Co ‘tion contract is also it nsequently, an origi bscriber cannot withdraw from the re-incorporation sub; Hee subse ‘hout the consent ofall shaveholde oo” Subscription agree b Th ‘pti agreements ty een gen ntact should be distinguished from . 4 8 88 such,23 form a co) : . to agreement oni mbodied in a i enter a Ee aa ‘Ween the partieg in the Joint Varo eaameth nture Agre ————— upra,: "Tid, "Di "Did, “Ong Yong, ‘ pid, EY. Tet at, | Nos, 1 oun 60, Reop, "144476 ana 144626, April 8, 2008 tcher 19, Section 1366, Scanned with CamScannerTITLE VI — stocks anp STOCKHOLDERS 608. ile the. terms and conditions may invol the number of shares each Party may o nominate, etc.), the corporation is not ap Ive the corporation (e., wn, the officers each can arty thereto. 4.01. Trustees and Nominees, The shares may be issued in trust for another person. The shares ma be regist. i ‘fone person but the beneficial LOGE eee Geos Act of the Philippines.” 5. _ Number of Shares Covered. A subscription agreement may cover one or more shares. But even if it covers two or more shares, the subscription agreement is considered an indivi: ible contract. A subscriber need not enter into only one subscription agreement if he will take two or more shares. He may subscribe to the capital stock under several subscription contracts. 6. Form. There is no law or rule in this jurisdiction requiring a form of subscription to capital stock as a requisite for its validity; hence, the same need not be in writing. A subscription, therefore, may arise out of mutual dealings between an individual and the corporation. If a person accepts a certificate of stock in his name or if he exercises. the rights of shareholders, he is liable for the unpaid subscription even if there was no express contract.2° 7. Kinds. A subscription contract maybe a pre-incorporation subscription contract or a post:incorporation subscription contract. As the terms imply, a pre-incorporation contract is one entered into before incorporation while a post-incorporation subscription contract is one entered into after the issuance of the certificate of incorporation. See Aurbach vy. Sanitary Wares Manufacturing Corp., G.R. Nos. 75875, 76961, and 75975-76, December 15, 1989; Ong Yong, a 10 “fal, supra i Guy .R, Nos. 189486 and 189699, September 5, 2012; Guy ¥. The Court Santana ‘Nos, 165849, 170185, 170186, 171066, and 176650, ecember 10, 2007. : se *Philippine Coconut Producers Federation, Inc. y. Republic of the Philippines, GR. Nos. 177857-68 and 178193, January 24, 2012. *'Section 3(d), Republic Act No. 7042. *°SEC Opinion dated October 24, 1963. SEC Opinion dated August 24, 1992. Scanned with CamScannerjor ase ES AND PORATION ‘CODE eENTARIED OO) 604 CONE REST PHILIPPINES och tain to shares ¢) iption contract ney) Stock ebptaringss aA suber ited Cae ey part of the or loti or those that im tease a Articles of. nae f capital stock. wanj be cop Subscription contact a condition precedent 9," d iptio: ae unconditional. A nie a subscription that ae ts ake ei conditions) en ubacriber ‘a stockholder, or co! hts unttg! so as to make SO ee tae condition is satisfiet Hl Seti xy a d Doctri e Trt th Ss ecxibed capital stock of the corporation is a trust fund fy e si i hich the creditors ha f debts of the corporation w1 si a te bok up to satisfy their credits. The corporation may not dissipate this and the creditors may sue stockholders directly fo, their unpaid subscription.® a. However, the Trust Fund Doctrine is not limited to the unpaid portion of the subscribed capital if the corporation is insolvent or if it cannot otherwise pay its obligation. The capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors.*? As the Supreme Court explained in one case: “We clarify that the Trust Fund Doctrine is not limited to reaching the stockholder’s unpaid y be conditiona} Payment of their subscription, of the stockholders, regardless of fll satisfaction of its claim." "” MAY be reached by the creditor in b. Money receiv ital i ed fi = capital is not covered by the beetiption of increase of authorized Trust Fund Doctrine prior to the Het anne “Lasky, 7, 1994, tevens, G.R, No, 4647, Ma, 469, Lrhlipnine Trust Co, y, Rj "12,2097, seo Opinion dated March * Mumanlan v, Cura, 69 py, Vera, GR, Court of Ay » 69 Phil. 7, | No. 1976: ql "rane SORA 152 ogy 1294; Comma, Jtmanry 29, 1928, 4 Pa “Donnina ¢, ¥ Leather 1 ; ler of Internal Reven' * Halley v, Prin ndustriog Swell In, Scanned with CamScannerTITLE VII — STOCKS AND STOCKHOLDERS a oval of such increase by the § approv" EC." However, Additional Paid- a Capital (APIO) is Part of the trust fund under the doctrine. APIC involves the infusion of cash or property by a stockholder whenever 20 additional shares are issued in consideration thereof. APIC shall neither be declared as dividend nor shall it be reclassified to absorb deficiency except through an organizational restructuring duly approved by the SEC.” APIC falls within the purview of the Trust Fund Doctrine because it forms part of the equity emanating from the original subscription agreement; it is considered an additional paid-in capital or premium that forms part of the capital of the corporation.*” c. The Trust Fund Doctrine is violated in the following instances: (1) When the corporation releases or condones payment of the unpaid subscription and the stockholder has no right to demand the refund of his investment; (2) When there is payment of dividends without unrestricted retained earnings; (3) When properties are transferred in fraud of creditors; (4) When properties are disposed or undue preference is given to some creditors even if the corporation is insolvent; and (5) When the capital stock is decreased which has the effect of relieving the stockholders of the obligation to pay their respective subscription.*® 4. Consistently, under the Trust Fund Doctrine, “a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors.” However, a release that is given Central Textile Mills v. NWPC, 260 SCRA 368 (1996). **SEC Opinion No. 14-13 dated June 11, 2014. “*Ibid., citing MC No. 11, Series of 2008. "Ibid. Note the SEC opined in SEC-GOC Opinion No. 18-03 dated March 19, 2019 that advances by stockholders may be converted into APIC to wipe out capital deficit, However, if the APIC is already reflected in the Audited Financial Statements to wipe out deficit should be approved by the SEC and should be subject to the ‘pplication by the corporation of a request for equity orcad, sis “Velasco v. Poii -R. No, 11528, March 15, 1918; Nava v. Peers Marketing Corporation eo seh 1.28120, November 25, 1976, 74 SCRA 65; Philippine lational Bank y, Bitulok Sawmill, Inc., et al., G.R, No. L-24177-86, June 29, 1968, 23 SCRA 1366; Philippine Trust Co. v. Rivera, supra. See also Donnina C. Halley v. "intwell, Inc., supra. *'SEC SGC Opinion No. 08-04 dated February 4, eg es inet “Donnis intwell, Inc., supra, citin pine Trust Co. v. Ben re a ta 190 ‘US 118 (1891); Philippine Trust Co. v. Rivera, ra, Scanned with CamScannerJURISPRUDENCE ON ps AND: CODE conntmnTARIES CORPORATION 606 THE HEY THE PHILIPPE ise, or to set off a debt g, compromises onsiderati, We f reuant to a bona fide ase, supported by ¢ Cration, yi mu corporation, ® or ending stockholders and subseqy, he jnst diss effectual as again’ Tae existing creditors. ee js unanimous consent octrine provides that Subsey; , Fund De ip The Trust i uubscription is also POSBibIo sp 8d ate and creditors,*? it they, e ing to the capital stock creditors have a righ This doctrine is the un “eens he distribution of capita} rocedure for the dis ADital aan embed ‘the RCCP, which allows. the distribution corporate capital only in three instances: (a) amendment 7 the Articles of Incorporation to reduce the authorized capit stock, (b) purchase of redeemable shares by the Corporation regardless of the existence of unrestricted/retained earnings and (¢) dissolution and eventual liquidation of the Corporation (2) Section 40 of the RCCP on the power of @ corporation to acquire its own shares; and (3) Section 139 of the RCCP on the prohibition against the distribution of corporate assets and Property unless the i titute a fund to poration constitute a wh Mf a ST sa k for the satisfaction of their g in derlying principle and/or is articulateq in i a on, or even, for that matter, on the and future litigations’ 7 24° ‘to prevent further squabble © litigations unless the indispensable conditions followed. Otherws Protection of coy itors are eI 4 ‘porate creditors tee the co Cw “orporate peace” laudably hope! time, it wi rain nothing but a dream because th tigations” di bun iz engage in “squabbles a" n unlawful distribution” blat. ' e “tant disregard of the Fis an octrine, 80, 1959 Ateaven Gy 1958 citing 1 cy Hectic Poy, ie RL Om ou aga, J “Ore Yong, altazar, G.R. No. L-TITLE VII — STOCKS AND STOCKHOLDERS SOF f. | Consicient with the doctrine, a stockholder has no right to demand for the return of his investment, His investment is qocked-in” until the liquidation of the corporation. A stockholder cannot, without violating the Trust Fund Doctrine, compel the forporation to return his investments without the consent of all the stockholders. Neither does he have the right to withdraw even when all stockholders assent thereto if there is prejudice to creditors. The underlying reason for the restriction springs from the necessity of imposing safeguards against the depletion by a corporation of its assets and the impairment of its capital needed for the protection of its creditors. g. It should be noted in this connection that there are those who question the continued force of the Trust Fund Doctrine. For instance, in Hospes v. Northwestern Manufacturing & Car Company,‘ the Supreme Court of Minnesota made this scathing commentary on the doctrine: “The ‘trust fund’ doctrine, commonly called the ‘American doctrine,’ has given too much confusion of ideas as to its meaning, and much conflict of decision in its application. To such an extent has this been the case that many have questioned the accuracy of the phrase, as well as doubted the necessity or expediency of inventing such doctrine. While a convenient phrase to express a certain general idea, it is not sufficiently precise or accurate to constitute a safe foundation upon which to build a system of legal rules. The doctrine was invented by Justice Story in Wood v. Dummer, 3 Mason, 308, which call for such invention, the fact in that case being that abank divided up two-thirds of its capital among its stockholders without providing funds to pay its outstanding billholders. Upon familiar principles this was a fraud of creditors. Evidently all that the eminent jurist meant by the doctrine was that corporate property must be first appropriated to the payment of the debts of the company before there can be any distribution of it among stockholders, — a proposition that is sound upon the plainest principles of common honesty. x x x The phrase that ‘the capital of a corporation constitutes a trust fund for the benefit of creditors’ is misleading. Corporate property is not held in trust, in any proper sense of the term. A trust implies two estates or interests, — one equitable and one legal; one Person as trustee, holding the legal title while another, as the cestui que ¢. Absolute control and power of disposition ‘trust, The capital of a corporation is its ‘rust, has the beneficial interes interest in it, as well as the legal title, are inconsistent with the idea of @ Property. It has the whole beneficial i ing Corporation, et al., supra; “Velasco v. Poizat, supra; Nava v. Poors Marke porati iipping eee ako Bitulok Savill Ine et abv err Pape Trust Co, \ iver, susran See SEC Opinions dated April 6, 006 and March 29, S98, . 48 Minn, 174, 60 N.W. 1117 (1892). Scanned with CamScanner1SPRUDENCE ON 183 AND JON TION CODE (OMMENTAR TT CORPORAT! 808 oon RE TE PHILIPPINES it, and sell and dispose of i, 4, its oreditors in the same gene. ats put no further: dt, its of me and profit it is a trusteo fo natural persons . d Doctrine, Hospes v. Northy, jou of the Trust Fun ‘ ae an‘facutine & Car Compara’ fered on eee they lanuj 8 2 ‘er th: i d referred to a is based eg are issued 10 sharoholders wie Baye Dat tig theory, if sl tion price, the corporate creditor © TERE tog, the subscription Ferg in case of insolvency. The same conclye! after the shareholders in eney, The san i Fund Doctrine is applied. However” can be reached i he “applied, the leblity of the shareholder 7 submitting to the proposition that there is deemeq Se eeataton to the creditor to the effect that the shares a paid before their issuance. sury Shares. Treasury shares are not subjec, scboct tion sobteaee because Section 59 of the RCCP covers uy acquisition of unissued shares. However, when treasury shares are re-issued, the shareholders are entitled to exercise their preemptive right. 10. Escrow Shares. The corporation may impose the condition that the shares to be issued shall be held in escrow until actual payment is received by the corporation. Title does not pass to the subscriber until the performance of the condition. A holder af escrow shares does not become entitled to the rights pertaining to a stockholder until the conditions for the release of such shares are fully met. The subscriber is not yet the owner of the said shares and consequently he cannot be accorded the ri st consequently rights belonging to a regular Tt may use the inco asa natural person. the same extent as & 11, Sources of Capital, “Capital” includes all properties and assets of the corporation that are used for i i ‘, oe ee for its business or operation. This should be distinguished from Authorized Capital Stock which end paar ey in the Articles of Incorporation to be substt “Subscribed Copter ters of the corporation. On the other hat! that'is Sovered by ic,that portion of the authorized capital st not while *Paid-Up Capitap eye greements. whether fully paid stock that has been subseribed sant ahah oes authorized cP “48 Minn, 174, 60 NW, ( 50 NW, 111 S'SEC Opinion dated decay a ra MSCLNACUBIP Lea} Ae: ission, 260 SCRA 9 Commision, 2008CRA vis igpy, MS" Y: National Wages and Prot scanned with CamScannerTITLE Vil — I — STOCKS AND STOCKHOLDERS re The capital of the corpornti a siete oa i ih ne the subscribe ea remain constant, the padi bee capital and th enced by making the subscriber make edditicn capital may be fully pay their subscription. Of course, payment of MePeeEaeet or price may be made Voluntarily without need of eal subscription The corporatii i by aoe rane ign gan increase its Subscribed Capital (1) by issn oe the Author an of the Authorized Capital Stock, or (2) b nna subscription, tab ‘apital Stock that necessarily involves additi scrip oth cases, additional capital in the form of shareholder's investments is likewise infused to the corporation through post-incorporation subscription. When shares are issued at a premium or for more than their par value, the additional amount that is paid is treated as additional paid-in capital (APIC). c, The issuance of shares out of the unsubscribed shares of the authorized capital stock does not need stockholder’s approval. What is necessary is only a resolution of the Board of Directors approving the same.‘ 11.01. Debt as Source of Capital. Subscription is not the only source of corporate funds after incorporation. As an ongoing concern, the corporation may get funds not only from shareholders but also from creditors in the form of debts. Additionally, funds may also come from the income of the corporation as a result of its operation. a. It is up to the corporation to decide what best serves its interest in choosing the source of funds. In making such decision, the corporation will consider the advantages and disadvantages of reising money through debts, like the issuance of bonds, rather than stocks, The advantages of debts include: (1) ‘The current shareholders (who cannot exercise their pre-emptive right) do not have to dilute or surrender their control of the corporation when funds are obtained by borrowing rather than issuing more shares of stocks; (2) Depending on the current tax law, it may be less itis if the i i debt rather than additional stock i { cee pede to bondholders are tax-deductible while dividends are not; and 1004. “SEC Opinion dated July 28, )pinion dat jets "Hermanson and Edwards, P- Scanned with CamScanneryURISPRUDENCE ON comMENTARIES ANT PORATION CODE Th BD Cl = TESTA PHILIPPINES is nd: (3) The issue of be rough fav financial Jeverage e the earnings Po 610 jg may increase the earnin, ot Je financial leverage; a Corpora th when the borrowed fynjtin ion thi corporation r share of common stock. ae has favorable used to inereas b, ‘The disadvs i owing: ines ane has a fixed interest Payment 2) _ The borrovier avoid default; thy must be met each period to avol . reduce a company’s abit 9) The use of debt may con an weitha nd t major loss (compared toa situation where ther more equity to meet the losses); (@) Italso causes the company to experience unfavorat, nam] leverage when income from operations falls bel faci wolr unfavorable financial leverage results when ty cost of borrowing funds exceeds the revenue they generate, and vantages of obtaining funds by orton, ' (4) Loan agreements usually require maintenance of acertain amount of working capital and place limitations on dividends and additional borrowings. 12, Balancing of Interests. It cannot be overemphasized however that subscription or investment of shareholders is not the only source of corporate capital. A large part of the funds ofa corporation may come from the creditors of the company. The Trust Fund Doctrine and other rules relating to the legal capital of the corporation are, in fact, directly concerned with the balancing of the interest of the shareholders and the creditors of the compaly. Dean Bayless Manning explained in his important work on ele Heep A of corporation laws on the legal capital are ing, or at least accommodating the combinatioa of the ditor's i . Hiner tor’s perspective and the shareholder's perspetti"® “yy ' ieee aes of the company desire that the enterprise ht"? cock iailer ta tans oo pent which only other claimants are those "ae ign’ Shareholders, The shareholders, by contt#s* would like to h; i i wold Hk 1 ave as ite 88 possible of their own assets tied up in ™ the jeopardy of creditor's claim, “Hermanson and Edwards, “Bayless Manning, P. 685, la ‘#et Capital, 1900 Sra Ba, p19, nereinaer re" a4 - Scanned with CamScahnerTITLE VII — STOCKS AND STOCKHOLDERS out (@) The creditor does not ordinaril i ; ie clal , ly wel ss ceo hin i hie wa nae ypareholder 3 often (not always) be willing for the incorpor se to incur further debt in order to benefit from Se ey enterpris ay erfen his own equity investment position is small (3) _ The creditor would prefer that the junior investment claimant, the shareholder, receive nothing as a return on his investment for 60 long a {Peas the creditor's claim has not been paid. The shareholder, on the thier and, would prefer a concurrent return paid out to him as the enterprise earns profits. @ The creditor wants protection against all manner of asset istributions to shareholders — particularly since he sees the board ff directors as a creature of the shareholders. The shareholder wants ‘neximum freedom to receive such distributions. (6) Each shareholder wants assurance that each other shareholder has contributed to the corporate pot a proprietorship investment proportionate to his shareholdings.” 13. Creditors. With respect to corporate creditors who supply additional funds to the corporation, they fall under two categories, namely, (1) commercial creditors and (2) investment creditors. Commercial creditors are normally short-term creditors including banks and other institutional lenders who extend revolving lines of short-term credit.** Investment creditors are those who acquire bonds or debentures issued by the corporation. ‘The considerations for bonds are also limited to the a. subscription agreements. considerations that the RCCP allows for Section 61 provides that: “The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation.” PROBLEMS: 1. @ X Corporation was organized by five individual incorporators iho vabseribed to the whole authorized capital stock of P1,000,000,00 and who paid ‘500,000.00. The incorporators, all saan pers of the Board of Directors, agreed among themselves ibscription will be paid out that the unpaid balance of their sul on of expected cash dividends. However, no dividends were ever Frater janning, p. 101. Scanned with CamScannerISPRUDENCE ON AND JURI ice COMMENTARTED, CORPORATION CO! THE Ey THE PHILIPPINI i decided to condone a, f Directors de . «4 subscriptions. This action e pel Was ret the unpaid sul vo by unanimous he Stockho}, dene by the Rene ‘The creditors of the corporation Sy “ n re their unpaid subscriptions. Can the cred iat subseri rocover? Reason. declared. The Board recover from the subscribers the tg, Condonation of the obligation to py‘ iption price violates the Trust Fund Doctrine Deca subscript mae amount that is supposed to be held in trys, for ie rods same is prejudicial to the rights and interests of yy, em. creditors of the corporation. (1971 Bar) : scribed to 100 shares of stock of 83D Corporation with, fe valle of P100,00 each, paying P2,500.00 on her subseriptige Subsequently, Ms. Zasked Mr. Y, the Presidentof thecorporatn, to release her from her subscription. Mr. Y consented Provided that Ms. X forfeits to the company what she had already paid, Ms. Z agreed and Mr. Y gave her a Certificate of Release, Not long afterwards, 3D Corporation went into insolvency and an assignee was appointed. The assignee now seeks to collect from Ms. Z the unpaid balance of her subscription. Decide the dispute with reasons, A: Ms.Zis liable, The unpaid subscription becomes due the moment the corporation is declared insolvent. Hence, the assignee of the insolvent corporation is well within his right to collect from Ms. A: Yes, the creditors can unpaid subscriptions. SEC, EC. 60, Pre-incorporation Subscription. - A subscription Of shai formed shall be Inevowane, tora tee Re (6) months f for a period of at least six the other cubeea Sate-ot Subscription, unless all of corporation faite to consent to the revocation, or the OF within a longer period oc" within the same period Subscription, No tipulated in the contract of to then ater the articles Portion subscription may be to the Commission’ "Corporation is submitted | Scanned with CamScannerTITLE VQ — I — STOCKS AND STOCKHOLDERS i NOTES ‘The presence of at least two contractin a pre-incorporation subscription, no consent because one of the parties existent. 8 parties is presupposed. In t all the parties can give their — the corporation — is still non- 2 Binding Effect. Despite the non-existence of the corporation, the subscription contract before incorporation is valid and binding. Section 60 of the RCCP provides that it is valid, binding and irrevocable for a period of six months. In addition, even if the six-month period has already expired, the pre-incorporation subscription contract is also irrevocable after the filing of the Articles of Incorporation with the SEC. a. The pre-incorporation subscription is irrevocable for a limited period prior to submission of the Articles of Incorporation with the SEC to prevent injustice that may be inflicted on subscribers who already exerted efforts to organize the corporation and who already committed financial resources therefor. b. Theirrevocable nature of the subscription after the filing of the Articles of Incorporation with the SEC is also similarly justified. In addition, the subscription agreement can no longer be revoked the moment the Certificate of Incorporation has already been issued by the SEC, Subscription agreements are already covered by the Trust Fund Doctrine after incorporation. 3. Revocation. ‘The pre-incorporation _ subscription agreement can be revoked only in the following cases: (1) if all the other subscribers consent to the revocation before the expiration of the six-month period; and (2) upon the expiration of the six- month period (but before the filing of the Articles with the SEC) even without the consent of the other subscribers or within a longer | Period as may be stipulated in the subscription agreement. ks. ~ Stocks shall SEC. 61, Consideration for Stoc! not be issued for a consideration Jess than the par or issued price thereof. Consideration for the Issuance of stock may be: - oa Scanned with CamScanner-RUDENCE ON JURISPI E TARIES AND RATION COD) comme REVISED § ‘PHILIPPINES ou THE RO rH ion: 0 paid to the corporation; cash 1 a (a) Actual ible or intangible, actualy, by Property, ad nd necessary OF Convener, ir valuation e, a the corporate esata fair valuat qual feet use and I tock issued rot issued Vi or i to the par rformed for or services actually c)_ Labor performer. raider to the corporation: 1) Previously incurred indebtedness of thy (d) Pret corporation; (e) Amounts transferred from unrestricteg retained earnings to stated capital; (f) Outstanding shares exchanged for stocks in the event of reclassification or conversion; (g) Shares of stock in another corporation; and/ or (h) Other generally accepted — form of Consideration, Where the consideration is other than actual cash, Or consists of intangible Property such as patents or copyrights, the valuation thereof s| initi determined by the stoc bl re kholders or the board of directors, Subject to the pproval of the Commission, ‘sued in exchange Consideration, “aor future service, The same 'n this sectj insofar as , may be s ion, insofa the corporation. °° USEd for the 'Ssuance of bonds by The issued pp; fixed in articles ot Oar value shares may be rectors iis auth, Paton Or by the board of Ori 4 the N oF the Conferreg by the articles outst ders represen MS, °F if not so fixed, bY the purpose, aPital Stock ata £ast a majority of the “Meeting duly called for Scanned with CamScannerTITLE VII — STOCKS AND STOCKHOLDERS Sis NOTES 1, Consideration. Section 61 of the ; aoa 1 RCCP enumerates the various types of consideration that the Jaw allows to be exohangéd ion agreements, The consideration for the jssuance of stock is not limited to only one of the items enumerated () Stocks shall not be issued for a consideration less than the par or issued price thereof; @) Shares of stock shall not be issued in exchange for promissory notes or future services; and (8) Where the consideration is property, whether tangible or intangible, such as patents or copyrights, the valuation thereof shall initially be determined by the stockholders or the board of directors, subject to approval by the SEC. a. In this connection, it should be noted that the concept of consideration under Section 61 of the RCCP is not the same as the concept of consideration or cause under Article 1350 of the New Civil Code. Article 1350 of the New Civil Code provides that cause or consideration is understood to be, for each contracting party, the prestation or promise of the thing or service by the other, the service or benefit that is remunerated, or mere liberality depending on the type of contract. Consideration is the justification for the contract. Hence, a contract for valuable consideration means value is stipulated in the contract. In Section 61 of the RCCP, what is being referred to is not the stipulated value but the property or right or service to be actually exchanged or received. The agreement is valid but the stipulated consideration is invalid if the same is not one of those allowed under Section 61. b. Actual cash paid to the corporation is obviously acceptable, With respect. to pre-incorporation subscription involving cash Payments, the SEC no longer requires the submission of a Bank Certificate of deposit of paid up capital, However, a bank certificate 10 the form prescribed by the Bangko Sentral ng Pilipinas (BSP) to Prove the existence of inward remittance is required but only with espect to those corporations with foreign subscribers who want to *eeister their investments with the BSP. Scanned with CamScanner[SPRUDENY AUN ewraniss AND UPS TION CODE Ml co! 616 COME REVS ‘PHILIPPINES property is als0 accep, il jon. it je abl intangible ideration, it ‘ble, c, ‘Tangible oF a be used as consider ~ Te Uiteg i ty wi However, if prope! that: operty is actually received by the Corporati, () Thep : (2) The property 18 ne se} and lac be subject to a fair valuation equal to the oo value I issued; issued value of the stoc! a or issue’ a valuation thereof shall initially ve determing by cesubehdera or the board of directors; an (6) The valuation is subject to approval by the SE, @._ The stockholders or the Board of Directors shall initiny approve the valuation of the property that is used as a consideration for the shares. The valuation is, however, subject to the approval by the SEC. The approval of the SEC is necessary in order to preyent watering of stocks. essary or convenient for its i e. Intangible properties that may be used as consideration include patents or copyrights, If intellectual property will serve asthe consideration, the corporation must submit to the SEC a copy of the Certificate of Registration of the intellectual property right together with an appraisal report by an accredited appraisal company thatis not more than six months old and a Deed of Assignment in favor of the corporation, (1) A mining claim is also. ace) ia i i . ptable because it is an intangible Property that is capable of valuation, However, the mining claim must be necessary and convenient for use by the seating corporation im carrying out its lawful purposes. The also requinen ae Eee the claim must be submitted. The SEC be appraised and t the actual value of the mining claim mus iciences and cnteeaned ES Sees _ f An undivided int See nee i an acceptable Consideration ae eal Property of a coownte imposes the following conding™ tH® Subscription of shares, The 5 interest in reg) Property; tons for the acceptance of the undivi “SEC Opinion N, 0, 08 “SEC Opinion dated fe pa January 23 2008, , 1999, , 2008, Scanned with CamScanner