ATTY: Remember the definition of subscribed.

Those which have issued a valid subscription

agreement whether paid or unpaid. Thats your subscribed capital. So in this case its still 500k
and your paid-up is still 250k. And your treasury is 100k. And now because you have treasury
shares your outstanding is 400k. Outstanding shares of stocks are those stock which are
subscribed and issued but are held by persons other than the issuing corporation.

Treasury shares - are those shares repurchased by the corporation itself.

What happens when the shares are repurchased?

They no longer form part of the outstanding capital but they still form part of the authorised
capital stock and the subscribed capital stock.

Will there be an instance will they will no longer form part of the authorised and
subscribed capitals tock?
Yes. When the treasury shares are retired.

How is retirement done?

Retirement is done by decreasing the authorised capital stock by amending the articles of
incorporation.

ATTY: As a general rule when the shares a reacquired by the corporation, they are not retired.
They Amy not form part of the outstanding capital but they still form part of the authorised and
subscribed capital stock. But when they are retired they will no longer form part of the
authorised and subscribed. When you retire, that means that the company no longer wants to
issue the treasury shares. When you buy back the shares its not retired, so the corporation can
issue it any time. You can issue it anytime because its still just there. But if you chose to retire,
then you have the decrease your authorised capital stock by amending the articles of
incorporation. So in this case, if you retire your 100k treasury shares, you ACS will now be
900k. But this needs the approval of the SEC. Its not easy to decrease the ASC. The consent of
all the creditors.

REMEMBER: When you acquire treasury shares, you do not retire the shares. They can can
still be reissued. They still form part of ASC and the SSC but not the outstanding capital stock.
But if you chose not to reissue it then you can retire the shares. How do you retire? You
decrease your authorised capital stock by amending the articles of incorporation.

What do you need in order to purchase treasure shares? Can you just buy it anytime?
No. The corporation cannot just buy it anytime. The corporation must have retained earnings.

Retained earnings - are the net profits you have after distributing your dividends to your
stockholders. It is the portion of your capital which comes from your profit. So your capital is
made up of your contributions, meaning the subscribed capital and you have your retained
earnings. Any income by the corporation which have not been distributed to the stockholder will
form part of the retained earning of the corporation.

What is the provision that requires that treasury shares can only be purchased upon the
existence of unrestricted retained earning? Which provision of the corporation code is
it?

SECTION 41. Power to Acquire Own Shares. — A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes including but
not limited to the following cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:

1.To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares

under the provisions of this Code.

ATTY: So in order to buy treasury shares, the corporation must have unrestricted retained
earnings and it can only buy shares not just for the sake of buying shares but always for a
legitimate corporate purpose, including but not limited to:
1. To eliminate fractional shares arising out of stock dividends - for example you have ten
shares in a corporation and the corporation declared 25% stock dividends. So that will give
you an additional 2.5 shares. What are you going to do with the 0.5? That is your fractional
shares. So the corporation can buy it from you.
2. Collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during
said sale - for example if you have subscribed capital stock of 500k, you have subscriber
that subscribed for 100k, of which only 50k is paid. You will learn later on that a subscription
is indivisible and you cannot even sell your shares until it is fully paid. So what happens
here? We said earlier that even if your shares are not fully paid, as long as you are
subscribed, you exercise all the rights of a stock holder. When does that stop? When your
shares become delinquent. The share become delinquent when the board makes a call for
the payment of the subscription and you do not pay your shares will be considered as
delinquent shares. In delinquent shares, it will undergo public bidding. So which shares will
be declared delinquent? Is it just the unpaid portion? No, as I said subscription is indivisible.
The whole 100k will be declared as delinquent. So later on in the delinquency sale, it will be
sold to the highest bidder, if no one will bid up to the third bidding, the corporation has the
right to purchase the entire thing. They become treasury shares.
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code - this is called the appraisal right of a stockholder, if a
stockholder votes against an act of a corporation that it does not agree with and that act is
specifically recognised under the corporation code as subject to appraisal right, then the
stockholder can demand that the corporation will buy his shares. So in this again, the
corporation has a legitimate reason to buy the treasury shares.

AGAIN: Treasury shares cannot just be bought at any time. There has to be a legitimate
corporate purpose. Including but not limited to three enumerated under section 41.

STUDENT QUESTION: What would be the wisdom of retiring shares?

ATTY: Maybe the corporation does not want to dilute the stockholdings of its current
stockholders. Because here the treasury shares still forms part of the subscribed so compared
to the total subscribed, gamy ang imong share because dako man ang subscribed, but if you
don’t have any intention to reissue it you jus retire it so dako pa ang shares sa imong
stockholders.
DOCTRINE OF EQUALITY OF SHARES OF STOCK - in the absence of any stipulation in the
articles of incorporation and certificate of stock to the contrary all stocks regardless of their
nomenclature enjoy the same rights and privileges and subject to the same liabilities.

So if the AOI does not say what the characteristic of each share are, its the same characteristic
for all.

Who has the power to classify?

1. The incorporators at the very beginning because they approve the AOI.
4. Members of the BOD and the stockholders, subsequently if there are changes done by
amending the AOI. So you have to go back to the SEC.

CLASSES OF SHARES

Par value and no par-value

Par value - is the one where you fix the price per unit.
No par value - there is no per unit price

Common and preferred

Common - is basically represents the residual right of the stockholder over the corporation.
This is the most common type of share. You cannot have a corporation without common shares.
and you cannot deprive them of voting rights. The only time common shares are deprived of
voting rights is when you have founder shares. But founders shares are only for a limited period.
After that common shares will have voting rights again.
Preferred - if the articles does not specify preferred are always also voting unless stated in the
articles. Only preferred and redeemable can be deprived of voting rights. Preferred shares can
either be:Preferred as to assets or Preferred as to dividends. Preferred as to dividends can
either be commutative or non-commutative and participating and non-participating.

So how does it work?

Dividends for preferred shares are either fixed on per unit or a percentage of par. For example
preferred shares entitled to dividends at 5 pesos per share and they are commutative. What
does it mean? It means that, remember again that divides are not a matter of right to the
stockholders, dividends becomes only a rights once it is declared. So no declaration, no right to
the earnings of the corporation. But if you are a preferred commutative stockholder, you are
entitled to dividends for every year that you are a stockholder, it does not mean that you entitled
to receive the dividends every year because you not. again, unless it is declared their can be no
dividends. But the moment it is declared, you are entitled to dividends not just of the current
year but also of the past years. So, in our example, you have been a holder of preferred
cumulative shares since 2017, but in 2017 no dividend declaration. Are you entitled to
dividends? No, because no declaration no right. 2018, no declaration. Again you are not entitled
to dividends. 2019, there was a declaration, am I entitled to it? Yes. How much? So lets say
1000 shares, 5 pesos per share. Son in 2019 I am entitled to 5k but because they are
cumulative, you are entitled to dividends in arrears. Meaning the dividends that the dividends
that should have been given to me had dividends been declared. In other words, I am also
entitled in 2017 of 5k and in 2018 of 5k. So a total of 15k. If its preferred non-cumulative then I
only get 5k.

So ordinarily once preferred share holder are given their dividends, the common shares will now
get their share in the dividends. So the common stockholder are the ultimate risk takers but at
the same time they are also the ultimate beneficiary. Ultimate risk taker because if no dividends
are declared they don’t earn anything. If their is declaration of dividends but it not enough to
cover the preferred shares, then they don’t get anything. But if their a declaration of dividends in
such a big amount that only a portion goes to the preferred share holder, they get the rest. For
example, the corporation 1m worth of dividend. Let say, there is 10k worth of preferred shares
which are entitled to 1 peso per share. So at this rate the preferred share holders at 1 peso will
have 10k share of the dividends. So 1m less 10k, which 99ok, this balance will go to the
common shareholders. This is why the common shareholders are the ultimate beneficiary
because they get the balance. So if only 10k dividends were declared, the preferred will get it
first, so there will be nothing for the common stockholder. But if its a big amount such as 1M the
common stockholders will get the balance.That is ordinarily, but if you’re preferred stockholders
are also participating, they not only get there 10 first they will also participate in the balance of
990k. They participate with the common stockholders. So in the example, if their are 10k
preferred stock and 40k common stocks, supposedly the 990k will only be divided by the 40k
common stockholders, but because the preferred are participating, they also share, so the 990k
will be divided by 50k. So at 990k divided by 40k its 24.75, this is supposed the share of the
common share but because the preferred will be included it 990k divided by 50 which is 19.81. if
non-participating it all goes to the common stockholders. But if it is participating, they get their 1
peso share plus they get their 19.81 per share. So they get a total of 20.81 per share.

Definitions:

Preferred as to Assets – preferred in the distribution of assets of the corporation in case of

liquidation
Preferred as to Dividends – preferred in the distribution of dividends

Cumulative shares – right to dividends in arrears. The declaration of dividends is always a

management prerogative. If your shares are preferred, it means that for every year that the
company did not declare dividends, each cumulative preferred shareholder will have an interest
in those undeclared dividends.

Non-cumulative shares - they don’t get dividends in arrears.

Participating shares – those which after they get their share of the dividends, they shall
participate in the sharing of dividends of the common stockholders.

Non-participating shares — Once you get your preferred shares, that’s it.