Corporation Law: The Revised Corporation Code of the Philippines - Sec 37

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE IV -  POWERS OF CORPORATIONS

Section 37.  Power to increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness. 

No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and by two-thirds (2/3) of the outstanding capital stock at a stockholders' meeting duly called for the purpose. Written notice of the time and place of the stockholders' meeting and the purpose for said meeting must be sent to the stockholders at their places of residence as shown in the books of the corporation served on the stockholders personally, or through electronic means recognized in the corporation's bylaws and/or the Commission's rules as a valid mode for service of notices.

A certificate must be signed by a majority of the directors of the corporation and countersigned by the chairperson and secretary of the stockholders' meeting, setting forth:

(a) That the requirements of this section have been complied with;

(b) The amount of the increase or decrease of the capital stock;

(c) In case of an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names nationalities and addresses of the persons subscribing, the amount of capital stock or number of no-par stock subscribed, the names, nationalities and addresses of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on the subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend therefor authorized;

(d) Any bonded indebtedness to be incurred, created or increased;

(e) The amount of stock represented at the meeting; and

(f) The vote authorizing the increase or decrease of capital stock, or incurring, creating or increasing of bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Commission and where appropriate, of the Philippine Competition Commission. The application with the Commission shall be made within six (6) months from the date of approval of the board of directors and stockholders, which period may be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the corporation and filed with the Commission and attached to the original articles of incorporation. After approval by the Commission and the issuance by the Commission of its certificate of filing may declare: Provided, That the Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by a sworn statement of the treasurer of the corporation accompanied by a sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five percent (25%) of the increase in capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-five percent (25%) of the subscription, has been transferred to the corporation: Provided, further, That no decrease in capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Nonstock corporations may incur, create or increase bonded indebtedness when approved by a majority of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Commission, which shall have the authority to determine the sufficiency of the terms thereof.

1. Increase or Decrease of Capital Stock.

• The exercise of the power to increase or decrease the authorized capital stock of the corporation involves the amendment of the Articles of Incorporation. 
• This should be distinguished from mere increase of subscribed capital stock or paid-up capital that does not necessarily require amendment of the Articles of Incorporation. 
• Nevertheless, a duly approved increase in either subscribed or authorized capital stock are binding and entitled to respect; the increase cannot be disregarded because they are corporate acts and powers done by the corporation.
• The capital stock may be increased by doing any of the following:
1. by increasing the number of shares and retaining the par value; or 
2. by increasing the par value of existing shares without changing the number of shares; or 
3. by increasing the number of shares and increasing the par value. 
• The capital stock may be decreased by doing any of the following:
1. by decreasing the number of shares and retaining the par value; or
2. by decreasing the par value of existing shares without changing the number of shares; or 
3. by decreasing the number of shares and decreasing the par value.
• The formal procedure provided for under Section 37 of the RCCP clearly reveals that a decrease of the capital stock consequently amends the underlying contractual relationship between the corporation and the shareholders. 
• For this reason, the consent of the contracting parties is required to give effect to such power of the corporation to decrease its capital stock.

1.01. Stock Split.

• The increase or decrease of capital will not necessarily result if there is a stock split. 
• In stock split, a share is divided or converted into two or more shares but the amount of the outstanding capital remains the same because the par value is also divided in as many shares. 
• Reverse stock split, as the term implies is the opposite of stock split. 
• It is the pro-rata combination of all the outstanding shares of a specified class into smaller number of shares of that class.
• A reverse stock split may be required:
• to increase the market value per share or 
• to eliminate minority stockholders.

2. Increase of Subscribed Capital.

• Increase in the capital stock of the corporation is necessary when additional funds are required for its operation and the corporation opts to raise funds through additional investments. 
• Additional investment may be infused initially by increasing the subscribed capital. 
• Increase in the subscribed capital need not go through the process provided for under Section 37 and mere approval of the Board is sufficient. 
• This is included in the power to issue shares of stock that is expressly provided for under Section 35 of the RCCP. ''The power to issue shares of stock in a corporation is lodged in the board of directors and no stockholders' meeting is required to consider it because additional issuances of shares of stock do not need approval of the stockholders."
• An increase in the authorized capital stock is required:
• if the additional subscription cannot be covered by the original authorized capital  or 
• if the original authorized capital is already exhausted.

2.01. Increase in Paid-Up Capital.

• Generally, there is also no need to get the approval of the SEC for the creation of additional paid-in capital. 
• The SEC has adopted the policy of allowing corporations, at their option, to apply for the SEC' s approval of the creation of the additional paid-in capital.
• However, there are certain cases when the valuation of the consideration is subject to the approval of the SEC like in cases where property is given in payment of subscription price.

2.02. Exempt from Registration Requirement of SRC. 

• Although no SEC approval is required for the issuance of additional shares, there are instances when the issuance of shares is subject to the registration requirement or at least, a request for exemption under the Securities Regulation Code and its implementing rules.
• Shares of stock are not exempt securities.
• However, there are cases when the issuance of shares is an exempt transaction. 
• Thus, Section 10.1 of the SRC provides that the requirements of registration shall not apply to, among other transactions, the following:
1. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock;
2. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased; 
3. The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange;
4. The sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12-month period; and 
5.  The sale of securities to any number of the following qualified buyers: 
• Bank; 
• Registered investment house;
• Insurance company;
• Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; 
• Investment company; or 
• Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication net worth knowledge, and experience in financial and business matters' or amount of assets under management.
• A notice of or application for exemption of the registration requirement under the SRC is not required for the issuance covered by numbers 1 and 2 in the immediately preceding enumeration.
• Hence, there is no need to file a notice of exemption if the existing shareholders will acquire additional shares from the corporation whether or not the same is covered by their pre-emptive right.
• On the other hand, a notice of exemption is required for the offerings covered by numbers 4 and 5 above.
• Thus, notice of exemption is necessary if persons other than existing shareholders will purchase shares from the corporation provided that the sale is to fewer than 20 persons in the Philippines during any 12-month period.
• At any rate, although an application for confirmation of the exempt status of the transaction is optional, a party may avail of such confirmation to defeat future challenge from the SEC.

3. Requirements. 

• Section 37 of the RCCP prescribes the following requirements for increase or decrease of the authorized capital stock:

1. It must be approved by a majority vote of the Board of Directors;
2. At a stockholders' meeting duly called for the purpose, 2/3 of the outstanding capital stock must approve the increase or decrease of the capital stock; 
3. In connection with the stockholders' meeting, written notice of the purpose of the meeting and of the time and place of the stockholders' meeting at which the proposed increase or diminution of the capital stock will be presented for approval must be addressed to each stockholder at his/her/ its place of residence as shown in the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally, or through electronic means recognized in the corporation's By-Laws and/or the SEG rules as a valid mode for service of notice; 
4. A certificate must be signed by a majority of the directors of the corporation and countersigned by the chairperson and the secretary of the stockholders' meeting, setting forth; 
• That the requirements of Section 37 of the RCCP have been complied with; 
• The amount of the increase or decrease of the capital stock;
• In case of an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and addresses of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on the subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend therefor authorized; 
• Any bonded indebtedness to be incurred, created or increased; 
• The amount of stock represented at the meeting; and
• The vote authorizing the increase or decrease of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.

• With respect to the increase of capital stock, the application to be filed with the SEC shall be accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least 25% of the increase in capital stock has been subscribed and that at least 25% percent of the amount subscribed has been paid in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription.
• The required 25% subscription under Section 37 shall be based on the additional amount by which the capital stock is increased and not on the total capital stock as increased.

4. SEC Approval. 

• The increase or decrease in the capital stock shall require prior approval of the SEC. The SEC requires the submission of certain documents for an application for increase or decrease of the authorized capital stock. Section 37 of the RCCP provides that "any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Commission, and where appropriate, of the Philippine Competition Commission.
• The application with the (SEC) shall be made within six (6) months from the date of approval of the board of directors and stockholders, which period may be extended for justifiable reasons.

4.01. Increase of Authorized Capital Stock.

• The basic documentary requirements prescribed by the SEC for the approval of the application for the increase of the authorized capital stock are as follows:

1. Certificate of Increase of Capital Stock;
2. Treasurer's Affidavit certifying the increase of capital stock, the amount subscribed and the amount received as payment; 
3. List of stockholders as of the date of the meeting approving the increase, indicating the nationalities of the subscribers and their respective subscribed and paid-up capital on the existing authorized capital stock, as certified by the corporate secretary;
4. Amended Articles of Incorporation; 
5. Notarized directors' certificate certifying: 
• the amendment of the Articles of Incorporation increasing the authorized capital stock, 
• the votes of the directors and the stockholders, and 
• he date and place of the stockholders' meeting, which shall be signed by a majority of the directors and the corporate secretary;
6. Endorsement/clearance from other government agencies or other SEC Departments, if applicable; and 
7. Secretary's Certificate — notarized document signed by the corporate secretary certifying that no action or proceeding has been filed or is pending before any Court or tribunal involving an intra-corporate dispute or claim by any person or group against the directors, officers or stockholders of the Corporation.

a. Additional Requirements. 

• The SEC likewise imposes additional requirements depending on how the additional subscription shall be paid. 
• For instance, if the subscription shall be paid in cash, additional requirements are:
1. the Subscription Contract and
2. Secretary's Certificate — notarized document signed by the corporate secretary certifying that all the non-subscribing stockholders waived their respective pre-emptive rights. 
• Other requirements are provided for if the corporation involved is a listed company or a rural bank. 
• If the additional subscription involves conversion of advances or liabilities to equity, the additional requirements include a Deed of Assignment signed by the creditor or subscriber assigning the advances as payment for his subscription because this involves transfer of an intangible property.
• There are also additional documentary requirements if issuance of stock dividends is involved, such as reconciliation of retained earnings available for dividend declaration signed by an independent auditor.

4.02. Decrease of Authorized Capital Stock. 

• The documents that are required by the SEC are as follows:

1. Certificate of Decrease of Authorized Capital Stock;
2. Audited financial statements as of last fiscal year, stamped received by the SEC and the BIR; 
3. If it involves a return of capital: Long form audit report and list of creditors with the amount due to each certified by the auditor or certified under oath by company accountant and written consent of each creditor; 
4. List of stockholders before and after the decrease, as certified by the corporate secretary; 
5.  Amended Articles of Incorporation;
6. Notarized directors' certificate certifying:
• the amendment of the Articles of Incorporation to decrease the authorized capital stock,
• the votes of the directors and the stockholders, and
• the date and place of the stockholders' meeting, which shall be signed by a majority of the directors and the corporate secretary; and
7.  Publisher's affidavit of the publication (once only) of the decrease of capital in a newspaper of general circulation.

• The exercise of the power. to decrease capital stock is a management prerogative. 
• As a consequence of the decrease in the capital stock, the value of the decrease may be distributed to the stockholders as long as the rights of the creditors are not affected. 
• That is the reason why the consent of creditors must be secured if the authorized capital is decreased.
• Part of the documentary requirements to be submitted to the SEC is a List of creditors and their consent if the decrease involves return of capital. 
• The financial statements are necessary because the SEC will allow decrease in capital stock only if the capital of the corporation will not be impaired.
• It is also necessary that the solvency of the company must be assured.
• The value of the decrease in the capital ,stock may be distributed to the stockholders as long as the rights of creditors are not affected. For this reason, the consent of the creditors needs to be secured.
• The rights of the stockholders and creditors should not be prejudiced. 
• Consent of the stockholders is necessary and required under the RCCP for the decrease in the capital stock because the same action amends the underlying contractual relationship between the corporation and its stockholders.

5. SEC Approval. 

• Section 37 provides that it is only from and after approval by the SEC and the issuance by the SEC of a certificate of filing that the capital stock shall stand increased or decreased. 
• Thus, there is no increase in the authorized capital stock even if the stockholders already paid the additional subscription if there is no approval of the SEC.
• Any payment by the shareholder of the subscription price before the filing of the application with the SEC shall be considered as deposits only on future subscriptions and the corporation will hold the same in trust until it files a petition to increase its capitalization and a certificate of filing of the increase of capital stock is approved and issued by the SEC.

5.01. Verification. 

• SEC Memorandum Circular No. 6, Series of 2008 provides for the rules for on-site verification of financial records relative to the application for increase in capital stock where the SEC will verify cash payment for subscriptions or the conversion of advances/liabilities to payment of subscription for the increase.
• The application for increase in capital stock must be accompanied by a Management Representation signed under oath by the President/Chief Executive Officer and Treasurer/Chief Finance Officer stating:
1. that all information and representations contained in the submitted application and its supporting documents are correct; 
2. the verification procedures required by the SEC were conducted by an independent auditor who issued a report thereon in accordance with the auditing standards in force;
3. the items/ accounts subject of the application are authorized, valid and legal; and 
4. the shares of stock to be issued are not watered. m In addition, the application must also be accompanied by a Report of an Independent Certified Public Accountant on the conduct and result of the required verification procedures.

6. Bonded Indebtedness. 

• Section 37 of the RCCP covers only cases where a corporation will incur, create, or increase bonded indebtedness. 
• The requirements of Section 37 do not apply to decrease of bonded indebtedness. 
• In addition, Section 37 does not cover all kinds of indebtedness because a corporation has an implied power to borrow money when necessary to carry out the purposes of its organization. In the exercise of such implied power, a corporation may execute notes or other customary evidences of indebtedness.
• Bonded indebtedness refers to secured indebtedness or indebtedness secured by real or personal property that are covered by certificates. 
• They refer to negotiable corporate bonds secured by mortgage on property. 
• Nonstock corporations may incur, create or increase bonded indebtedness when approved by a majority of the Board of Trustees and by at least 2/3 of the members in a meeting duly called for the purpose.
• The requirements are basically the same as the requirements for increase and decrease of capital stock as it likewise requires the same ·approvals by the directors and the stockholders.
• Prior approval of the SEC is necessary for the creation or increase of bonded indebtedness. 
• In addition, the bonds issued by a corporation are securities and shall therefore be registered with the SEC, which shall have the authority to determine the sufficiency of the terms thereof. The documents that are required by the SEC are as follows:
1. Certificate of Creation of Bonded Indebtedness; 
2. Audited financial statements as of the last fiscal year stamped received by BIR and SEC; 
3. Unaudited financial statements for the current year period, if item no. 2 is more than six months old certified by the company accountant; 
4. List of the company's properties with their corresponding book, appraised or bondable values that will be used to secure the projected bond issues certified by the company accountant;
5. Projected financial statements, certified by the company accountant, showing the utilization of the proceeds of the bonds and the redemption of the bond issues;
6. Trust indenture executed by the corporation and the trustee; 
7. Sample form of the mortgaged bond certificate to be issued; 
8. Notarized Secretary's Certificate of no pending case of intra-corporate dispute; and 
9. Compliance Monitoring Division (CMD) Clearance and/or clearance from other Department of the Commission.

PROBLEM: 

Suppose "X" Corporation has an authorized capital stock of Pl million divided into 100,000 shares of stock with par value of Pl0.00 each. Give two ways whereby said authorized capital stock may be increased to about Pl.5 million. 

Two ways of increasing the Authorized Capital Stock of "X" Corporation to Pl.5 million are: 

1. Increase the number of shares while maintaining the par value per share, that is, increase the shares from 100,000 to 150,000 shares with the same par value of Pl0.00 each. 
2.  Increase the par value while maintaining the number of shares, that is, increase the par value of the 100,000 shares to P15.00 each. (2001 Bar)