Revised Corporation

Code (RCC) RA No.

11232
Revised Corporation Code
History
On February 23, 2019, Republic Act No. 11232 or the
Revised Corporation Code became effective, replacing
Batas Pambansa Blg. 68. The law introduces fresh and
progressive concepts aimed at improving the ease of doing
business in the country, promoting good corporate
governance and afford protection to corporations,
investors and consumers alike, amid a fast-evolving
business landscape.
Revised Corporation Code
Salient Features
1. One person corporation (OPC)
2. Perpetual corporate term
3. No minimum capital stock
4. Independent directors
5. Emergency board
6. Remote communication
7. Electronic filing and monitoring
8. Alternative dispute resolution
9. Deterrence to abuses, fraud and corruption
Revised Corporation Code
Table of Contents:
1. Title I - GENERAL PROVISIONS DEFINITIONS AND CLASSIFICATIONS
2. Title II - INCORPORATION AND ORGANIZATION OF PRIVATE
CORPORATIONS
3. Title III - BOARD OF DIRECTORS, TRUSTEES, OFFICERS
4. Title IV - POWERS OF CORPORATION
5. Title V - BY-LAWS
6. Title VI - MEETINGS
7. Title VII - STOCKS AND STOCKHOLDERS
8. TITLE VIII - CORPORATE BOOKS AND RECORDS
Revised Corporation Code
Table of Contents:
9. Title IX - MERGER AND CONSOLIDATION
10. Title X - APPRAISAL RIGHT
11. Title XI - NON-STOCK CORPORATION
12. Title XII - CLOSE CORPORATIONS
13. Title XIII - SPECIAL CORPORATIONS
14. Title XIV – DISSOLUTION
15. Title XV - FOREIGN CORPORATIONS
16. Title XVI - INVESTIGATIONS, OFFENSES, AND PENALTIES
17. Title XVII - MISCELLANEOUS PROVISIONS
TITLE I GENERAL PROVISIONS
Types of Business Organization:
1. Sole Proprietorships
A form of business organization with only one proprietary owner. It
is when a person personally or a single individual conducts business
under his own name or under a business name.
2. Partnerships
Art. 1767, New Civil Code
3. Corporations
Sec. 2, Revised Corporation Code.
TITLE I GENERAL PROVISIONS
Sole Proprietorship Partnership Corporation
Commencement Starts upon selling Created by mere Created by operation of
agreement of the parties law.
No. of Incorporators Sole proprietor At least 2 persons One Person Corporation
is allowed under the
RCC.
Commencement of No juridical personality Execution of the From the date of
Juridical Personality contract (Art. 1784, Civil issuance of the
Code) Certificate of
Incorporation by the
SEC. (Sec. 18, RCC)
Liability Liabilities up to the Liabilities up to the As a rule, shareholders
extent of his personal extent of his personal are liable up to the
property. property. extent of their capital
contributions
Exception: Piercing the
veil of corporate fiction
TITLE I GENERAL PROVISIONS
Sole Proprietorship Partnership Corporation
Management Managed by the sole Absence of any Power to do business is
proprietor. agreement, every vested in the Board of
partner is an agent of Directors (BOT) or Board
the partnership. of Trustees.
Transferability of Transferrable through Needs consent of all Does not need prior
Interest asset sale partners (based on consent of the
delectus personae) stockholders
Right of Succession None None Yes
TITLE I GENERAL PROVISIONS
Advantages of a Corporation Disadvantages of a Corporation

High capitalization Higher Income Tax Liability

Limited liability Less Participation in the Management.

Right of succession No delectus personae

Transferability of interest Dissolution

Easier management Greater degree of government control

and supervision
Difficulty in meeting requirements
 TITLE I GENERAL PROVISIONS
Sec. 2 Corporation Defined (I implore you to understand
this provision by heart.)

Breakdown of the provision:

1.Artificial Being,
2.Created by operation of law,
3.Having the rights of succession
4.Powers, attributes, and properties that is expressly
authorized by law, or incidental to its existence.
TITLE I GENERAL PROVISIONS
Can a corporation sue for moral damages?
Yes, a corporation can sue a person for moral damages. A juridical person is
generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock.
Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article
2219 of the Civil Code. This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other form of defamation.
Article 2219(7) does not qualify whether the plaintiff is a natural or juridical
person. Therefore, a juridical person such as a corporation can validly complain
for libel or any other form of defamation and claim for moral damages.
(Filipinas Broadcasting Network vs. Ago Medical and Educational Center, G.R.
No. 141994, January 17, 2005)
TITLE I GENERAL PROVISIONS
Private Corporation Public Corporation GOCCs
Definition An artificial being Public corporations are Government-owned or
created by operation of those formed or controlled corporation
law, having the rights of organized for the refers to any agency
succession, and powers, government of a portion organized as a stock or
attributes, and of the state. (Section 3, non-stock corporation,
properties expressly Act No. 1459, vested with functions
authorized by law, or Corporation Law) relating to public needs
incidental to its whether governmental or
existence (Sec. 2, RCC) proprietary in nature,
and owned by the
Government directly or
through its
instrumentalities either
wholly, or, where
applicable as in the case
of stock corporations, to
the extent of at least
fifty-one (51) per cent of
its capital stock (EO 292)
TITLE I GENERAL PROVISIONS
Is Boy Scout a Private Corporation?
Boy Scout of the Philippines vs. Commission on Audit
Facts:
This case arose when the COA issued Resolution No. 99-0115 on August 19, 1999
("the COA Resolution"), with the subject "Defining the Commission’s policy with
respect to the audit of the Boy Scouts of the Philippines." In its whereas clauses,
the COA Resolution stated that the BSP was created as a public corporation under
Commonwealth Act No. 111, as amended by Presidential Decree No. 460 and
Republic Act No. 7278; that in Boy Scouts of the Philippines v. National Labor
Relations Commission,6 the Supreme Court ruled that the BSP, as constituted
under its charter, was a "government-controlled corporation within the meaning
of Article IX(B)(2)(1) of the Constitution"; and that "the BSP is appropriately
regarded as a government instrumentality under the 1987 Administrative Code."
TITLE I GENERAL PROVISIONS
Is Boy Scout a Private Corporation?
Boy Scout of the Philippines vs. Commission on Audit
Facts:
The BSP sought reconsideration of the COA Resolution in a letter signed by the BSP National President
Jejomar Binay. He claimed that RA 7278 eliminated the “substantial government participation” in
the National Executive Board by removing: (i) the President of the Philippines and executive
secretaries, with the exception of the Secretary of Education, as members thereof; and (ii) the
appointment and confirmation power of the President of the Philippines, as Chief Scout, over the
members of the said Board.
The BSP further claimed that the 1987 Administrative Code itself, of which the BSP s. NLRC relied on
for some terms, defines government-owned and controlled corporations as agencies organized as
stock or non-stock corporations which the BSP, under its present charter, is not.
And finally, they claim that the Government, like in other GOCCs, does not have funds invested in
the BSP. The BSP is not an entity administering special funds. The BSP is neither a unit of the
Government; a department which refers to an executive department as created by law; nor a bureau
which refers to any principal subdivision or unit of any department.
TITLE I GENERAL PROVISIONS
Boy Scout of the Philippines vs. Commission on Audit
Held:
The BSP is a public corporation or a government agency or instrumentality with
juridical personality, which does not fall within the constitutional prohibition in
Article XII, Section 16, notwithstanding the amendments to its charter. Not all
corporations, which are not government owned or controlled, are ipso facto to be
considered private corporations as there exists another distinct class of corporations
or chartered institutions which are otherwise known as “public corporations.” These
corporations are treated by law as agencies or instrumentalities of the government
which are not subject to the tests of ownership or control and economic viability but
to different criteria relating to their public purposes/interests or constitutional
policies and objectives and their administrative relationship to the government or
any of its Departments or Offices. Boy Scouts of the Philippines vs. Commission on
Audit, 651 SCRA 146, G.R. No. 177131 June 7, 2011
TITLE I GENERAL PROVISIONS
Two types of GOCCs
1. With original charter
Those GOCCs that are created by law.
2. Without original charter
GOCCs without original charters refer to
corporations created under the Corporation Code but
are owned or controlled by the government.
TITLE I GENERAL PROVISIONS
Examples of GOCCs with Original Charter:
TITLE I GENERAL PROVISIONS

Examples of GOCCs without Original Charter:

TITLE I GENERAL PROVISIONS
What is the purpose of distinguishing GOCCs with original
charter vs. Those merely acquired by the Government?
The purpose distinguishing GOCCs with original charter vs.
those merely acquired by the Government is to determine
whether the Labor Code, or the Civil Service Commission’s
rules will apply as regards the employment of the GOCCs
employees.
TITLE I GENERAL PROVISIONS
Section 3 Classes of Corporations.
Under the RCC, corporations shall be classified by the into:
1. Stock corporations
a. Those which have capital stock divided into shares,
and
b. are authorized to distribute to the holders of such
shares dividends, surpluses, among others.
2. Non-stock corporations
A catch all phrase.
TITLE I GENERAL PROVISIONS
Section 3 Classes of Corporations.
The fact that the capital of the Club is divided into shares does not
detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of
whether or not the Club is engaged in such business is its object or
purpose as stated in its articles and by-laws. Moreover, for a stock
corporation to exists, two requisites must be complied with: (1) a capital
stock divided into shares; and (2) an authority to distribute to the holders
of such shares, dividends or allotments of surplus profits on the basis of
the shares held. In the case at bar, nowhere it its AOI or by-laws could be
found an authority for the distribution of its dividends or surplus profits.
Strictly speaking, it cannot therefore, be considered as stock
corporation, within the contemplation of the Corporation Code. (CIR vs.
Club Filipino, 5 SCRA 312)
 Other Classes of Corporations

As to purpose Public corporation Private corporation Quasi-public

corporation
As to legal right De jure corporation De facto corporation Corporation by Corporation by
estoppel prescription
As to laws of Domestic corporation Foreign corporation
incorporation
As to whether the Open corporation Close corporation
corporation is open,
or not
As to control Parent Subsidiary Affiliate
As to the number of Corporation Corporation sole
persons who compose aggregate
them
As to whether they Ecclesiastical Lay corporation21
are for a religious corporation
purpose, or not
As to whether the Eleemosynary Civil corporation
corporations are corporation
Nationality of Corporations

Three test:
1.Place of Incorporation Test
2.Control Test
3.Grandfather Rule
Place of Incorporation Test

The state where the corporation is

incorporated is determinative of the
corporation’s citizenship. (Corporation
Law, Atty. Maria Zarah R. Villanueva-
Castro)
Place of Incorporation Test

Under Philippine jurisdiction, the primary

test is always the Place of Incorporation
Test since we adhere to the doctrine that a
corporation is a creature of the State whose
laws it has been created. (Villanueva,
Philippine Corporate Law, p. 58)
Control Test
In order for the control test to apply, we must first determine the
nationality of the stockholders.
It is considered a Philippine national when:
a. A corporation is wholly owned by Filipino citizens even if it is
incorporated abroad. The control test is inapplicable here as the
corporation is 100% owned by Filipinos.
b. Under Sec. 3 of the Foreign Investment Act.
The control test applies when a corporation is at least 60% owned by
Filipino citizens. And this is the applicable mode in determining the
nationality of a corporation engaged in the exploration, development, and
utilization of national resources.
Control Test
Under Section 3 of the Foreign Investments Act:
The term "Philippine national" shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty (60%) of the fund will accrue to the benefit of the
Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stocks outstanding and
entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines, in order that
the corporations shall be considered a Philippine national;
Control Test
Under the first definition of Philippine national:
The term "Philippine national" shall mean:
1. A citizen of the Philippines or a domestic partnership or association
wholly owned by citizens of the Philippines;
2. Or a corporation organized under the laws of the Philippines of which
3. At least sixty percent (60%) of the capital stock outstanding and entitled
to vote;
4. Owned and held by citizens of the Philippines
Control Test
The Philippine national under the provided clause:

1. A corporation and its non-Filipino stockholders own stocks;

2. Registered under the SEC enterprise;
3. At least 60% of the capital stocks outstanding and entitled to vote;
4. Of both corporations must be owned and held by citizens of the Philippines;
5. And at least sixty percent (60%) of the members of the Board of Directors of
both corporations must be citizens of the Philippines.
Compliance with these requisites shall render a corporation a Philippine
national.
Control Test
The Constitution expressly declares as State policy the development of an economy
"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals,
who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations
or associations at least 60 percent of whose capital with voting rights belongs to Filipinos.
The FIA’s implementing rules explain that "[f]or stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential."
In effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital"
in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as
well as with full beneficial ownership. This is precisely because the right to vote in the
election of directors, coupled with full beneficial ownership of stocks, translates to effective
control of a corporation. (Gamboa vs. Teves)
Control Test
Grandfather Rule
The Strict Rule or the Grandfather Rule Proper pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which states,
"but if the percentage of Filipino ownership in the corporation
or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of
Philippine nationality."
Under the Strict Rule or Grandfather Rule Proper, the combined
totals in the Investing Corporation and the Investee Corporation
must be traced (i.e., "grandfathered") to determine the total
percentage of Filipino ownership.
Grandfather Rule
Moreover, the ultimate Filipino ownership of the shares must first
be traced to the level of the Investing Corporation, and added to
the shares directly owned in the Investee Corporation x x x.
It is only when the Control Test is first complied with that the
Grandfather Rule may be applied. (Supra)
Application of the Grandfather Rule
Applying the Grandfather Rule, both the direct, and indirect
shareholdings in the corporation are determined.

C Corp
60% ownership

B Corp
70% ownership

A Corp Filipinos
100% ownership 40% ownership
Filipino individuals
30% ownership
When is the Grandfather Rule Resorted to?

In case of:
When is the Grandfather Rule Resorted to?
When is the Grandfather Rule Resorted to?

“Doubt” refers to various indicia that the “beneficial ownership” and

“control” of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders.
Significant indicators of doubt (dummy status):
(1) That the foreign investors provide practically all the funds for the
joint investment undertaken by these Filipino businessmen and
their foreign partner;
(2) That the foreign investors undertake to provide practically all the
technological support for the joint venture; and
(3) that the foreign investors, while being minority stockholders,
manage the company and prepare all economic viability studies
When is the Grandfather Rule Resorted to?

Non-payment by some subscribers of their shares in the partly

nationalized company creates serious doubt as to the true extent
of control, and ownership by Filipinos over the corporation.
(Narra Nickel v. Redmont, G.R. No. 195580, January 28, 2015)
Taken from ppt
presentation of
Atty. Zara-
Villanueva
What are shares

Shares represent the interest, or the investment of the

corporation.

It is also a form of security. Securities are shares, participation or

interests in a corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character. (Sec. 3.1,
Securities, and Regulations Code)
Doctrine of Separate Juridical
Personality.
The general doctrine of separate juridical personality provides that a
corporation has a legal personality separate and distinct from that of
people comprising it. By virtue of that doctrine, stockholders of a
corporation enjoy the principle of limited liability: the corporate debt is
not the debt of the stockholder. Thus, being an officer or a stockholder of
a corporation does not make one's property the property also of the
corporation. (Bustos vs. Millans Shoe, Inc. G.R. No. 185024, April 04,
2017)
The reason for this is to protect shareholders.
Piercing the Veil of Corporate Fiction
Under the doctrine of piercing the veil of corporate entity, the corporation's separate juridical
personality may be disregarded when there is an abuse of the corporate form. Whenever the
doctrine applies, the principal and the conduit will be treated as one; the controlled
corporation will be deemed to have, "so to speak, no separate mind, will or existence of its
own, and is but a conduit for its principal."

Corporate personality may be disregarded when the corporate identity is used to:
1. Defeat public convenience,
2. Justify wrong,
3. Protect fraud, or
4. Defend crime
Piercing the Veil of Corporate Fiction
CONCEPT BUILDERS, INC.,vs. THE NATIONAL LABOR RELATIONS COMMISSION, G.R. No.
108734 May 29, 1996

In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on
the same day, a similar information sheet stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casiño as the corporate secretary
of both corporations. It would also not be amiss to note that both corporations had
the same president, the same board of directors, the same corporate officers, and
substantially the same subscribers.
Piercing the Veil of Corporate Fiction
Example:
From the foregoing, it appears that, among other things, the respondent
(herein petitioner) and the third-party claimant shared
the same address and/or premises. Under this circumstances, (sic) it
cannot be said that the property levied upon by the sheriff were not of
respondents.
Clearly, petitioner ceased its business operations in order to evade the
payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a business
conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to
petitioner corporation.
Piercing the Veil of Corporate Fiction
When piercing does not apply:
1. Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not in itself sufficient ground for
disregarding the separate corporate personality. Thus, mere ownership of 70% of the
outstanding capital stock does not justify the disregard of the separate corporate
personality. (Aboitiz Equity Ventures, Inc. v. Chiongbian, G.R. No. 197530, July 9,
2014)
2. The similarity of business of two corporations does not warrant the disregard of
the corporate veil. The mere fact that the businesses of the two entities are
interrelated is not a
justification for disregarding the separate personalities, absent sufficient showing
that the corporate entity was purposely used as a shield to defraud creditors and
third persons of their
rights. (China Banking Corp. v. Dyne-Sem Electronics Corp)
Piercing the Veil of Corporate Fiction
When piercing does not apply:
3. Interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction. (Jardine Davies, Inc. v.
JRB Realty, Inc., G.R. No. 151438, July 15, 2005)

2. The similarity of business of two corporations does not warrant the

disregard of the corporate veil. The mere fact that the businesses of the two
entities are interrelated is not a
justification for disregarding the separate personalities, absent sufficient
showing that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their
rights. (China Banking Corp. v. Dyne-Sem Electronics Corp)
Piercing the Veil of Corporate Fiction
Piercing in a One Person Corporation
Piercing the veil also applies to a One Person Corporation
provided that the sole shareholder claiming limited
liability has the burden of affirmatively showing that the
corporation was adequately financed. Otherwise, he/she
shall be jointly, and severally liable to the creditors of the
One Person Corporation.
Instrumentality Rule
In the application of this rule, courts are called upon to apply the "Three-Pronged Control
Test," that is, to determine the presence of three factors, namely:

1. Control, not mere majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiffs legal right; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of The absence of any of these elements will prevent the application of the
doctrine of "piercing the corporate veil." (Concept Builders, Inc. v. The National Labor
Relations Commission G.R. No. 108734, May 29, 1996)
TITLE I GENERAL PROVISIONS
Sec. 5
Who are the parties involved in the organization of the
corporation:
1. Incorporators,
2. Corporators,
3. Board of Directors,
4. Promoters,
5. Underwriters,
6. Founders
TITLE I GENERAL PROVISIONS
1. Incorporators
Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
Note: under the RCC, a corporation can become an incorporator.
2. Corporators
Corporators are those who compose a corporation, whether as
stockholders or shareholders in a stock corporation or as members in a
non-stock corporation.
a. Stockholders
b. Members
TITLE I GENERAL PROVISIONS

3. Board of Directors/Trustees
These are the group of people who manage the corporation.
4. Promoter
A promoter is a person who, acting alone or with others, takes initiative in
founding and organizing the business or enterprise of the issuer and receives
consideration therefor.
As a rule, he is personally liable for contracts made by him in behalf of the
Compensation of promoters.
Exceptions:
a. When there is an express, or implied agreement to the contrary; or
b. Novation of the contract.
TITLE I GENERAL PROVISIONS
5. Underwriters
As distinguished from promoters who have no commitment since they
simply promote, underwriters have commitment such that they
guarantee the sale of stocks and if these were not sold, they will be
the ones who will buy the shares. The underwriters therefore assume
liability.
6. Founders
Those who have brought the idea of forming a corporation.
Classification of Shares

A share of stock is a unit of division of the capital stock of a

corporation. The stock represents:
1. The right interest or right of the stockholder in the
management of the corporation through the exercise of his
voting rights;
2. The interest or right of the stockholder in the earnings of the
corporation in the form of the dividends to be distributed (for
a discussion on dividends, see Sec. 42)(the economic rights);
and
3. The interest or right of the stockholder in the residual assets
of the corporation upon its dissolution.
Classification of Shares

Doctrine of Equality of Shares

Under this doctrine, 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. This doctrine is
now expressly provided for in Section 6. In addition, Section 6 of the
RCCP requires that the features of the shares must be stated in the
Certificate of Stock.
If the Articles of Incorporation, therefore, does not provide for any
distinction of the shares of stocks of the corporation, all shares shall
enjoy the same rights and privileges. All the shares are to be treated
equal.
Classification of Shares
Shares are classified as:
(1) Common shares
(2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
(7) Treasury shares
(8) Convertible shares
(9) Voting shares
(10) Non-voting shares
(11) Shares in escrow
Classification of Shares
Two common classification:
1. Common shares
Common shares or stocks represent the residual ownership interest in
the corporation. 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.

2. 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. 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.
Classification of Shares

Corporations issue preferred stock for the following reasons:

(1) To avoid the use of bonds that have fixed interest charges that must
be paid regardless of the amount of net income;
(2) To avoid issuing so many additional common shares that earnings per
share will be less in the current year than in prior years;
(3) To avoid diluting the common shareholders' control of the
corporation since preferred shares usually have no voting rights.
(Hermanson and Edwards, p. 616)
Classification of Shares

Classes of Preferred Shares:

1. Non-cumulative
2. Cumulative
3. Non-participatory
4. Participatory
Classification of Shares

Preferred Shares
Participating Those which, after getting their
fixed dividend preference, share
with the common stocks with the
rest of the dividends.

Non-participating Those which, after getting their

fixed dividend preference, have
no more right to share in the
remaining dividends with the
common stocks.

Preferred shares are deemed non-participating, unless it is stipulated.

Classification of Shares
Preferred Shares
Cumulative Regardless of lack of profits in any
given year, and lack of declaration
of dividends, the arrears (amount
of dividends undeclared or unpaid)
have to be paid to the preferred
stocks in a subsequent year (once
profits are made), before any
dividends can be paid to the
common stocks.
Non-cumulative Entitlement to receipt of
dividends essentially depends on
the declaration of said dividends.
preferred shares are deemed non-cumulative, unless it is stipulated.
Classification of Shares
Note on Preferred Shares:
SEC Opinions dated May 24, 1994, January 17,1983, August 09,
1982, and January 11, 1982 does not allow a provision giving the
board of directors a blanket authority to fix the terms, and
conditions of the preferred shares.
Such terms, and conditions must be spelled out in the Articles of
Incorporation.
Classification of Shares
Classification of Common Shares
1. Par value shares
Those shares that have a fixed value as stated in the
Articles of Incorporation, and stock certificate.

2. No-par value shares

No-par value shares refer to shares without such
arbitrary amount.
Classification of Shares
Pointers on no-par value shares.

1. 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,
2. The shares without par value may not be issued for a consideration less
than the value of five pesos (P5.00) per share; and
3. 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.
Classification of Shares
Pointers on no-par value shares.
4. The following shares cannot be without par value whether the corporations that
issue them are public or nonpublic:
(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; and
(8) Shares in other corporations authorized to obtain or
access funds from the public.
Except for public utilities, the common characteristic of these corporations is
the presence of trust relationship. It was observed that "an aspect to be
considered really is whether it is desirable considering the nature of the business
of the corporate entity that the amount of capital be more or less easily
identifiable."
Classification of Shares
Voting, and Non-Voting
1. Voting
2. Non-voting

In the absence of a provision in the Articles of

Incorporation, and consistent with the Doctrine of Equality
of Shares, the shares in a stock corporation are
considered voting shares.
Classification of Shares
The issuance of non-voting shares is subject to the following
conditions under Section 6 of the RCCP (and the Corporation Code):
1. Only preferred or redeemable shares may be deprived of voting
rights;

2. There must always be shares with full voting rights; and

3. The non-voting shares may still vote in the matters enumerated

above.
Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to vote
is invalid. (Heirs of Wilson P. Gamboa v. Teves, G.R. No. 176579,
June 28, 2011)
Classification of Shares
As a rule, preferred shares are not entitled to vote, except:
(1) Amendment of the articles of incorporation;
(2) Adoption and amendment of by-laws;
(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
Note: 2/3 vote of all the outstanding shareholders are required to ratify
these acts.
Reclassifcation of Shares

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.
Founders’ Shares
 Founders’ shares may be a form of reward to the
founders of the corporation.
 The special rights granted to founders’ shares are
subject to the approval of the SEC. The approval of the
SEC was inserted to prevent abuse.
 The five year limitation refers to the exclusive right to
vote an be voted for in the election of directors, a
right normally enjoyed by holders of common shares,
the class of shares which are supposed to have
complete voting rights. After the expiration of the
five-year period, the founders’ shares shall have equal
rights with the holders of common shares.
Redeemable Shares
Sec. 08
Redeemable shares are shares of stocks issued by a corporation which said
corporation can purchase or take up from their holders as expressly provided for in
the articles of incorporation and certificates of stock representing said shares.
Redeemable shares are usually preferred shares.
a. Section 8 of the RCCP provides formal requirements for redeemable shares. The
obligation to redeem must be indicated in the Articles of Incorporation and the
Certificates of Stock.
b. The issuance of redeemable shares may be likened to temporary borrowings that
enable a corporation to adjust its capital structure to meet varying conditions.
It is issued regardless of whether, or not there is an unrestricted retained earnings.
Treasury Shares
Under Section 9 of the Corporation Code (now the RCCP), treasury shares
are shares of stock that have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase,
redemption, and donation or through some other lawful means. Treasury
shares are issued shares but being in the treasury, they do not have the
status of outstanding shares.
Treasury Shares
Life stages
1. Issued as in ordinary shares
2. Acquired by the corporation through purchase,
redemption, donation or some other lawful means
3. Some may be disposed of for a reasonable price
fixed by the BOD.
Treasury Shares
Nature of Treasury Shares
1. A treasury share may be common or preferred share.
2. Treasury shares are different from the authorized but unissued share.
3. The corporation has the option to retire the treasury shares.
4. Treasury shares may be declared as property dividend to be issued out of
the retained earnings previously used to support their acquisition
provided that the amount of the retained earnings has not been
subsequently impaired by losses.
5. Inasmuch as treasury shares are not considered as outstanding capital
stock, the corporation is not entitled to any right or privilege of a
shareholder.
6. The Board of Directors is empowered to re-issue the treasury shares.
Treasury Shares
Limitations
1. They may be sold again as long as the corporation holds them as treasury
shares.
2. Treasury shares cannot be represented during stockholder's meetings for
otherwise equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their control of
the corporation.
3. The amount of unrestricted retained earnings equivalent to the cost of
treasury shares being held shall be restricted from being declared and
issued as dividends. The dividend restriction on retained earnings on
account of treasury shares being held shall be lifted only after the treasury
shares causing the restriction are reissued.
Trust Fund Doctrine
What is the Trust Fund Doctrine?
Under the Trust Fund Doctrine, the subscribed capital stock of the
corporation is a trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy their credits. The
corporation may not dissipate this and the creditors may sue stockholders
directly for their unpaid subscription.
Trust Fund Doctrine
In case of an insolvent corporation:
1. Stock,
2. Property, and
3. Other Assets
Trust Fund Doctrine
Instances where the Trust Fund Doctrine is violated:

1. When the corporation releases or condones payment of the unpaid

subscription and the stockholder has no right to demand the refund of his
investment;
2. When there is payment of dividends without unrestricted retained
earnings;
3. When properties are transferred in fraud of creditors;
4. When properties are disposed or undue preference is given to some
creditors even if the corporation is insolvent; and
5. When the capital stock is decreased which has the effect of relieving the
stockholders of the obligation to pay their respective subscription.
Trust Fund Doctrine

Exception

1. Amendment of the Articles of Incorporation;

2. Purchase of redeemable shares; and
3. Dissolution of the corporation.