Corporation Law: The Revised Corporation Code of the Philippines - Sec 6 (September 11, 2023)

THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE I - GENERAL PROVISIONS 

Definitions and Classifications 

SEC 6.  Classification of Shares. – The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock.

The shares in stock corporations may be divided into classes or series of shares, or both. No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, That there shall always be a class or series of shares with complete voting rights.

Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters:

(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;

(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 of authorized capital stock;

(f) Merger or consolidation of the corporation with another corporation or other corporations;

(g) Investment of corporate funds in another corporation or business in accordance with this Code; and

(h) Dissolution of the corporation.

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 to stocks with voting rights.

The shares or series of shares may or may not have a par value: Provided, That banks, trust, insurance, and preneed companies, public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether publicly listed or not, shall not be permitted to issue no- par value shares of stock. 

Preferred shares of stock issued by a corporation may be given preference in the distribution of dividends and in the distribution of corporate assets in case of liquidation, or such other preferences: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, further, That such terms and conditions shall be effective upon filing of a certificate thereof with the Securities and Exchange Commission, hereinafter referred to as “Commission”. 

Shares of capital stock issued without par value 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 in respect thereto: Provided, That no-par value shares must be issued for a consideration of at least Five pesos (P5.00) per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may further classify its shares for the purpose of ensuring compliance with constitutional or legal requirements.

1. Concept of Shares

• A share of corporate stock has been defined as the unit into which the proprietary interests in a corporation are divided.
• It is the "intangible interest or right which an owner has in the management, profit and assets of the corporation."
• The shares comprise what is known as the capital stock. 
• Capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.
• A specific class of shares may have rights or privileges or restrictions different from the rest of the shares in the corporation.

2. Reason for Classification. 

• So that entrepreneurs who decide to go into business have a wide latitude of flexibility and in order to assure that they will be able to raise capital and at the same time run the corporation in the manner which will be equitable to all investors. 
• The classes and number of shares, which a corporation hall issue are first determined by the incorporators in the Articles of Incorporation filed with the SEC.
• After the corporation comes into existence, the Board of Directors and the stockholders may alter them by amending the Articles of Incorporation.

3. Doctrine of Equality of Shares

• All stocks issued by the corporation are presumed to be equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. 
• Section 6 of the RCCP requires that the distinguishing features of the shares must be stated in the Certificate of Stock. 

Sec. 6 (1): The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock.

4. Kinds of Shares

1. Common or preferred shares
2. Voting or non voting shares 
3. Par value or no par value shares
4. Treasury shares
5. Redeemable shares
6. Founder’s share 

5. Common Shares

• Common shares or stocks represent the residual ownership interest in the corporation.
• Residual ownership interest is the claim that the owners of a business have on the assets of the business after all liabilities have been paid off. 
• It is also known as owner's equity or net assets.
• It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.

6. Preferred Shares

• Preferred stocks are those that entitle the shareholder to some priority on dividends and/or asset distribution. 
• Preferred shareholders are not creditors of the corporation by virtue of the preferred shares. 
• This is because one cannot be a creditor by virtue of his own instrument. 
• The holder obtains neither the enforceable claim to interest and repayment of principal that is provided by debt nor the rights of residual owner that is provided by common shares.
• Yet, all preferred contracts fundamentally attempts to endow certain owners with rights analogous to creditor rights. 
• Corporations issue preferred shares of stocks for the following reasons: 
1. To avoid the use of bonds which has a fixed interest charge and must be paid regardless of net income 
2. To avoid issuing additional common shares that earnings per share will be less in the current year than in the prior year 
3. To avoid diluting common shareholders’ control of the corporation since preferred shares usually have no voting rights. 
• Preferred shareholders are deprived of the right to vote in the election of directors and on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner as shareholders
• There is no guarantee that the holder of preferred shares will receive dividends every fiscal year since the same is dependent upon the availability of surplus profit or unrestricted retained earnings. 
• Thus, dividends are only paid when profits are earned by corporations .
• General Rule: Even if there are existing profits, the Board has the discretion to determine whether or not dividends are to be declared. 
• Hence, preferred shares that are referred to as "interest bearing," on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only.
• Preferred shares are considered in the computation of the equity of foreigners and Filipinos in a corporation for purposes of determining compliance with nationalization laws. Both common shares and preferred shares are part of the outstanding capital stock.
• Preferred shares may be: 
• Cumulative or non-cumulative 
• Participating or non-participating
• Preferred as to dividends 
• Preferred as to assets upon distribution

6.01. Fixing Terms and Conditions of Preferred Shares.

• The rights, privileges, or restrictions of preferred shares must be indicated in the articles of incorporation and in the certificate of stock.
• The board of directors may fix the terms and conditions of preferred shares of stock or any series thereof subject to the following requirements:

1. The articles of incorporation must provide for a class of shares that are preferred shares; 
2. The board of directors must be authorized in the articles of incorporation to fix the terms and conditions of the preferred share; and 
3. A certificate of the terms and conditions fixed by the Board shall be filed with the SEC. The terms and conditions shall be effective upon filing of the said certificate with the SEC.

6.02. Kinds of Preferred Shares

• Preferred Shares as to Assets
• share which gives the holder thereof preference in the distribution of assets of the corporation in case of liquidation
• Preferred Shares as to Dividends
• share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. 
• It can be classified further by:
• Cumulative
• if a dividend is omitted in any year, it must be made up in a later year before any dividend may be paid on the common in the year later 
• Non-cumulative
• there is no need to make up for the undeclared dividends and the directors do not even have discretion to declare those past dividends subsequently.
•  Participating preferred shares
• entitled to participate with the common shares in excess distribution
• entitled to a fixed, cumulative dividend.

6.03 Convertible Shares

• Preferred shares may be stipulated as convertible into common shares. 
• This feature of the preferred share must be stipulated in the Articles of Incorporation.
• Conversion may be mandated by law. 

7. Par Value and No Par Value Shares. 

• Par value shares
• those with fixed value stated in the Articles of Incorporation and the share certificate.
• an arbitrary amount assigned to the share and is expressed in the certificate covering the share. 
• No-par value shares 
• refer to shares without such arbitrary amount
• The use of par value may sometimes result in confusion on the part of the investors who might be misled because the par value does not represent the market value. Thus, no par value shares may be issued to avoid such confusion. 
• The issued value or stated value of shares may be higher than the par value. 
• The Board is authorized to fix the amount for which the shares shall be subscribed. This is subject to the condition that the value fixed cannot be below par. 
• With respect to no par value shares, the stated or issued value cannot be less than P5.00. 
• Other values that are commonly associated with shares of stocks are as follows: 
• Market value
• The price at which shares of capital stock is bought and sold by investors in the market.
• It is directly affected by all the factors that influence general economic conditions, investor's expectations concerning the corporation, and the corporation's earnings.
• Book value
• The amount per share that each shareholder would receive if the corporation were liquidated without incurring any further expenses and if assets were sold and liabilities liquidated at their recorded amounts. 
• Liquidation value
• The amount a stockholder would receive upon the dissolution and liquidation of the corporation. 
• Redemption value
• The price per share at which the corporation may redeem its share. 
• Issued (Stated) value 
• The selling price of the shares fixed by the Board or in the Articles of Incorporation. 

7.01 Conditions for the issuance of No Par Value Shares

1. 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 its creditors in respect thereto;
2. Shares issued without par value may not be issued for a consideration less than the value of five pesos (PHP5.00) per share 
3. The entire consideration received by the corporation for the no-par value shares shall be treated as a capital and shall not be available for distribution as dividends. 

7.02 Shares That Cannot be No-Par Value Share

1. Preferred shares 
2. Shares in banks
3. Shares in trust companies 
4. Shares in insurance companies
5. Shares in preneed companies
6. Shares in public utilities
7. Shares in building and loan associations
8. Shares in other corporations authorized to obtain or access funds from the public. 

• The common characteristic of these corporations is the presence of trust relationship, except for public utilities.

8. Voting and Non-voting Shares

• In the absence of provision in the Articles of Incorporation, and consistent with the Doctrine of Equality of Shares,, the shares in a stock corporation is considered as a voting share.
• Under the present law, all shareholders regardless of the classification, other than holders of preferred or redeemable shares, are entitled to vote.
• The legislature justified the provisions allowing non-voting shares by observing that "to attract investors or to provide for a more realistic and flexible management of a corporation under certain circumstances certain shares must be denied voting rights."
• Nonetheless, non-voting shares may still vote on matters regarding: 

1. Amendment of the articles of incorporation;
2. Adoption and amendment of bylaws;
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 authorized 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.

• The issuance of non-voting shares is subject to the following conditions:

1. Only preferred or redeemable shares may be made non-voting shares;
2. There must always be shares with full voting rights; and 
3. The non-voting shares may still vote in the matters enumerated above.

• Any provision in the Articles of Incorporation restricting the right of common shareholders to vote is invalid.
• A mandatory feature in the Articles of Incorporation that the voting rights of a class of common shares shall be assigned to a trustee who shall exercise all rights for all corporate actions may be construed as a virtual denial of voting rights.

9. Nationalization Requirements

• The shares may be classified to facilitate the requirements of nationalization laws
• For instance, in a realty company where foreign equity is only up to 40%, the Articles of Incorporation may classify 60% of the shares as Class A shares that can be acquired only by Filipinos and 40% of the shares as Class B shares that can be acquired by Foreigners and Filipinos. In such case, there will be an assurance that excess foreign participation will be prevented.
• The classification of shares into Class A and Class B shares is not required under the Constitution or statute. Such arrangement is only a device internally adopted by Philippine companies to facilitate monitoring of foreign equity in the company.

10. Escrow Shares

• Just like treasury shares, they are not reflected in the Articles of Incorporation.
• Escrow shares result by virtue of a transaction to place shares in escrow until the happening of an event or fulfillment of a specified condition.
• They are deemed to be subjected to an agreement by virtue of which the shares is deposited by the grantor or his agent with the third person to be held by the latter until the performance of a certain condition or the happening of an event.
• An escrow deposit makes the depository a trustee under an express trust.

11. Reclassification

• Shares that are originally common may be reclassified into preferred shares. 
• Reclassification of shares is a legitimate exercise of corporate powers under the Corporation Code.
• A holder of shares that are reclassified can exercise the appraisal right. In other words, the shareholders retain their right to dissent and demand payment of the fair value of their hares.
• Reclassification v. Exchange of Shares
• Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest. 
• Exchange of shares is different - there would be shifting of the balance of stock features like priority in dividend declarations or absence of voting rights. 
• Yet, neither the reclassification nor exchange of shares per se, yields realized income for tax purposes.

Problems:

Q: The proposed Articles of lncorporation of X Corporation contains the following provision: "The preferred shares shall be entitled to dividends in such a rate as may be determined by the Board of Directors whenever there are unrestricted retained earnings." Is the provision valid?

A: NO. The provision is not valid. A provision in the Articles of Incorporation that gives the Board of Directors blanket authority to fix the terms and conditions of preferred shares might result in an abuse of such authority that might adversely affect the rights of shares already issued. Thus, in order to protect the interest of shareholders, the Securities and Exchange Commission does not allow a provision giving such blanket authority. There must be certain features, guidelines or standards to be followed in the issuance of preferred shares that are spelled out in the Articles of Incorporation.

Q: The proposed Articles of lncorporation of X Corporation contains the following paragraph: "The preferred shares shall be non-voting except in those cases where the law expressly allows them to vote; that the said shares shall be redeemable within one to ten years from date of issue as the Board may fix; that they shall earn cumulative dividend of 6% to 16% per annum, as the Board may determine." Is the paragraph valid?

A: YES. The provision is valid. A provision in the Articles of lncorporation that gives the Board of Directors a blanket authority to fix the terms and conditions of preferred shares might result in an abuse of such authority that might adversely affect the rights of shares already issued. In this case, there is no such blanket authority. Instead, there are certain features, guidelines or standards to be followed in the issuance of preferred shares that are spelled out in the Articles of Incorporation.