CLASSIFICATION OF SHARES 7042, otherwise kno wn as the "Foreign Investments Act of

1991"; and other pertinent laws.

SECTION 6. Classification of Shares. — The classifcation of
shares, their corresponding rights, privileges, or restrictions, SECTION 8. Redeemable Shares. — Redeemable shares
may be issued by the corporation when expressly provided in
and their stated par value, if any, must be indicated in the
the articles of incorporation. They are shares which may be
articles of incorporation. Each share shall be equal in all
purchased by the corporation from the holders of such shares
respects to every other share, except as otherwise provided in
upon the expiration of a fixed period, regardless of the
the articles of incorporation and in the certificate of stock.
existence of unrestricted retainedearnings in the books of the
corporation, and upon such other terms and conditions stated
The shares in stock corporations may be divided into classes or
in the articles of incorporation and the certificate of stock
series of shares, or both. No share may be deprived of voting
representing the shares, subject to rules and regulations issued
rights except those classifed and issued as "preferred" or
by the Commission.
"redeemable" shares, unless otherwise provided in this Code:
Provided, That there shall always be a class or series of shares
SECTION 9. Treasury Shares. — Treasury shares are shares
with complete voting rights.
of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation through
Holders of nonvoting shares shall nevertheless be entitled to
purchase, redemption, donation, or some other lawful means.
vote on the following matters:
(a) Amendment of the articles of incorporation; Such shares may again be disposed of for a reasonable price
fixed by the board of directors.
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate property; CLASSIFICATION OF SHARES
(d) Incurring, creating, or increasing bonded indebtedness; (1) Founder’s Share
(e) Increase or decrease of authorized capital stock; (2) Par Value Shares
(f) Merger or consolidation of the corporation with another
(3) Non-Par Value Shares
corporation or other corporations;
(g) Investment of corporate funds in another corporation or (4) Common Shares
business in accordance with this Code; and (5) Preferred Shares
(h) Dissolution of the corporation. (a) Preferred Participating Shares
(b) Preferred Cumulative Shares
Except as provided in the immediately preceding paragraph, (6) Voting Shares
the vote required under this Code to approve a particular (7) Non-Voting Shares
corporate act shall be deemed to refer only to stocks with (8) Redeemable Shares
voting rights.
(9) Treasury Shares
The shares or series of shares may or may not have a par (10) Shares in Escrow
value: Provided, That banks, trust, insurance, and preneed
companies, public utilities, building and loan associations, and 1 FOUNDER’S SHARE
other corporations authorized to obtain or access funds from • Holders are entitled to an EXCLUSIVE right to vote
the public, whether publicly listed or not, shall not be permitted and be voted for, but limited for 5 years only from
to issue no-par value shares of stock. date of inception of the corporation
Preferred shares of stock issued by a corporation may be given
preference in the distribution of dividends and in the distribution Purpose of having the EXCLUSIVE right to vote and
of corporate assets in case of liquidation, or such other be voted for: To ensure that the corporation will
preferences: Provided, That preferred shares of stock may be eventually succeed because they are the ones who
issued only with a stated par value. The board of directors, envisioned the Corporation. They have the idea of how
where authorized in the articles of incorporation, may fix terms the business shall proceed.
and conditions of preferred shares of stock or any series
thereof: Provided, further, That such terms and conditions shall Thus, the laws provide that for a period of 5 years or
be effective upon filing of a certificate thereof with the
less – they have the right to vote and be voted upon. NO
Securities and Exchange Commission, hereinafter referred to
as the "Commission". ONE ELSE have the right to nominate and elect. This
is used to guide the infant corporation.
Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of such The certificate of the founders’ shares defines the
shares shall not be liable to the corporation or to its creditors in privilege that the holders of this share shall have.
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 2 PAR-VALUE VS NON-PAR VALUE SHARES
as capital and shall not be available for distribution as
dividends. PAR-VALUE SHARES
• This is the minimum price stated in the Articles of
A corporation may further classify its shares for the purpose of Incorporation.
ensuring compliance with constitutional or legal requirements. • These represent the capital of the corporation
SECTION 7. Founders' Shares. — Founders' shares may be How do we arrive at the par value?
given certain rightsand privileges not enjoyed by the owners of
other stocks. Where the exclusive right to vote and be voted for Dividing the authorized capital stock (ACS) into the
in the election of directors is granted, it must be for a limited number of shares
period not to exceed five (5) years from the date of
incorporation: Provided, That such exclusive right shall not be Example: 100M capital divided into 100M shares = 1
allowed if its exercise will violate Commonwealth Act No. 108, peso par value
otherwise known as the "Anti-Dummy Law"; Republic Act No.
How do we arrive at the authorized capital? PREFERRED SHARES
Multiplying the par value shares by the number of Shares having certain rights and privileges not available
shares to holder of the common shares

Watered Stock Shareholders are given preference in the:

Shares are purchased below the par value (1) Distribution of dividends; and
(2) Distribution of corporate assets upon
dissolution
NON-PAR VALUE SHARES
• No fixed value stated in the Articles of Kinds of Preferred Shares as to Dividends
Incorporation and on the Certificate of Stock but (a) Preferred Participating Shares
issued for a consideration not less than five (5) (b) Preferred Cumulative Shares
pesos per share

Can all the corporations issue non-par value PREFERRED PARTICIPATING SHARES
shares? Preferred shareholders already earned premium for their
General Rule: Yes, any corporation can issue non-par preferred shares and they still participate in the
value shares. distribution of the common shares. They take both –
they have preference and they also participate.
Exceptions: Corporations that have access to public
funds, such as: Who can issue preferred shares?
(1) Banks Every corporation can issue preferred shares.
(2) Trust
(3) Insurance and Preneed Companies
(4) Public Utilities CUMULATIVE PREFERRED SHARES
(5) Building and Loan Associations Share which entitles the holder not only to the payment
of current dividends but also to dividends in arrears.

Characteristics of a Non-Par Value Share Illustration. Corporation has cumulative shares.

(1) Deemed fully paid Year 1 – the corporation has not declared dividends
(2) Non-assessable Year 2 – the corporation decided to declare dividends
(3) Holders cannot be made liable more than the
issued value In this case, if the stipulated dividend is not paid in Year
(4) It must not be issued less than 5 pesos per 1, it shall be added to the dividend which shall be due in
share Year 2 and the accumulated dividends must be paid to
(5) Treated as capital the holder of said preferred share before any dividend
(6) Not available for distribution of dividends may be paid to the holders of common stock.

Even if the Corporation has profits, is it obliged to

Distinction between Par Value and Non-Par Value give dividends?
Question: If the assets of the corporation have all Answer: No.
been exhausted and there are still creditors, can the
creditors go after the shareholders? If the Corporation does not declare dividends for a
Non-Par Value Par-Value long time, what does the BIR assess?
No – the creditors cannot Yes – the creditors can go
go after such holders. The after the shareholders. Answer: The BIR will assess the corporation for
non-par value shares are Improperly Accumulated Earnings Tax (IAET).
deemed fully paid. The subscribers are
liable to corporate
creditors for their unpaid 6 VOTING SHARES VS NON-VOTING SHARES
subscriptions Voting Shares – provided with voting rights on any
issue on the corporation. The voter can participate in
any meeting and on any issue that may be raised during
the meeting.
3 COMMON SHARES vs PREFERRED SHARES
Reason: A shareholder is a part-owner of the
COMMON SHARES corporation. Since the shareholder cannot interfere with
• Entitle the holders pro rata on the profits of the the management, he can only exercise his ownership
corporation without preference over other by voting on certain issues. As part-owner, he has
stockholders the right to protect his ownership. Hence, entitles
• Given voting rights him to vote.
Non-Voting Shares – not provided with voting rights but 7 REDEEMABLE SHARES
subject to exceptions • Redeemable shares are redeemable at a fixed
date or at the option of either the issuing
Exceptions: Holders of nonvoting shares shall corporation or the stockholder or both at a
nevertheless be entitled to vote on the following matters: certain redemption price.
(1) Amendment of the articles of incorporation • These shares may be issued by the corporation
(2) Adoption and amendment of the bylaws when expressly provided in the articles of
(3) Sale, lease, exchange, mortgage, pledge, or incorporation.
other disposition of all or substantially all of • They are shares which may be purchased by the
the corporate property corporation from the holders of such shares upon
the expiration of a fixed period, regardless of the
Note: In determining whether there is a existence of unrestricted retained earnings in the
disposition of all or substantially all of the books of the corporation, and upon such other
corporate property, the guide is when such terms and conditions stated in the articles of
sale already affects the operations of the incorporation and the certificate of stock
corporation. When the corporation could no representing the shares, subject to rules and
longer carry out its business, then that will regulations issued by the Commission.
be the point when it will have to be open for
voting, including non-voting shares. Purpose: Purely capital

SC ruled that 80% is considered “substantially Redeemable Shareholder is an Investor

all” Note: A holder of a redeemable share is an investor
who is entitled to dividends.
(4) Incurring, creating, or increasing bonded
indebtedness General Rule: When the redemption period is due, the
(5) Increase or decrease of authorized capital holder can compel the corporation to buy it back
stock (usually at a premium). The corporation cannot refuse
(6) Merger or consolidation of the corporation with and cannot even argue that it does not have retained
another corporation or other corporations earnings yet.
(7) Investment of corporate funds in another
corporation or business in accordance with this Exception: Insolvency – such as when the assets are
Code; and less than the liabilities. Only when the corporation has
(8) Dissolution of the corporation no longer assets left to be paid that the stockholder
cannot compel the Corporation to redeem the shares.
Reason why a stockholder with non-voting shares is
still entitled to vote on these issues: Basis why the Corporation cannot be compelled to
Because the fundamental contract of these parties is the buy back the shares: Trust Fund Doctrine – wherein
Articles of Incorporation. the assets of the corporation are primarily reserved for
the creditor, and not for the investors of the corporation.
In obligations and contracts, we have learned that if we
change the terms and conditions of the contract, we can Distinction Between an Investor and a Lender
novate the contract. What is necessary in novation is the INVESTOR CREDITOR/LENDER
consent of both parties. If you need to change Entitled to dividends Not entitled to profits but is
anything in the AOI, you need consent. All parties only paid for the balance +
must be able to participate WON they agree on the interest
change of the agreement. Can compel the corporation to No assumption of risk
redeem when the redemption
period is due, UNLESS the
Right of Appraisal corporation is insolvent
For those who dissent the proposed agreement, they
could exercise their right of appraisal. Such right can Hence, the investor assumes
be exercised by a stockholder who disagrees with the the risk
decision of the Board of Directors to amend the Articles
of Incorporation. The dissenting stockholder can IOW, in a redeemable share, the investor takes the risk
demand the corporation to buy back his shares at that he will not be paid when the corporation is insolvent
their fair market value. because these assets are primarily reserved for the
creditors of the corporation under the Trust Fund
Doctrine.

Would the investors have voting rights?

It depends if the redeemable shares are issued together
with voting rights or not.

Note: Once repurchased or redeemed, the redeemable

shares become part of the treasury shares as they are
now back in the treasury of the corporation.
8 TREASURY SHARES CORPORATE TERM
• These are stocks issued and were fully paid, but
were reacquired by the corporation through SECTION 11. Corporate Term. — A corporation shall have
purchase, donation, sale, and other lawful means. perpetual existence unless its articles of incorporation provides
otherwise.

Nature of Treasury Shares Corporations with certi�cates of incorporation issued prior to

Treasury shares are part of capital. When these shares the effectivity of this Code, and which continue to exist, shall
were bought or reacquired, surplus money was used have perpetual existence, unless the corporation, upon a vote
and not capital money. Otherwise, we will be violating of its stockholders representing a majority of its outstanding
the Trust Fund Doctrine. capital stock, noti�es the Commission that it elects to retain its
specific corporate term pursuant to its articles of incorporation:
Provided, That any change in the corporate term under this
Being part of capital, the treasury shares can be sold section is without prejudice to the appraisal right of dissenting
again. As to how much, it is the Board that will decide. stockholders in accordance with the provisions of this Code.

Special Features of Treasury Shares A corporate term for a specific period may be extended or
(1) Once reacquired, it shall form part of its shortened by amending the articles of incorporation: Provided,
capital as a corporate asset. That no extension may be made earlier than three (3) years
(2) They can only be reacquired if there are prior to the original or subsequent expiry date(s) unless there
are justifiable reasons for an earlier extension as may be
unrestricted retained earnings.
determined by the Commission: Provided, further, That such
(3) It is not entitled to dividends because in extension of the corporate term shall take effect only on the day
effect, the corporation is paying itself, which is following the original or subsequent expiry date(s).
absurd. Otherwise, it will involve double sale for
the same shares. A corporation whose term has expired may apply for a revival
(4) It is not entitled to the right to vote because of its corporate existence, together with all the rights and
the corporation is not a stockholder. If allowed privileges under its certificate of incorporation and subject to all
and the BOD exercises such right as of its duties, debts and liabilities existing prior to its revival.
Upon approval by the Commission, the corporation shall be
representative of the corporation, it can be deemed revived and a certificate of revival of corporate
subject to abuses. existence shall be issued, giving it perpetual existence, unless
its application for revival provides otherwise.
If they are were voting shares when issued,
now that they are back, who may vote? No application for revival of certificate of incorporation of banks,
Answer: NO ONE. Treasury shares have no banking and quasi-banking institutions, preneed, insurance and
voting rights. trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service
business, and other �financial intermediaries shall be approved
If the law were to give them voting rights, since by the Commission unless accompanied by a favorable
these treasury shares are owned by the recommendation of the appropriate government agency.
corporation, the BOD necessarily will act on
behalf of the corporation. If they were given
voting rights, the BOD will definitely vote for TERM OF EXISTENCE
them all the time. General Rule: A corporation shall have a perpetual
(5) It can be resold by the corporation existence
(6) It is not considered as outstanding shares
because it is back to the corporation – it is in Exception: Unless the Articles of Incorporation provides
already otherwise.
9 SHARES IN ESCROW Situation 1. If a new corporation was formed AFTER
Issued or committed to a particular shareholder, but February 3, 2019 – it shall have a perpetual existence.
deposited with a 3rd person or a deposit account
pending the fulfilment by that 3rd person for which it was Situation 2. If a corporation is organized BEFORE
reserved of the conditions expressly provided in the February 3, 2019 – it is also deemed perpetual UNLESS
certificate of stocks the corporation, upon a vote of its stockholders
representing a majority of its outstanding capital stock,
Share is subject to an agreement; share is deposited notifies the Commission that they intend to retain its
with a 3rd person to be kept by the depositary until the original term pursuant to its articles of incorporation.
performance of a certain condition

REVIVAL OF A CORPORATION
Rule: A corporation whose term has expired may apply
for a revival of its corporate existence to the
Commission. Upon the approval by the Commission, the
corporation shall be deemed revived and a
CERTIFICATE OF REVIVAL OF CORPORATE
EXISTENCE shall be issued.
 CAPITAL STOCKS addresses of the original subscribers, amount subscribed
and paid by each on the subscription, and a statement that
some or all of the shares are without par value, if applicable;
SECTION 12. Minimum Capital Stock Not Required of Stock
(i) If it be a nonstock corporation, the amount of its capital,
Corporations. —Stock corporations shall not be required to
the names, nationalities, and residence addresses of the
have a minimum capital stock, except as otherwise specifically
contributors, and amount contributed by each; and
provided by special law.
(j) Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
Authorized Capital Stock – refers to the maximum
amount of capital which the corporation will receive An arbitration agreement may be provided in the articles of
when it issues all its shares. incorporation pursuant to Section 181 of this Code.

Subscribed Capital Stock – refers to the committed The articles of incorporation and applications for
amendments thereto may be �led with the Commission in
amount of capital which the corporation will receive from
the form of an electronic document, in accordance with the
its existing subscribers Commissions rules and regulations on electronic filing.

Paid-Up Capital – refers to the amount of capital which CONTENTS OF THE ARTICLES OF
the corporation already received from its subscribers. INCORPORATION
This represents the paid portion of the subscribed (1) The name of the corporation;
capital.
(2) The specific purpose or purposes for which the
corporation is being formed. Where a corporation
has more than one stated purpose, the articles of
If you are a new corporation, how much should be incorporation shall indicate the primary purpose and
subscribed? the secondary purpose or purposes: Provided, That
General Rule: The Revised Corporation Code does not
a nonstock corporation may not include a purpose
require a minimum subscribed capital stock. which would change or contradict its nature as such;
(3) The place where the principal office of the
Reason: To attract the formation of more business corporation is to be located, which must be within the
organizations. Philippines;
(4) The term for which the corporation is to exist, if the
Exception: However, the 25% subscribed capital stock
corporation has not elected perpetual existence;
is compulsory when there is an increase in the capital
(5) The names, nationalities, and residence
stock. Thus, it requires that at least 25% must be addresses of the incorporators;
subscribed, and 25% must be paid-up. (6) The number of directors, which shall not be more
than �fifteen (15) or the number of trustees which
may be more than fifteen (15);
(7) The names, nationalities, and residence
CONTENTS OF THE
addresses of persons who shall act as directors
ARTICLES OF INCORPORATION
or trustees until the first regular directors or trustees
are duly elected and qualified in accordance with this
SECTION 13. Contents of the Articles of Incorporation. — Code;
All corporations shall �file with the Commission articles of
incorporation in any of the official languages, duly signed and (8) If it be a stock corporation
acknowledged or authenticated, in such form and manner as (a) the amount of its authorized capital stock
may be allowed by the Commission, containing substantially (b) number of shares into which it is divided
the following matters, except as otherwise prescribed by this (c) the par value of each,
Code or by special law: (d) names, nationalities, and residence
(a) The name of the corporation; addresses of the original subscribers
(b) The specific purpose or purposes for which the (e) amount subscribed and paid by each on the
corporation is being formed. Where a corporation has more
subscription, and
than one stated purpose, the articles of incorporation shall
indicate the primary purpose and the (f) a statement that some or all of the shares
secondary purpose or purposes: Provided, That a nonstock are without par value, if applicable;
corporation may not include a purpose which would change or
contradict its nature as such; If it be a nonstock corporation
(c) The place where the principal office of the corporation is to (a) the amount of its capital
be located, which must be within the Philippines; (b) the names, nationalities, and residence
(d) The term for which the corporation is to exist, if the addresses of the contributors, and
corporation has not elected perpetual existence;
(e) The names, nationalities, and residence addresses of the (c) amount contributed by each
incorporators; (9) Such other matters consistent with law and
(f) The number of directors, which shall not be more than which the incorporators may deem necessary
�fifteen (15) or the number of trustees which may be more than and convenient.
fifteen (15);
(g) The names, nationalities, and residence addresses of
persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified in
accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized
capital stock, number of shares into which it is divided, the
par value of each, names, nationalities, and residence
NAME OF THE CORPORATION
Importance: For identification purposes; the name is
important in order to distinguish it from other
organizations

Conditions:
(1) Not have been used nor reserved for
(2) Not misleading
(3) Must be descriptive of the corporation’s
purpose

PRIMARY AND SECONDARY FRANCHISE

(1) Primary Franchise – right to exist as a corporation
(2) Secondary Franchise – intended for the carrying
out of a specific business

Once you are issued a certificate of incorporation, this

is called primary franchise – this means you have the
right to exist as a corporation.

If you are dealing or engaged in the jeepney business,

you will also be given another franchise by the LTFRB –
a secondary franchise – which is intended for the
carrying out of a specific business.

The fact that you are given a primary franchise is not a

guarantee that you can immediately pursue any
business that you want, especially if the business that
you are trying to pursue would involve public interest or
public utilities.

PRINCIPAL OFFICE
Importance: For the SEC to be able to locate and
identify where the corporation is and to know where to
serve summons and notices

NEXT MEETING: Continue until Section 20