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CLASSES OF SHARES

The corporation issues classes of shares. The shares or stocks may be par value or no par value, voting or non-
voting, common or preferred, promotion share, share in escrow, convertible share, founders’ share, redeemable share,
and treasury share.
Par value share is one with a specific money value fixed in the articles of incorporation and appearing in the certificate
of stock while the no par value share is one without any stated or par value. The voting share is a share with a right to vote
while the non-voting share is a share without right to vote. It is generally customary to give the right to vote to the common
stock and to withhold it from the preferred. If stock is originally issued as voting stock, it cannot be deprived of the right
without the consent of the holder. No share may be deprived of voting rights except those classified and issued as “preferred”
or “redeemable” shares unless otherwise provided in the Code.
Common shares, which are ordinarily issued by private corporations, entitle the holder thereof pro rata division of
profits, if there are any, without preference or advantage over other stockholders. They are the residual owners of the
corporation. They get only the assets left over in case of liquidation after all other securities holders are paid. A corporation
may issue more than one class of common stock.
Preferred shares entitle the holder to certain preferences over the holders of the common stock. They may be voting,
convertible, or redeemable. Convertible shares are changeable by the stockholder from one class to another class.
Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may
be purchased or taken up by the corporation upon the expiration of a fixed period. Also these shares may be preferred as to
assets in case of liquidation or preferred as to dividends, and which, in turn, may be either cumulative or non-cumulative, and
participating or non-participating. Cumulative preferred shares entitle the holder not only to the payment of current dividends
but also to dividends in arrears while non-cumulative preferred shares entitle the holder to the payment of current dividends
only in preference to common stockholders. Participating preferred shares give the holder the right to receive the stipulated
dividends at the preferred rate. Non-participating preferred share entitle the holder to receive the stipulated preferred
dividends and no more.
Promotion shares are issued to promoters, for those who are interested in the company, for incorporating the
company or for services in launching or promoting the company. Share in escrow is subject to an agreement by virtue of which
the share is deposited by the grantor or his agent with the person to be kept by the depositary until the fulfillment of a certain
event. Founders’ shares are issued to the organizers and promoters of a corporation in consideration of some supposed right
or property. Lastly, treasury shares are lawfully issued by the corporation and fully paid for and later reacquired.
BOARD OF DIRECTORS
All corporate powers, business conducted and all property of corporations are exercised by the BOD. BODs are
selected thru an election by cumulative voting or straight voting (in stock corporations) and they shall hold office for one year
and until their successors are elected and qualified. Directors owe their duties to corporation rather than to individual
shareholders. The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. Contracts
entered into without a formal board resolution does not bind the corporation except when majority of the board has
knowledge of the contract and the contract benefited the corporation.
Every director must own at least one (1) share of the capital stock of the corporation, which share shall stand in his
name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock
of the corporation of which he is a director shall thereby cease to be a director. Majority of BOD should be resident of
the Philippines.
Immediately after the election of BOD, the directors of a corporation must formally organize the election of (1) a
president, who shall be a director, (2) a treasurer who may or may not be a director, (3) a secretary who shall be a resident
and citizen of the Philippines, and (4) other officers as may be provided for in the by-laws. Any two or more positions may be
held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at
the same time. Directors and trustees cannot attend or vote by proxy in a board meeting compared to stockholders who can
attend and vote by proxy in a stockholder’s meeting.
The by-laws of a corporation may create an executive committee, composed of not less than three members of the
board, to be appointed by the board. Majority of the number of director/trustees shall constitute the quorum for the
transaction of the business unless the AOI or by-provide otherwise. Majority of the directors/trustees constituting the quorum
shall be valid as corporate act except the election of officer which requires majority of all the members of the board.
Board of directors are jointly and severally liable in the following instances: (1) if they willfully/ knowingly vote for or
assent to patently unlawful acts of the corporation, (2) they are guilty of gross negligence or bad faith in directing the affairs of
the corporation, (3) they acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees, (4)
issuance of watered stock, (5) disloyalty of directors, (6) he agrees to hold himself personally and solidarily liable with the
corporation, (7) he is made, by a specific provision of law, to personally answer for his corporate action. The director is liable
when he takes advantage of information by virtue of his office to the disadvantage of the corporation.
Removal of BOD may be with cause or without cause. There shall be a call for meeting for the purpose of removing
the BOD, notice by publication or registered mail to the stockholder, election, and affirmative vote of 2/3 of outstanding
capital stock/members. However, removal without cause may not be used to deprive minority stockholder of the right of
representation. The board cannot remove a director or trustee as member of the board.
Any vacancy occurring in the BOD or BOT terms may be filled by the vote of at least majority of the remaining
directors or trustees, if still constituting quorum. If quorum cannot be obtained, vacancies must be filled by the
stockholders/members in a regular or special meeting for that purpose.
CORPORATE POWERS
Generally, the powers of a corporation are to sue and be sued in its corporate name, succession, to adopt and use a
corporate seal, to amend its articles of incorporation, to adopt by-laws, to issue or sell stocks and admit members, to acquire
and encumber properties, to enter into merger or consolidation, to make reasonable donations except in political parties, to
establish pensions and benefits for the employees and officers, and essential and necessary powers to promote its purpose.
Also, specifically, a corporation has the power to, first, extend or shorten corporate term. In case of extension of
corporate term, any dissenting stockholder may exercise his appraisal right. Second, to increase or decrease capital stock –
any increase or decrease in the capital stock bonded indebtedness shall require prior approval of the Securities and Exchange
Commission. Third, to incur, create or increase bonded indebtedness – non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called for the purpose. Fourth, to deny pre-emptive right – pre-emptive right is
the right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The
purpose of which is to enable the shareholder to retain his proportionate control in the corporation and retain equity to the
surplus profit. Fifth, to sell or dispose of corporate assets – sale by the corporation is considered a sale of all or substantially all
of the corporate assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing
its purpose. Sixth, to acquire own shares - A stock corporation shall have the power to purchase or acquire its own shares for
legitimate corporate purposes provided it has unrestricted retained earnings to cover the shares to be acquired. Seventh, to
invest corporate funds in another corporation or business – a private corporation may invest its funds in any other corporation
or business or for any purpose other than the primary purpose for which it was organized. Eighth, to declare dividends -
the BOD of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash,
in property, or in stock to all stockholders on the basis of outstanding stock held by stockholder. Lastly, to enter into
management contract – management contract is one where a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such contracts are called service contracts, operating
agreements or otherwise. No management contract shall be entered into longer than five years for any one term.
There are acts which a corporation is not empowered to do or perform because they are not based on the powers
conferred by its articles of incorporation or by the Corporation Code on corporations in general, or because they are not
necessary or incidental to the exercise of the powers so conferred. They are called ultra vires acts.
PROXY AND VOTING TRUST
In a board of directors meeting, no proxy is allowed to vote for the director or trustee. The proxy votes as an agent and in
person, the principal does not cease to become a stockholder, agreement need not to be notarized and is revocable, and it is
limited to a particular meeting. On the other hand, trustee votes as owner and he may also vote by person or by proxy, the
ownership is transferred to the trustee, the agreement is irrevocable and it includes rights and all meetings within 5 years.
DELIQUENCY
Payment of stock becomes due and payable in the term prescribed in the subscription contract and in the absence of
the provision contract, at any time specified by the board of directors. Failure to pay on such period shall render the entire
balance due and payable and renders the stockholder liable to interest. If no payment was made within 30 days after such
period, the stock shall be considered delinquent stock, which is subject to delinquency sale.
If the delinquent stockholder pays the balance before the public auction, said sale shall not commence and the
certificate of stock shall be issued to him. In case there is no bidder at the public auction who pays the full amount of the
balance, the total amount shall be credited as paid and its title to all the shares of stock shall be vested in the corporation as
treasury shares which may be disposed by the corporation. As a result, the stockholder have no right to ovote or be voted
upon and are not entitled to any right except dividends.
MERGERS AND CONSOLIDATION
Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or
may consolidate into a new single corporation which shall be the consolidated corporation.
In merger, one of the constituent corporations remains as an existing juridical person, the surviving corporation,
whereas the other corporations shall be absorbed by the former. The constituent corporation will acquire all assets, rights of
action, and assume all the liabilities of dissolved corporation. Although there is dissolution of the latter corporation, there is
no winding up because the constituent corporation automatically acquires all their assets, privileges, powers as well as their
liabilities. The merger is deemed instituted from the time the SEC issues a certificate of merger.
In consolidation, the constituent corporations shall be dissolved and a new consolidated corporation will emerge
into new corporate entity which shall obtain all the assets of the disappearing corporations, as well as all their liabilities.
Approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of
merger or consolidation, notice of such meetings shall be given to all stockholders or members of the respective corporations,
affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock/members of the
constituent corporations are needed. The articles of merger, signed by the Presidents and Secretaries, will be executed by the
constituent corporations and will be filed in SEC in quadruplicate copy for approval. When SEC is satisfied that the
merger/consolidation is not inconsistent with the laws, it shall issue a certificate of merger/consolidation at which time the
merger/consolidation shall become effective.
APPRAISAL RIGHT
Appraisal right is a right to demand payment of the fair value of his shares, after dissenting from a proposed
corporate action involving fundamental changes in the corporation. If within 60 days after the corporate action was approved
and the dissenting (uncooperative) stockholders and the corporation cannot agree in the fair value of the shares, it shall be
determined by three disinterested person: one chosen by the stockholder, one by the corporation and the other one chosen
by the two. Their determination of the fair value is final and shall be paid within 30 days.
Notation is necessary so as to guide the secretary of the corporation who shall deny to the dissenting stockholder the
right to vote and the right to receive dividends in the proper situation contemplated under Section 83. Failure to do so shall
give right to the corporation to terminate the rights of the stockholder.
CLOSE CORPORATION
A close corporation is one whose articles of incorporation provide that its shares shall not be held by a group of more
than 20 persons, all the issued stock of all classes is subject to one or more specified restrictions on transfer and that
the corporation shall not list in any stock exchange or make any public offering of any of its stock. If at least 2/3 of the voting
stock of the said corporation is owned or controlled by another corporation which is not a close corporation, then the
corporation will not be deemed close corporation.
Restrictions on the right to transfer shares must appear in the AOI, by-laws and certificate of stock, otherwise, the
same shall not be binding on any purchaser in good faith. Restriction on the transfer must not be onerous than granting the
existing stockholder or corporation the option to purchase the shares.
PRE-EMPTIVE RIGHT
The pre-emptive right is the right to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. The purpose of which is to enable the shareholder to retain his proportionate control in the
corporation and retain equity to the surplus profit. It shall extend to all stocks to be issued, including re-issuance of treasury
share, whether for money or property or personal services, or in payment or corporate debts, unless the articles of
incorporation provide otherwise.
SPECIAL CORPORATION
Two examples of a special corporation are educational and religious corporation. An educational corporation is a
stock or non-stock corporation organized to provide facilities for teaching or instruction. They normally maintain a regular
faculty and curriculum and normally have a regular organized body of pupils or students or attendance at the place where
organizational activities are carried on. Except provided by special laws, the incorporation of educational corporations shall be
governed by the Code. The SEC shall not accept or approve the AOI and by-laws of any educational institution unless
accompanied by favorable recommendation of the Department of Education, Culture and Sports.
Educational corporation may be classified as stock or non-stock. In a non-stock educational corporation, number of
trustees shall not be less than 5 nor more than 15 – it shall be in multiples of 5, unless otherwise provided in AOI, the term of
office of 1/5 of the number of trustees shall be staggered with 1 year interval, trustees shall have a term of 5 years, trustees
elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period,
majority of trustees shall constitute a quorum for the transaction of business, the powers and authority of trustees shall be
defined in the by-laws. On the other hand, the requirement that the number of trustees in educational institutions shall be in
multiples of 5 and the staggering system are mandatory.
A religious corporation is composed entirely of spiritual persons and which is erected for the furtherance of a religion
or for perpetuating the rights of the church or for the administration of the church or religious work or property. It can be
classified into corporation sole and religious society. A corporation sole is incorporated by one person and consists of 1
member or corporator only and his successors, such as bishop while a religious society is incorporated by an aggregate of
persons.
DISSOLUTION OF CORPORATION
Dissolution of corporation may be voluntary or involuntary. A voluntary dissolution may be done by amending the AOI
to shorten the life, and submitting copy to the SEC of the amendment. Upon approval of the amended AOI or the expiration of
the shortened term, the corporation is deemed dissolved without any proceedings. Mere filing of the Articles of Dissolution
with the SEC, without more, is not enough to support the conclusion that actual dissolution of an entity in fact took place.
In an involuntary dissolution, SEC may dissolve a corporation upon filing of a verified complaint and after notice and
hearing on the following grounds: continuous inoperation for a period of at least five years, failure to organize and commence
business within two years from incorporation, commission of ultra vires acts, serious dissention in close corporation,
illegality, fraud and misused of asset of close corporation, quo warranto proceedings, and issuance of watered stocks.
In connection with dissolution, liquidation is the winding up of the affairs of a corporation by converting assets and
property to cash, settling with the creditors and debtors and the apportioning the amount of profit and loss. Corporation shall
continue as a body corporate for three (3) years after the time when it would have been so dissolved for the purpose of
prosecuting and defending claims, to settle its affair, dispose its assets and distribution of assets but not to purpose of
continuing the business. Before corporation may distribute its assets to the stockholders, there should be lawful dissolution
and payment of liability and debts. Liquidation may be done by the corporation itself through the board of directors, by
receivership, or by trustees.