MOM

February 15, 2022

How does one become a stockholder in a corporation?

 A person may become a stockholder in a corporation by voluntarily acquiring a share. Voluntary acquisition of
shares can be by purchase which may be from the corporation itself or from other shareholders OR through
subscription.

What is the difference between these 2 modes?

These are used intercgangeably but strictly speaking, they are different:

Subscription Purchase
As to the time Can be made before or after Made only after incorporation
when entered incorporation (original issuance) (subsequent issuance like acquisition
into of treasury shares)
If there is an Subscriber need not pay unless there is a Purchaser must fully pay the purchase
agreement as to call price at the time the shares are
the time of transferred
payment
Cannot be released from his obligation to A stockholder who sells his shares can
pay the subscription price condone the obligation of the
purchaser to pay
Statute of frauds does not apply here Statute of frauds apply if the purchase
is not less than 500

How do you subscribe to shares of stock?

 By entering into a subscription contract. A subscription contract is a contract by which the subscriber agrees to
take a certain number of shares of the capital stock of a corporation, paying the consideration, therefor or
expressly or impliedly promising to pay for the same. It is also defined as any contract for the acquisition of
unissued stocks in an existing corporation or a corporation still to be formed.

Who are the parties to the subscription contract?

 The parties to Subscription Contract are the subscriber and the corporation itself.

How do you perfect a subscription contract?

 Like any other contract, A SC is formed by an offer by one of the parties, the corporation or the subscriber, and
an acceptance of this offer by the other. There is a binding contract of subscription as soon as the offer to take
the shares made by a person to a corporation is accepted by the corporation, or as soon as the person to whom
the offer is made accepts an offer of shares by a corporation.

What is the required form for the validity of a subscription contract?

 There is no law or rule in this jurisdiction requiring a form of subscription to capital stock as a requisite for its
validity, hence, the same need not be in writing. It can be oral.

RIGHTS AND OBLIGATION:

Corporation- entitled to the purchase price
Stockholder- right to dividends, right to vote and attend meetings.

Upon the perfection of a SC, does the subscriber already have the right to a share of dividends?
 YES. The subscriber as well have the right to attend meetings and vote therein.

What is the significance of the recording of the name of the subscriber in the Stock and Transfer Book?
 He has now in a status of a stockholder, meaning, he can already exercise the rights of a stockholder. Prior to the
recording of his name in the Stock and Transfer Book, he is not yet considered to be a stockholder, thus, he
cannot yet exercise the rights of a stockholder thereof.

Who are the parties to a Pre-incorporation subscription?

 The parties to a Pre-incorporation subscription are the subscriber and those incorporators. In this case, the
corporation is still not existing but this pre-incorporation subscription already binds the corporation (peculiar
provision). The promoters or incorporators are the ones who execute the contract with the subscribers on
behalf of the corporation. Once the corporation is formed, it becomes bound by the contract.

Can pre-incorporation subscription be revoked?

  As a GR: Pre-incorporation subscription is irrevocable for a period of 6 months from the date of subscription to
ensure the funders of the corporation will not back out from their commitment and corporation will really be
registered as corporation.

 XPN:
1. When all of the other subscribers consent to the revocation; or
2. The corporation fails to incorporate between the same period or within a longer period stipulated in the
contract of subscription.

What happens after the 6 months period?

 It now becomes revocable.
 XPN: When a longer period is stipulated in the contract of subscription like when it agreed upon that it is
irrevocable for 12 months.
HOWEVER, they cannot agree for a shorter period than 6 months since it is the minimum period required by the
RCCP. Thus, the same shall be void.

When a person subscribes to shares of stocks, you need not pay in full. Are you already a stockholder even without
paying in full?
 YES. The balance of the subscription must be paid upon the call of the board of directors or upon the date
provided in the contract of subscription.

Can the corporation condone unpaid balance of the subscription?

 NO, because this will violate the trust fund doctrine. Under the Trust fund doctrine, the subscribed capital stock
of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right
to look up to satisfy their credits.

Generally, Trust fund doctrine covers the subscribed capital stock, meaning, both paid and unpaid portion including
any APIC. How about if the corporation is insolvent?
 If the corporation is insolvent or cannot otherwise pay its obligation, then the trust fund doctrine provides that
all the property and other assets of the corporation are regarded as equity in trust for the payment of the
corporate creditors.

SOURCES: 1. Investment of Stockholder

2. Borrowings
3. Operations/Profits

GR: Only the investments put in by stockholders (portion of assets and properties)
XP: Insolvent: (Funded by three sources are covered by the trust fund doctrine)

How about that portion of the subscription already paid by the stockholder to the corporation? Is there any instance
that the stockholder can demand the return of what he has paid?
 YES. If the stockholder exercises his right of appraisal, in cases of redeemable shares, and when the corporation
acquires its own shares.

The corporation has an ACS of 10M. 4M is the subscribed CS. When the corporation issued 6M unsubscribed portion,
will that be covered by a subscription contract?
 YES. Subscription contract may pertain to shares that are part of the original ACS appearing in the AOI or those
that involve shares in the increase of capital stock. The issuance of the shares is to be approved by the Board of
Directors.

When the corporation increases its ACS in the amount of 20M, who will approve this increase?
 This will be approved by the majority of the Board of Directors with the assent of 2/3 of OCS, and provided that
25% of such increase is subscribed, and 25% of such increased subscribed capital is paid.

The corporation issues shares out of these increase in the ACS. Will this be covered in the subscription contract?
 YES. This will be approved by the Board of Directors.

The corporation re-acquires the shares and later, it re-issues those re-acquired shares. Will such re-issuance be
covered in a subscription agreement?
 NO, because subscription contract does not apply to treasury shares. This may be issued below par bc
corporation already received that amount in the initial issuance. BOD will approve.

How about original issued shares?

 This must be issued at par value or if no par is provided, at the stated amount in the by-laws.

What are watered stocks?

 Watered stocks are stocks that are issued for a consideration less than the par or issued price thereof.
Creditor expects that when they lend money to the corporation it is adequately funded based on its capital stock.
 In case of watered stock, the capital of the corporation in the financial statement is provided it is fair value but in
reality the corporation has received no or less than the fair value. So, it is like bloated. They appear big but its only
water inside. It is deceiving to the creditor and the public.

What are the considerations for the issuance of shares?

 Actual cash paid to the corporation;
 Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
 Labor performed for or services actually rendered to the corporation;
 Previously incurred indebtedness of the corporation;
 Amounts transferred from URE to stated capital;
 Outstanding shares exchanged for stocks in the event of reclassification or conversion;
 Shares of stock in another corporation; and/or
 Other generally accepted form of consideration.

CONSIDERATION IS ANY VALUABLE CONSIDERATION OF THIS OR ANY COMBINATION.

However, stocks shall not be issued for a consideration:

o less than the par or issued price thereof;
o issued in exchange for promissory notes or future services; (CONTIGENT) and

PM is prohibited but in subscribing it is allowed not to pay in full and PM is executed. How do you reconcile?
The portion covered by the PM is not considered paid in this case, there still must be an actual consideration.
PM- cannot result to a paid status.

Other consideration for property other than cash?

o Where the consideration is other than actual cash, or consists of intangible property such as patents or
copyrights, necessary or convenient for its use and lawful purposes, the valuation thereof shall initially
be determined by the stockholders or the board of directors, subject to the approval of the Commission.

What is “Amounts transferred from URE to stated capital?”

 Amounts transferred from URE to stated capital are also acceptable consideration. This happens whenever there
is a declaration of stock dividends because stock dividends is acquisitions already of the shares of stock. In a
stock dividends, a corporation distributes a portion of its URE to the stockholders. Though earnings are not
distributed in a form of cash, these earnings are converted into shares of stocks and it is these shares that are
distributed to the stockholders as dividends, hence, mode of acquisition and consideration.

What about Outstanding shares exchanged for stocks?

 Net assets of corporations for conversion or spin-off.
 The corporation may also accept as consideration the outstanding shares exchanged for stocks in the event of
reclassification or conversion. Conversion includes conversion of a single proprietorship or partnership into a
corporation or a spin-off of one or more division of the company. The consideration in these cases is actually the
net assets of those enterprises or units.

STOCKHOLDER A- PAID IN CASH

STOCKHLDER B- PAID IN OTHER THAN CASH
Difference in rights? NO.
What is SA paid in excess? NO still since it based on the number of shares.

What is Deposit on Stock Subscription?

 Deposit on Stock Subscription refers to an amount of money received by the corporation as a deposit with the
possibility of applying the same as payment for the future issuance if capital stock.

 Person making a deposit on stock subscription does not have the standing of a stockholder and hence, not
entitled to dividends, voting rights or other attributes of a stockholder. He becomes stockholder upon
subscribing and paying. Corp is not obliged to issue stock certificate.

What are stock certificates?

 Stock certificates are tangible representation of shares, or proof of ownership of shares but the same is not the
only proof nor the best proof. Ownership of shares may also be proved by those names stated in the record
books of the corporation.

Difference between stock certificate and share of stock:

 Stock certificate is the instrument itself or the document which serves as an evidence that a person is a
stockholder of a corporation while a share of stock is an intangible property owned by the stockholder
subscribed or purchased from the corporation.
 Stock certificate for convenience, not the sole proof of ownership nor the best proof. (Can be proven by the
Stock and Transfer Book)
Is issuance of a stock certificate necessary for one to become a stockholder?
 NO, provided that the name of the person is already recorded in the record book of the corporation.

When is stock certificates issued?

 These are only issued when the subscription are fully paid for. But a person is already a stockholder upon
subcrtiption and SC is not necessary for one to become a stockholder because it is merely a proof of ownership.

What are the requisites for it to be valid?

1. Fully paid as well as the interest and other expenses

What is transfer?
 Transfer is an acquisition of shares from a current stockholder of a corporation. (subsequent issuance)

How transfer is made?

 Voluntary transfer of a share that is represented by a certificate must strictly comply with the following
conditions:
o There must be delivery of the certificate;
o The share certificate must be indorsed by the owner or his agent; and
o Must be recorded in the books of the corporation

 Delivery that is required is delivery from the transferor to the transferee. It is the delivery of the certificate
coupled with the endorsement by the owner or his duly authorized representative that is the operative act of
transfer of shares from the original owner to the transferee. For the transferee to be a stockholder, the transfer
must be registered in the books of the corporation.

Can indorsement be in blank?

After transfer, can he exercise rights of the stockholder?

 NO. Registered in the Stock and Transfer Book by presenting the certificate of stock and deed of conveyance.
 Old certificate is cancelled and new shall be issued.
 Only after registration, transferee can exercise rights of the stockholder.

Before the transfer is registered in the corporate books, does it have any binding effects?
 YES, but only as to the transferor and the transferee. Unregistered transfer does not affect third persons and
corporation.
 B as transferree- cannot be compelled to issue dividends to him before registration, it must issue dividends to
registered owner or to A.
 Can B compel A to give him the dividends? Yes. Since the transfer is valid as to them.
 B can also compel A to have him registered.
 Ministerial duty on the part of the CORP to register.
 Tranferor- voluntary
 Transferee- DAPAT MAY SPA, he can also compel transferor

NO certificate of stock BUT FULLY PAID?

May transfer be made even if the same is not yet fully paid?
 NO. Pursuant to Section 63, a subscription is one, entire and indivisible whole contract. It cannot be divided into
portions so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full
payment of his subscriptions together with any interests and expenses, is any is due.

A- 10k, only 5k paid

B-

A- Cannot transfer half, but full

A- Can compel 5k HE PAID FROM B but not from CORP
B- Now if b owns the transfer, B is free to transfer the shares to anyone.

What is the rationale for the principle of indivisibility?

 The reason behind the principle is that, it would be difficult to determine whether or not the partial
payments made should be applied as full payment for the corresponding number of shares which can only be
covered by such payment or as proportional payment to each and all of the entire number of subscribed shares,
and the difficulty in determining the unpaid balance to be assumed by each transferee.

Does the corporation benefits from this principle?

 YES. By prohibiting the transfer of shares to many persons (when these are still unpaid), the corporation has the
greater chance of claiming the unpaid balance. One subscription pertains to one person only. It cannot be
divided into two or more people because that will be difficult to collect from. By attaching only one name, it will
be easier for the corporation to collect for the unpaid balance.