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STOCKHOLDERS AND MEMBERS

A person becomes a shareholder the moment he:

1. Enters into a subscription contract with an existing corporation (he is a stockholder upon acceptance of the
corporation of his offer to subscribe whether the consideration is fully paid or not);
2. Purchase treasury shares from the corporation; or
3. Acquires shares from existing shareholders by sale or any other contract, or acquires shares by operation of law like
succession.

RIGHTS OF A STOCKHOLDER AND MEMBER

1. Management Right:
a. To attend and vote in person or by proxy at a stockholders’ meetings (CC, Secs. 50, 58);
b. To elect and remove directors (CC, Secs. 24, 28);
c. To approve certain corporate acts (CC, Sec. 58);
d. To adopt and amend or repeal the by-laws of adopt new by-laws (CC, Secs. 46, 48);
e. To compel the calling of the meetings (CC, Sec. 50);
f. To enter into a voting trust agreement (CC, Sec. 59);
g. To have the corporation voluntarily dissolved. (CC, Secs. 118, 119)
2. Proprietary rights
a. To transfer stock in the corporate book (CC, Sec. 63);
b. To receive dividends when declared (CC, Sec. 43);
c. To the issuance of certificate of stock or other evidence of stock ownership (CC, Sec. 64);
d. To participate in the distribution of corporate assets upon dissolution (CC, Sec. 118, 119);
e. To pre-emption in the issue of shares. (CC, Sec. 39)
3. Remedial rights
a. To inspect corporate books (CC, Sec. 74);
b. To recover stock unlawfully sold for delinquent payment of subscription (CC, Sec. 69);
c. To be furnished with most recent financial statements or reports of the corporation’s operation (CC, Sec. 74,
75);
d. To bring suits (derivative suit, individual suit, and representative suit);
e. To demand payment in the exercise of appraisal right. (CC, Secs. 41, 81)

DOCTRINE OF EQUALITY OF SHARES


Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the
corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same
liabilities. (CC, Sec. 6)

PROXY
The term “proxy” designates the formal written authority given by the owner or holder of the stock, who has a right to
vote it, or by a member, as principal, to another person, as agent, to exercise the voting rights of the former.
It is also used to apply to the holder of the authority or person authorized by an absent stockholder or member to vote
for him at a stockholders’ or members’ meeting.
It also refers to the instrument which evidences the authority of the agent.
NOTE: A proxy is a special form of agency. A proxy holder is an agent and as such a fiduciary.

Purposes of proxies
The purposes and use of proxies are as follows:
1. Assures the presence of a quorum in meetings of stockholders of large corporations;
2. Enables those who do not wish to attend a stockholders’/ members’ meeting to protect their interest by exercising
their right to vote through a representative; and
3. One of the devices in securing voting control or management control in the corporation.

VOTING TRUST
Voting trust agreement A voting trust agreement (VTA) is an agreement whereby one or more stockholders transfer
their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other specific
rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.

Principal purpose:
acquire control of the corporation.
RIGHT TO DIVIDENDS
It is the right of the stockholder to demand payment of dividends after the board’s declaration. Stockholders are entitled
to dividends pro rata based on the total number of shares that they own and not on the amount paid for the shares.

Entitlement to receive dividends


GR:
Those stockholders at the time of declaration are entitled to dividends.
XPNs:
1. In case a record date is provided for.
2. Holders of shares not fully paid which are not delinquent shall have all the rights of a stock holder.

APPRAISAL RIGHT
It refers to the right of the stockholder to demand payment of the fair value of his shares, after dissenting from a
proposed corporate action involving a fundamental change in the charter or articles of incorporation in the cases
provided by law.

Instances where a stockholder may exercise his appraisal right:


Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in
the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the
corporate property and assets as provided in the Code;
3. In case of merger or consolidation (CC, Sec. 81);
4. In case the corporation decides to invest its funds in another corporation or business for any purpose other than its
primary purpose as provided in Sec. 42 of the CC;
5. Under Sec. 105, any stockholder of a close corporation may, for any reason, compel said corporation to purchase his
shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of capital stock.

Limitations on the exercise of appraisal right


1. Any of the instances provided by law for the exercise of the right by a dissenting stockholder must be present (CC,
Secs. 81, 42);
2. The dissenting stockholder must have voted against the proposed corporate action (CC, Sec. 82);
3. A written demand on the corporation for payment of his shares must be made by him within 30 days after the date
the vote was taken.
4. The price must be based on the fair value of the shares as of the day prior to the date on which the vote was take
5. Payment of the shares must be made only out of the unrestricted earnings of the corporation

RIGHT TO INSPECT
The duty to keep these books is imperative and mandatory.
GR: All the books and records must be kept at the principal office of the corporation
The right must be exercised during reasonable hours on business days.
The right to inspect extends to the books and records of the wholly-owned subsidiary of the corporation.
The right does not extend to trade secrets.

PRE-EMPTIVE RIGHT
It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to
their present shareholdings. (CC, Sec. 39)
Purpose of pre-emptive right
To enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus
Exercise of pre-emptive right

Stock Transactions covered includes:


(a) the reissuance of treasury shares which would cover the increase in the authorized capital stock;
(b) opening for subscription the unissued portion of existing capital stock; and
(c) disposition of treasury shares.

RIGHT TO VOTE
The stockholders can exercise their right to vote through the election, replacement and removal of Board of Directors or
Trustees and on other corporate acts which require stockholders’ approval.
Nature of the right to vote
One of the rights of a stockholder is the right to participate in the control and management of the corporation that is
exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock,
and such is a property right.

Instances when non-voting shares are entitled to vote


The non-voting shares may still vote in the following matters:
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 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 the corporation code; and
8. Dissolution of the corporation. (CC, Sec 6)

RIGHT OF FIRST REFUSAL


A right that grants to the corporation or another stockholder the right to buy the shares of stock of another stockholder
at a fixed price and only valid if made on reasonable terms and consideration.

GR: The right of first refusal can only arise by means of a contractual stipulation, or when it is provided for in the AOI
XPN: In the case of a close corporation, the right of first refusal is required to be found in the AOI.

When only the by-laws provide a right of first refusal without the corresponding provision in the AOI and not printed in
the stock certificate, it is null and void.

REMEDIAL RIGHTS

Actions that the stockholders or members can bring


1. Derivative suit – one brought by one or more stockholders or members in the name and on behalf of the corporation
to redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue or are the ones to be sued or hold control of the corporation.
2. Individual suit – an action brought by a stockholder against the corporation for direct violation of his contractual rights
as such individual stockholder, such as the right to vote and be voted for, the right to share in the declared dividends,
the right to inspect corporate books and records, and others.
3. Representative suit – one brought by a person in his own behalf and on behalf of all similarly situated.

OBLIGATIONS OF A STOCKHOLDER
The following are the obligations of the stockholder:
1. Liability to the corporation for unpaid subscription (CC, Sec. 67-70);
2. Liability to the corporation for interest on unpaid subscription if so required by the by laws (CC, Sec. 66);
3. Liability to the creditors of the corporation for unpaid subscription (CC, Sec. 60);
4. Liability for watered stock (CC, Sec. 65);
5. Liability for dividends unlawfully paid (CC, Sec. 43); and
6. Liability for failure to create corporation. (CC, Sec. 10)

While a stockholder has no personal liability for the debts of the corporation beyond the amount of his capital
investment, he is personally liable for the above obligations.