Lectures in Corporation Law

Sections 5-9, RCCP

Atty. Warren B. Concepcion

CORPORATORS & INCORPORATORS,
STOCKHOLDERS AND MEMBERS
 WHO COMPOSES A CORPORATION?
- Corporators - who compose a corporation, whether a stockholders/shareholders in a
stock corporation, or as members in a non-stock corporation.
- Incorporators - stockholders or members mentioned in the AOI as originally forming
and composing the corporation and who are signatories thereof.
- Directors/Trustees - generally elected by the SH or by their fellow directors to conduct
the business, control the property, and exercise corporate powers
- O cers - appointed/employed to assist in the management of the a airs of the
corporation
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TRI-LEVEL HIERARCHY OF AUTHORITY
- The three levels of control in a corporation:
1. The Board of Directors
2. The Corporate O cers
3. The Stockholders
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DISTINCTIONS B/W CORPORATORS & INCORPORATORS
- Incorporators are those mentioned in the AOI while corporators are otherwise
- Incorporators are corporators while corporators are not necessarily incorporators
- Incorporators in a stock corporation should not exceed 15 whereas the number of
corporators may exceed 15 taking into consideration the number of authorized shares
of the corporation.

- Take note:
Under the OCC, the majority of the incorporators should be residents of the
Philippines while no such requirement is imposed on corporators under the RCC.
Except for corporation sole, the number of incorporators should not be less than 5.
These distinctions no longer hold under the RCC because the requirement of
residency for incorporators was removed and a OPC is now allowed.
CORPORATE CAPITAL STRUCTURE
SHARES OF STOCKS
SECURITIES
Generally, these are financial instruments traded in the
financial market used to raise capital.

There are primarily three types of securities: Equity –

which provides ownership rights to holders; Debt –
essentially loans repaid with periodic payments; and
Hybrids – which combine aspects of debt and equity.
Importance of Securities
On the part of the investors, it provides liquidity (the ability to convert
their investments to cash), diversity (the ability to invest in different kinds
of securities), and transparency (subject to regulatory oversight and
reporting.

On the part of issuers, it provides capital formation. Securities are an

important source of capital. Companies, businesses, and government can
raise funds to finance their operations and investments which in turn can
help stimulate economic growth and create jobs.
Securities under the SRC
Sec. 3.1 of SRC provides:

Securities are shares, participation, or interests in a

corporation or in a commercial enterprise or profit-making
venture AND evidenced by a certificate, contract, or
instrument whether written or electronic in character.
Securities under the SRC
Sec. 3.1 of SRC provides:

Securities are shares, participation, or interests in a

corporation or in a commercial enterprise or profit-making
venture AND evidenced by a certificate, contract, or
instrument whether written or electronic in character.
Securities under the SRC
It includes:

(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed

securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement,
certifies of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like options and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments;
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission.
Categories of securities mentioned in SRC:
1. Debt Instruments: Bonds, debentures, notes, evidence of indebtedness,
asset-backed securities;
2. Equity Instruments: Shares of stock, certificates of interest or participation
in a profit-sharing agreement, certificates of deposit for a future subscription;
proprietary or non-proprietary membership certificates in corporations;
3. Investment Instruments: Investment contracts, fractional undivided
interests in oil, gas, or other mineral rights;
4. Derivatives like options and warrants;
5. Trust Instruments: Certificates of assignments or participation, trust
certificates, voting trust certificates, or similar instruments;
6. Catch-All: Other instruments as may in the future be determined by the
Commission (SEC).
 SHARES OF STOCKS
- Forms of securities representing equity ownership in a corporation divided up into
units. They are the measure of the stockholder’s proportionate interest in the
corporation.
- Securities, under the SRC, are de ned as shares, participation, or interest in the
corporation, or in a commercial enterprise, or pro t-making venture and evidenced by a
certi cate, contract, instrument, whether written or electronic in evidence.
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NATURE OF SHARES OF STOCKS
- Intangible personal property in the hands of the shareholders = Asset
- Investments of the shareholders in the company = Equity/Capital
CAPITAL STOCK
- It consists of all classes of shares issued to stockholders, that is, common shares as
well as preferred shares, which may have di erent rights, privileges, or restrictions as
stated in the AOI.
- The terms “capital stock” and “outstanding capital stock” - Sec. 173, RCCP are de ned
as the total shares of stocks issued to subscribers or shareholders, whether fully or
partially paid.

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- A speci c class of shares may have rights or privileges or restrictions di erent from the
rest of the shares in the corporation
- The classes and number of shares, which a corporation shall issue, are rst determined
by the incorporators in the AOI led with the SEC.
- After the corporation comes into existence, the BOD and the SH may alter them by
amending the AOI
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CLASSIFICATION OF SHARES
- POLICIES ON THE CLASSIFICATION OF SHARES (SEC. 6)

1. Freedom and power of the Corporation to classify shares,

but subject to limitations;
2. Presumption of equality of the rights and features of
shares when nothing is expressly provided to the
contrary.
DOCTRINE OF EQUALITY OF SHARES
- Each share shall be equal in all respects to every other share, except as otherwise
provided in the Articles of Incorporation and the certi cate of stock.
- Thus, all shares have the same rights and privileges unless classi ed di erently in the
AOI and such classi cation is not contrary to law.
- Any restriction on shares should also be stated in the AOI, otherwise, it is not valid.
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Classification of Shares
COMMON SHARES
- A basic class of stock ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder
to a pro-rata division of pro ts.
- Ordinary shares

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PREFERRED SHARES
-Entitle the holder thereof to certain preferences over the holders
of common stock designed to induce investors or persons to
subscribe for shares of stocks.
-Preference as to assets; preference as to dividends; or such other
preferences.
-Rights, privileges, or restrictions of PS must be indicated in the
AOI; exception - BOD may x terms and conditions; requirements
AOI must provide for PS
BOD must be authorized in the AOI to x
Filing of the Certi cate of the TC xed by BOD with the SEC
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PREFERRED SHARES
- Preferred shares as to dividends may be (1) cumulative or (2)
non-cumulative and they may also be (3) participating or (4)
non-participating
- Maybe converted into common shares (convertible shares);
provided such feature must be indicated or stipulated in the
AOI
VOTING AND NON-VOTING SHARES
- Voting shares are those which can vote on ALL corporate
acts requiring stockholder’s approval. (Note that the
corporation should always have voting shares - these are the
common shares)
- Non-voting shares are those deprived or denied the right to
vote (preferred shares, redeemable shares, treasury shares,
delinquent shares); however, holders of NVS shall be entitled
to vote on 8 speci c corporate matters.
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 PAR VALUE AND NO PAR VALUE
- Par value shares are those with xed value stated in the AOI
and appearing in the stock certi cate (NB: par value does not
re ect the market value)
- No par value shares are those without par value (nominal or
face value) on the face of the stock certi cate; Requirements:
such fact must be stated in the AOI and consideration of their
issuance cannot be less than the issued value, i.e. not less
than P5 for each; Who determines the issued price or value
of NPV shares; Limitations
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FOUNDERS’ SHARES (SEC. 7)
- Shares classi ed as such in the AOI which may be given certain rights and privileges
not enjoyed by the owners of other stocks; issued or given to original organizers or
founders of the company
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REDEEMABLE SHARES (SEC. 8)
- Shares that maybe purchased by the Corporation from the holders of
such shares upon the expiration of a xed period, regardless of the
existence of unrestricted retained earnings in the books of the
Corporation.
- Shares classi ed as such in the AOI which may be issued by the
Corporation when expressly provided in the AOI.
- Purpose/rationale?
- Mandatory or Optional
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TREASURY SHARES (SEC. 9)
-Shares of stocks that have been issued and fully paid for, but
subsequently reacquired by the issuing corporation through
purchase, redemption, donation, or some other lawful means.
OTHER CLASSIFICATION OF SHARES
- Hybrid securities
- Escrow shares - put into escrow until the happening of an event
or ful llment of a speci ed condition
- Shares to comply with nationalization requirements (e.g. Class A
and Class B shares)
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MODES OF DEALINGS WITH SHARES OF STOCKS
- Initial dealing (initial issuance of shares)
- Subsequent dealings (disposition, encumbrances,
other legal process)