Corporation Law: The Revised Corporation Code of the Philippines - Sec 61

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES 

Republic Act No. 11232 

TITLE VII - STOCKS AND STOCKHOLDERS

Section 61. Consideration for Stocks.

Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be:

(a) Actual cash paid to the corporation;

(b) Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;

(c) Labor performed for or services actually rendered to the corporation;

(d) Previously incurred indebtedness of the corporation;

(e) Amounts transferred from unrestricted 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 shall initially be determined by the stockholders or the board of directors, subject to the approval of the Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided in this section, insofar as applicable, may be used for the issuance or bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred by the articles of incorporation or the bylaws, or if not so fixed, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.


1. Consideration.
  • Section 61 of the RCCP enumerates the various types of consideration that the law allows to be exchanged for shares in subscription agreements. 
  • The consideration for the issuance of stock is not limited to only one of the items enumerated because the law states that the consideration may be any or a combination of any two or more of the considerations enumerated. 
  •  However, Section 61 imposes the following conditions:
    1. Stocks shall not be issued for a consideration less than the par or issued price thereof;
    2. Shares of stock shall not be issued in exchange for promissory notes or future services; and 
    3. 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. 
  • 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.

(a) Actual cash paid to the corporation;

  • 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 in the form prescribed by the Bangko Sentral ng Pilipinas (BSP) to prove the existence of inward remittance is required but only with respect to those corporations with foreign subscribers who want to register their investments with the BSP.  
(b) Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
  • Tangible or intangible property is also acceptable. 
  • However, if property will be used as consideration, it is required that:
  1. The property is actually received by the corporation; 
  2. The property is necessary or convenient for its use and lawful purposes;
  3. It must be subject to a fair valuation equal to the par or issued value of the stock issued;
  4. The valuation thereof shall initially be determined by the stockholders or the board of directors; and 
  5.  The valuation is subject to approval by the SEC. 
  • The stockholders or the Board of Directors shall initially 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 prevent watering of stocks.
  • Intangible properties that may be used as consideration include patents or copyrights. 
    • If intellectual property will serve as the consideration, the corporation must submit to the SEC:
      1. a copy of the Certificate of Registration of the intellectual property right together
      2. an appraisal report by an accredited appraisal company that is not more than six months old and
      3. a Deed of Assignment in favor of the corporation.
  •  A mining claim is also acceptable because it is an intangible property that is capable of valuation. 
    • However, the mining claim must be necessary and convenient for use by the acquiring corporation in carrying out its lawful purposes. 
    • The Mining Permit covering the claim must be submitted. 
    • The SEC also requires that the actual value of the mining claim must be appraised and determined by the Bureau of Mines and Geo-Sciences and confirmed directly to the SEC by said bureau.
  • An undivided interest in real property of a co-owner is an acceptable consideration for the subscription of shares. The SEC imposes the following conditions for the acceptance of the undivided interest in real property:
    1. The property must be something that the corporation may acquire and hold in carrying out its purpose or reasonably necessary or convenient in the pursuit of business; 
    2. The interest in the co-ownership must have a pecuniary value capable of ascertainment (at fair valuation equal to the par or issued value of the stock issued);
    3. The right over the property must actually be transferred to the corporation and no creditors of the property held in common shall be prejudiced by the transfer; and
    4. The transfer shall be subject to Articles 1620 and 1623 of the New Civil Code.
      • This means that there must be Waiver of Rights signed by all possible co-owners stating that they waive their right of redemption or pre-emption in relation to the transfer. 
      • The co-owner who is transferring his undivided interest in the shares shall execute an affidavit stating that:
        • he already gave notice to the other co-owners and 
        • the 30-day redemption period had already expired.
      • In the alternative, the SEC also requires an affidavit executed by the co-owners that they were given the required notice and that the 30-day redemption period had already expired.
(c) Labor performed for or services actually rendered to the corporation;
  • Labor performed for or services actually rendered to the corporation are acceptable. 
    • For example, shares can be issued as a bonus that is formally given out as additional compensation for satisfactory service rendered. 
    • Under this concept, the bonus takes the form of additional expenses on the part of the paying corporation for services rendered by the grantee.
  • However, future services are not acceptable.
    • Consequently, "movie star contracts" cannot be accepted as payment for subscription inasmuch as the services of movie stars under such contracts are not yet considered as actually rendered/received as their services would still be performed in the future. 
    • Only such services that have been actually rendered are acceptable subscription payment.
(d) Previously incurred indebtedness of the corporation;
  • Previously incurred indebtedness of the corporation may also be used as a consideration. 
    • The indebtedness involved is one that is acknowledged by the Board. 
    • Moreover, even indebtedness is subject to the confirmation of the Securities and Exchange Commission regarding valuation.
    • To prevent watering of stocks, the amount of the indebtedness or liabilities to be settled should be at least equal to the par value of the shares of stock, which the corporation intends to issue.
  • It is legally acceptable for one block of shareholders to be allowed to pay through a previously incurred indebtedness while others will pay in cash.
  • The set-off of the debt is equivalent to payment for the stock in cash.
(e) Amounts transferred from unrestricted retained earnings to stated capital;
  • Amounts transferred from unrestricted retained earnings to stated capital are also acceptable consideration. 
  • This happens whenever there is a declaration of stock dividends. 
  • The corporation cannot agree that the subscription price shall be paid only through the dividends that will be declared later. 
  • In effect, this stipulation obligates the subscriber to pay nothing for the shares in the contingency that dividends will not be declared later. 
  • This is illegal and in fraud of the other subscribers. 
  • It is settled that a corporation has no power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers by subjecting the particular subscriber to lighter burdens or by giving him greater rights and privileges.
(g) Shares of stock in another corporation;
  • One of the additional considerations provided under Section 61 of the RCCP is "shares of stock in another corporation." 
  • With respect to the shares of stock in another corporation, the acceptance of shares is subject to the provisions of Section 41 of the RCCP. 
  • It should also be noted that shares in another corporation is also considered property. 
  • Hence, the acceptance of shares is subject to the rule on approval of valuation of property. 
1.01. Generally Accepted Form of Consideration.
  • Section 61 of the RCCP likewise added "generally accepted form of consideration" in the list of considerations for subscription of shares. 
  • The records of Congress do not reveal the intent with respect to this consideration. 
  • While the term is quite broad, it is believed that the inclusion of this consideration does not justify the acceptance of any other consideration that is not similar to those specifically identified. 
  • As stated earlier, Article 1350 of the New Civil Code provides that "in onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other." 
    • If the prestation is "to give," what should be given is either cash or properties that are described in Section 61 (b) of the RCCP. 
    • If the obligation is to do or not to do, then it can fall under "labor" that must be already performed or rendered as required under Section 61(c) of the RCCP. 
1.02. Conversion.
  • The corporation may accept as consideration the outstanding shares exchanged for stocks in the event of reclassification or conversion. 
    • "Conversion" also includes conversion of a single proprietorship or partnership into a corporation or a spin-off of one or more division of the company. 
    • The consideration in these cases is actually the net assets of those enterprises or units. 
  • The partnership that will be converted into a corporation must be dissolved and a duly executed Articles of Dissolution of Partnership should be submitted. 
    • In addition, considering that two personalities are involved, there must also be transfer of the properties of the single proprietorship or partnership to the corporation hence, SEC requires a Deed of Assignment of the assets and liabilities to the corporation and a separate Deed of the Assignment for land with primary entry by Register of Deeds.
  • The creditors must consent to the conversion; hence, SEC requires a list of creditors, with the amount due to each creditor certified by the auditor or certified under oath by the company accountant and the written consent of each creditor.
2. Watered stocks. 
  • Watered stocks are stocks that are issued for a consideration less than the par or issued price thereof.
3. Issued Price. 
  • It is necessary to fix the issued price of no-par value shares. 
  • Section 61 of the RCCP provides that the issued value may be fixed in any of the following: 
    1. The Articles of Incorporation; or
    2. A resolution issued by the Board of Directors pursuant to authority conferred upon it by the Articles of Incorporation or the By-Laws; or 
    3. In the absence of provisions in the Articles of Incorporation or if the power is not delegated to the Board, in a resolution of the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. 
  • The "issued value" of the shares may be higher than its par value. 
    • A share is a property that may also appreciate in value. 
    • Hence, it may happen that the fair market value or the book value may be greater than the par value. 
    • The Board can therefore fix a selling/subscription price that is greater than the par value.
    • It is important to point out in this connection that a stock certificate represents an interest in the corporation that is based on the number of shares owned by a stockholder regardless of the amount paid for such shares. 
    • The capital paid in excess of the par value cannot be again issued a stock certificate if the share to which the paid-up surplus was applied as payment had already been previously issued a stock certificate.
  • It should be recalled that the amount of the Authorized Capital Stock is present only if the shares of a corporation have par value. 
    • It is possible to calculate and state the subscribed capital by multiplying the number of subscribed shares with the par value. 
  • If the shares have no par value, no authorized capital stock is stated and the Stated Capital is fixed by the issuance of the no-par value shares with fixed issued value. 
    • In those cases, the responsibility for making that statement of the issued value is placed by law on the board of directors.
    • The total peso value declared by them is considered the Stated Capital. 
4. Deposit on Subscription. 
  • The deposit on stock subscription refers to an amount of money received by the corporation as a deposit with the possibility of applying the same as payment for the future issuance of capital stock.
  • Deposit on subscription is not subject to documentary stamp tax.
  • The deposit on stock subscription is merely an amount of money received by a corporation with a view of applying the same as payment for additional issuance of shares in the future, an event that may or may not happen. 
  • The person making a deposit on stock subscription does not have the standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives and attributes of a stockholder.
PROBLEM: 
Assume that you want to be a participant in the business independently of your being its legal counsel, and that more investors are expected after the firm is formally organized. Explain briefly with legal reasons. Citing the proper law or laws, how may you lawfully charge your fee and apply them to the payment of your share in the capital of the firm?
I may use the chargeable fee as payment for shares in the corporation provided that the corporation ratifies or adopts the agreement for the services that I rendered before incorporation. 

Section 61 of the RCCP provides that consideration for the issuance of stock may be, among other enumerated items, "labor performed for or services actually rendered to the corporation." 
Compensation for services actually rendered to the corporation is credit that is property with ascertainable value. Hence, I can continue to perform services for the company after its organization and thereafter ask as payment shares in the corporation. With respect to the services performed prior to incorporation, the agreement with the incorporators or promoters is not necessarily binding on the corporation. The corporation can however ratify the same. In such a case, the services can then be used as consideration for shares in the corporation. (1973 Bar) 

 

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