NOTES G - STOCKS AND STOCKHOLDERS

Subscription contract – Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed (Sec. 59 RCCP)

What are the kinds of subscription contracts?

1) Pre-incorporation subscription – entered into before the incorporation and irrevocable for
a period of six (6) months from the date of subscription unless all other subscribers consent
to the revocation or if the corporation failed to incorporate. It cannot also be revoked after
the submission of the Articles of Incorporation with the SEC (Sec. 60, RCCP).

2) Post-incorporation subscription – entered into after incorporation.

Shares of Stock – interest or right which an owner has in the management of the corporation, and
its surplus profits, and, on dissolution, in all of its assets remaining after the payment of it debt. The
stockholder may own the share even if he is not holding a certificate of stock.

Comparison (Sundiang & Aquino, Reviewer 2014):

SHARE OF STOCK CERTIFICATE OF STOCK

1. Unit of interest in a
corporation.
2. it is used an incorporeal
or intangible property.
3. It may be issued by the
corporation even if the
subscription is not fully paid.
1. Evidence of the holder’s ownership of the
stock and of his right as a shareholder and up
to the extent specified therein.
2. It is concrete and tangible.
3. May be issued only if the subscription is fully
paid.

RIGHTS AND OBLIGATIONS OF STOCKHOLDERS

What are the basic rights of stockholders?

1) direct or indirect [participation in management;

2) voting rights (Sec. 6, RCCP);
3) right to remove directors (Sec. 27, RCCP);
4) propriety rights:
(i) right to dividends (Sec. 42);
(ii) appraisal right (Sec. 27, RCCP);
(iii) right to issuance of stock certificate for fully paid shares (sec. 63, RCCP)
(iv) proportionate participation in the distribution of assets in liquidation (Sec. 139);
(v) right to transfer of stocks in corporate books (Sec. 62, RCCP)
(vi) pre-emptive right (Sec. 38, CCP);
5) right to inspect books and records (Sec. 73, RCCP);
6) right to be furnished with the most recent financial statement/financial report (Secs. 73
and 74, RCCP)

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 7) right recover stocks unlawfully sold for delinquent payment of subscription; and
8) right to file individual suit, representative suit, and derivative suits.

What are the obligations of a stockholder?

1) Liability to the corporation for unpaid subscription (Sec. 66, RCCP);

2) Liability to the corporation for interest on unpaid subscription if so required by the by-laws
(Sec. 65, RCCP);
3) Liability to the creditors of the corporation for unpaid subscription (Sec. 66, RCCP);
4) Liability for watered stock (Sec. 64 RCCP) by creditor or officer

Action by stockholders or members.

(1) Wrong or injury done directly against the corporation. – As a result of the separate identities
of the corporation and its stockholders, it follows that any wrong or injury done directly
against the corporation gives rise to a cause of action on the part of the corporation through
the board of directors (or trustees) and not primarily of an individual stockholder.
(2) Lack of action on the part of officials of corporation. – But, whenever the officials of a
corporation refuse, or fail to bring suit to redress the wrong, such as when they are the ones
to be sued, a stockholder may maintain a derivative suit to enforce the corporate right of
action in behalf of himself, the other stockholders, and for the benefit of the corporation.

Meaning of watered stock.

Watered stock is stock issued for no value at all or for a value less than its equivalent either
in cash, property, services, or stock dividends. It includes stock:

(1) Issued without consideration (bonus share);

(2) Issued as fully paid when the corporation has received a lesser sum of money than its par
or issued value (discount share);
(3) Issued for a consideration other than actual cash, such as property or services, the fair
valuation of which is less than its par or issued value;
(4) Issued as stock dividend when there are no sufficient retained earnings or surplus (see Sec.
43.) to justify it.

Issued of waters stock prohibited.

(1) Reason for prohibition. – The issuance of watered stock is prohibited to protect persons
who may acquire stock and those who may become creditors of the corporation on the faith
of its outstanding capital stock being fully paid.

The prohibition secures equality among subscribers and prevents discrimination against
those who have paid in full the par or issued value of their shares.

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Remedies to enforce payment of stock subscription.

They are as follows:

(1) Extra-judicial sale at public auction. – This is the first and most special remedy and its
consists in permitting the corporation to put up unpaid stock for sale and dispose of it for the
account of the delinquent subscribers. In this case, the provisions of Sections 67 to 69,
inclusive, are applicable and must be followed (see Velasco vs. Poizat, 37 Phil. 302);
(2) Judicial action. This other remedy is by court action under section 70 (Ibid.);
(3) Collection from cash dividends and withholding of stock dividends. – This is authorized by
Section 43, par. 1.

When stock becomes delinquent.

A stock becomes delinquent upon failure of the holder to pay the unpaid subscription or
balance thereof within 30 days from the date specified in the contract of subscription, or in the
absence of a date fixed in the contract of subscription, from the date stated in the call made by the
board of directors. (Ibid.)

Call and assessment defined and distinguished.

(1) A call is a declaration officially made by a corporation usually expressed in the form of a
resolution of the board of directors requiring the payment of all or a certain prescribed
portion of a subscriber’s stock subscription.

Requisites for a valid call.

The requisites for a valid call are:

(1) It must be made in the manner prescribed by law

(2) It must be made by the board of directors; and
(3) It must operate uniformly upon all the shareholders.

Meaning of highest bidder.

The highest bidder is the person offering at the sale “to pay the full amount of the balance on the
subscription together with accrued interest, cost of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share.” (Sec. 68, par.3.) Thus, the subscriber cannot
incur any deficiency liability because the highest bid must not be less than the full amount due.