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1. CAPITAL – The value of the actual property or estate of the corporation whether in money or 7.

7. Founder’s share - Shares classified as such in the articles of incorporation and issued to
property. Its net worth (or stockholder’s equity) is its assets less its liabilities. organizers and promoters of a corporation in consideration of some supposed right or property
such as special preference in voting rights and dividend payments.
CLASSIFICATION OF CAPITAL STOCK But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to
approval by the SEC, and cannot exceed 5 years from the date of approval.
Authorized Capital Stock - The capital stock divided into shares.
8. Voting shares - Shares with a right to vote. If the stock is originally issued as voting stock, it
Subscribed Capital Stock- The total amount of the capital stock subscribed whether fully paid or may not thereafter be deprived of the right to vote without the consent of the holder.
9. Non‐voting shares - Shares without right to vote.
Outstanding Capital Stock - The portion of the capital stock issued to subscribers, whether fully The law only authorizes the denial of voting rights in the case of redeemable shares and
paid or partially paid (as long as there is a binding subscription contract) except treasury stocks preferred shares, provided that there shall always be a class or series of shares which have
(Sec. 137). complete voting rights.

Unissued Capital Stock – The portion of the capital stock that is not issued or subscribed. It does 10. Convertible shares - A share that is changeable by the stockholder from one class to another
not vote and draws no dividends. at a certain price and within a certain period.

Paid-up Capital – The amount paid by the stockholders on subscriptions from unissued shares 11. Watered stock - A stock issued not in exchange for its equivalent value either in cash,
of the corporation. property, share, stock dividends, or services.
“Water” in the stock represents the difference between the fair market value at the time of the
Issued capital stocks - The total amount of a company's stock, both common and preferred, that issuance of the stock and the par or issued value of said stock. Both par and no par stocks can
has been issued and represents the total capitalized value of the company. Includes non-retired thus be watered stocks.
shares being held as Treasury stock.
12. Fractional share - A share with a value of less than one full share.
Circulating capital stocks - The portion of an organization's investment that is continually used
and replenished in ongoing operations. Circulating capital can consist of operating expenses, 13. Shares in escrow - Shares subject to an agreement by virtue of which the share is deposited
raw material stock, inventories of finished goods or physical capital on hand. by the grantor or his agent with a third person to be kept by the depositary until the performance
of certain condition or the happening of a certain event contained in the agreement.
Working capital - refers to that part of the firm’s capital, which is required for financing short-term
or current assets such as cash marketable securities, debtors and inventories. Funds thus, 14. Over‐issued stock - Stock issued in excess of the authorized capital stock. It is also known
invested in current assets keep revolving fast and are constantly converted into cash and this as spurious stock. Its issuance is considered null and void.
cash flow out again in exchange for other current assets. Working Capital is also known as
15. Street certificate - Stock certificate endorsed by the registered holder in blank and the
short-term capital.
transferee can command its transfer to his name from issuing corporation.
16. Promotion share - This is a share issued by promoters or those in some way interested in
the company, for incorporating the company, or for services rendered in launching or promoting
1. Par value shares - Shares with a value fixed in the articles of incorporation and the certificates
the welfare of the company.
of stock.
2. No par value shares - Shares having no par value but have issued value stated in the
certificate or articles of incorporation.
1. Promotion – A promoter is a person who, acting alone or with others, takes initiative in
3. Common shares - basic class of stock ordinarily and usually issued without extraordinary founding and organizing the business or enterprise of the issuer and receives consideration
rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the therefor (Sec. 3.10, SRC).
2. Incorporation
4. Preferred shares - Shares with a stated par value which entitle the holder thereof to certain
preferences over the holders of common stock. The preference may be (a) as to asset; or (b) as
to dividends; or (c) as may be determined by the board of directors when so authorized to do so
a. Drafting and execution of Articles of Incorporation by the incorporators and other documents
5. Redeemable shares - Shares of stocks issued by the corporation which said corporation can required for registration of the corporation
purchase or take up from their holders as expressly provided for in the articles of incorporation
b. Filing with the SEC of the articles of incorporation
and certificate of stock representing said shares at a fixed date or at the option of the issuing
corporation or the stockholder or both at a certain redemption price.
c. Payment of filing and publication fees
6. Treasury shares - Shares of stock which have been issued and fully paid for, but
d. Issuance by the SEC of the certificate of incorporation
subsequently reacquired by the issuing corporation by purchase, redemption, donation or
through some other lawful means
3. Formal Organization and Commencement of the Transaction of Business As can be gleaned from the foregoing, there are three (3) basic requirements for amending the
Articles of Incorporation, namely:
These are conditions subsequent, which may be satisfied by substantial compliance in order that
a corporation may legally continue as such. 1. Majority vote of the board of directors

Formal organization: 2. Vote or Written assent of the stockholders representing at least 2/3 of the outstanding capital
a. Adoption of By-Laws and filing of the same with the SEC;
3. Approval by the Securities and Exchange Commission
b. Election of board of directors/trustees, and officers;
Anent the first 2 requisites, a meeting must be held, whether it be during the regular annual
c. Establishment of principal office; meeting or a special meeting called for such purpose. The rules regarding the meeting (i.e.
notice, place, etc.) can be found in the corporate by-laws.
d. Providing for subscription and payment of capital stock.
The meeting of the stockholders must first take place and the issue of the amendment must be
assented to by stockholders representing at least 2/3 of the outstanding capital stock.
Thereafter, it must be approved by at least a majority of the board of directors and duly certified
Incorporators - those mentioned in the Articles of Incorporation as originally forming and
by the Corporate Secretary.
composing the corporation, having signed the Articles and acknowledged the same before a
notary public. They have no powers beyond those vested in them by the statute. To prove that these acts have been complied with, the following documents will be executed:
There is only one set of incorporators, hence, they will remain to be such incorporators up to the 1. Resolution of the Stockholders
termination of the life of the corporation.
2. Board Resolution
3. Directors’ Certificate
a. natural person; b. not less than 5 but not more than 15; c. of legal age; d. majority must
be residents of the Philippines; and e. each must own or subscribe to at least one share 4. Secretary’s Certificate
(Sec. 10).
The aforementioned documents, together with the amended Articles of Incorporation must be
GENERAL RULE: Only natural persons can be incorporators. submitted to the Securities & Exchange Commission. If the amendment refers to the corporate
purpose which requires a secondary license from a government agency, then the endorsement
EXCEPTION: When otherwise allowed by law, e.g., Rural Banks Act of 1992, where or license from such government agency must also be submitted. If there is an increase in the
incorporated cooperatives are allowed to be incorporators of rural banks. authorized capital stock, then a Treasurer’s Affidavit and corresponding Bank Certificate must be
submitted to prove such fact.
“Sec. 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code
or by special law, and for legitimate purposes, any provision or matter stated in the articles of A corporation which actually exists for all practical purposes as a corporation but which has no
incorporation may be amended by a majority vote of the board of directors or trustees and
legal right to corporate existence as against the State. It is one which has not complied with all
the vote or written assent of the stockholders representing at least two-thirds (2/3) of the the requirements necessary to be a de jure corporation but has complied sufficiently to be
outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accorded corporate status as against third parties although not against the state.
accordance with the provisions of this Code, or the vote or written assent of at least two-
thirds (2/3) of the members if it be a non-stock corporation. Requisites:

The original and amended articles together shall contain all provisions required by law to be set 1. The existence of a valid law under which it may be incorporated;
out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring
the change or changes made, and a copy thereof duly certified under oath by the corporate 2. A bona fide attempt in good faith to incorporate under such law;
secretary and a majority of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the stockholders or members, 3. Actual use or exercise in good faith of corporate powers; and
shall be submitted to the Securities and Exchange Commission.
4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of continued
The amendments shall take effect upon their approval by the Securities and Exchange good faith.
Commission or from the date of filing with the said Commission if not acted upon within six (6)
months from the date of filing for a cause not attributable to the corporation.” In the case of a de facto corporation, the only way in which its corporate existence can be
questioned is in a direct proceeding by the State, brought for that purpose. Private individuals
cannot raise the objection in such a case, either directly or indirectly, and nobody can raise the
objection collaterally.
7. WHAT IS PREEMPTIVE RIGHT/ RIGHT OF PRE-EMPTION? Dividends cannot be declared out of the capital except in the case of Wasting Assets
Corporation or those corporations solely or principally engaged in the exploitation of wasting
A: It is the preferential right of shareholders to subscribe to all issues or disposition of shares of assets to distribute the net proceeds derived from exploitation of their holdings such as mines,
any class in proportion to their present shareholdings. (Sec. 39) oil wells, patents and leaseholds, without allowance or reduction for depletion (Reviewer in
Commercial Law, Jose R. Sundiang & Timoteo Aquino, 2005 ed.).
Right of pre-emption of stockholders. - Whenever the capital stock of a corporation is increased
and new shares of stock are issued, the new issue must be offered first to the stockholders who PROFITS - In its usual and ordinary meaning, the term profit means the "return to capital rather
are such at the time the increase was made in proportion to their existing shareholdings and on than earnings from labor performed or services rendered. It has also been defined as "the
equal terms with other holders of the original stocks before subscriptions are received from the excess of return over expenditure in a transaction or series of transactions," or the "excess of an
general public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding amount received over the amount paid for goods and services".
shares of the corporation, he may subscribe 20% of any shares of stock issued by the
corporation. This principle is known as the right of pre-emption or pre-emptive right of DISTINCTIONS :(1) A dividend, as applied to corporate stock, is that portion of the profits or net
stockholders. earnings which the corporation has set aside for ratable distribution among the stockholders.
Thus, dividends come from profits, while profits are the source of dividends.
(2) Profits are not dividends until so declared or set aside by the corporation. In the meantime,
a. Availability of right to new issues of shares and unissued shares - it extends to the all profits are a part of the assets of the corporation and do not belong to the stockholders
unsubscribed portion of the capital stock and even to treasury shares. individually. (19 Am. Jur. 2d 284.) They may be in cash as well as in kind.

b. Acquisition by transferor of right. — When shares of stock are sold by the holder after an
increase of the capital stock has been voted, the purchaser acquires, as an incident to the stock, 10. REQUISITES OF BY-LAWS (ELEMENTS)
the same right of preference in subscribing for or purchasing the new stock as was possessed
by the transferor. Validity of by-laws.
The following are considered as the elements of valid by-laws:
c. Right subject to exceptions. — The application of the right of pre-emption in a stock (1) They must not be contrary to existing law and inconsistent with the Code (Sec. 36[5]; Sec.
corporation depends on a consideration of all the surrounding circumstances of each case. In 46.); - By-laws must not be contrary to the general law, and, therefore, as a rule, a by-law is void
other words, the right is not absolute as it admits of certain exceptions if it is repugnant to the law of the land, whether statutory or constitutional.

8 & 9. DIVIDENDS – Corporate profits set aside, declared, and ordered to be paid by the (2) They must not be contrary to morals and public policy - By-laws must also be consistent with
directors for distribution among shareholders at a fixed time. the public policy and not in conflict with public welfare. If they conflict with either, they are invalid
and will not be sustained.
Dividend is that part or portion of the profits of a corporation set aside, declared and ordered by
(3) They must not impair obligations of contract (Ibid.); - the power of a corporation to adopt by-
the directors to be paid ratably to the stockholders on demand or at a fixed time.
laws does not extend to the adoption of such as impair the obligation of existing contracts or
Forms: a. Cash destroy or impair rights, either of stockholders or members or of third persons.

b. Property (4) They must be general and uniform in their operation and not directed against particular
individuals (8 Fletcher, p. 734.), - A by-law affecting stockholders or members must be general,
c. Stock and that is, it must affect alike, and operate equally as to all stockholders or members under the
same circumstances. i.e., not discriminatory;
While cash dividends due on delinquent shares can be applied to the payment of the unpaid (5) They must be consistent with the charter or articles of incorporation; and - By-laws are
balance, stock dividends cannot be applied as payment for unpaid subscription. Stock dividends subordinate to the charter of the corporation and part of its charter is its articles of incorporation.
shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid. In order for by-laws to be valid, they must be consistent with the terms and spirit of the charter
of the corporation.
The right to dividend is based on duly recorded stockholdings, accordingly, the corporation is (6) They must be reasonable. Reasonableness is another essential of a valid by-law. The
validity or reasonableness of a by-law of a particular corporation — whether it is in conflict with
prohibited from declaring dividends in favor of non-stockholders.
the law of the land, or with the charter of the corporation or is in a legal sense unreasonable and,
As a rule, dividends among stockholders of the same class must always be pro rata equal and therefore, unlawful — is purely a question of law and not of fact.
without discrimination and regardless of the time when the shares were acquired.

Declaration of dividends is discretionary upon the board. Dividends are payable only when there
are profits earned by the corporation and as a general rule, even if there are existing profits, the
Board of Directors has the discretion to determine whether or not dividends are declared
(Republic Planters Bank vs. Agana, 269 SCRA 1), subject to the rule on non-retention of
retained earnings in excess of 100% of paid-in-capital.