My closely-held corporation is looking into expansion through opening an additional

branch. Me and my Board of Directors are deliberating on where we could get extra funding for
expansion and we have come up of two choices; these are issuing preference shares or publicly
trading shares of stock. In choosing between the two options we need to consider its advantages
and disadvantages on which is more effective, efficient and with less cost especially considering
we are a closely-held corporation. As a closely held corporation there are factors to consider such
advantages, disadvantages and restrictions as provided under the Revised Corporation Code of
the Philippines when choosing between these two options.
The first option which is the issuance of preference shares is a common way of raising
capital especially because we have only issued ordinary shares so far. Preference shares are
shares with dividends from a company’s stock and its shareholders’ dividends are paid out first
before common stockholders. If we issue preference shares we can get a lower debt-to-equity
ratio (-which is used as a way to analyze the stability of a business’ finance) and the lower this
ratio is the more attractive it is to investors. Preference shareholders do not have any voting
rights which can be seen as an advantage for the corporations because they retain control. Since
we are a closely held corporation that is looking into funds for expanding business, issuing
preference shares can easily increase our corporation’s capital as investors want high fixed
dividends that has “stronger bankruptcy protection” (Norris, 2021). However, according to the
Revised Corporation Code of the Philippines (2019) a closely held corporation is only allowed a
maximum of 20 shareholders, therefore we might not gain as much funds for expansion due to
this limitation. Nonetheless, this will be dependent on the amount of stocks that will be issued
and number of preference shareholders that will invest in them.
The second option, which is to publicly trade shares of stock, is an option that can easily
raise our capital fast but because we are closely held corporation we have restrictions due to the
Corporation code. Investors may want to invest into common stocks from close corporations
because the share prices are more stable, therefore we can price them higher. Public trading as a
close corporation is limited which prevents the corporation to being a victim of investors who
have an unpredictable nature although that results to difficulty on raising additional capital
(Hayes, 2021). The main issue here is that this is not permitted in the Revised Corporation code
of the Philippines. Section 95 states that a close corporations are not allowed to list in a stock
exchange or offer any kind of stock to the public (Revised Corporation Code of the Philippines,
2019). As an ethical corporation we also do not want to break the law. So, that means we might
have to transition into a public corporation in order to publicly trade stocks and the costs for
compliance of requirements can be expensive and issuance of other financial documents have
additional costs (Balasubramaniam, 2022) . Therefore it is contrary to looking for additional
funding to expand the business. Other than that, I want to protect my ordinary shareholders and
the power of their vote because opening to public means there will be more ordinary
shareholders that will overturn the votes of the shareholders.
With that assessment, I have come to a conclusion that issuing preference shares would
be a better and right option for us to gain additional funds for expansion. We are a closely held
corporation for a reason and I want to protect the other owners and shareholders power on our
stocks. This approach is also more stable because we are sure that investors will be interested in
preference shares. Becoming a public corporation that only has ordinary shares will not be
attractive to investors and since we will be newly known to the market we cannot go against its
competition immediately. Therefore, issuing preference shares can give us a more guaranteed
and secure increase in capital to fund expanding the business without violating the law and the
rights of the shareholders.
References:

Balasubramaniam, K. (2022, June 9). What Are the Advantages and Disadvantages of a
Company Going Public?Investopedia. Retrieved June 23, 2022, from
https://www.investopedia.com/ask/answers/advantages-disadvantages-company-going-
public/
Hayes, A. (2021, June 27). Closely Held Corporation. Investopedia.

https://www.investopedia.com/terms/c/closely-held-corporation.asp#toc-share-prices
Norris, E. (2021, December 14). Why Would a Company Issue Preferred Shares Instead of
Common Shares? Investopedia. Retrieved June 23, 2022, from
https://www.investopedia.com/ask/answers/042015/why-would-company-issue-
preference-shares-instead-common-shares.asp
Revised Corporation Code, Rep. Act No. 11232 (Phil).