But in the case of no par value shares, the entire consideration received by the corporation, even when they are issued for a premium, forms part of legal capital and | shall not be available for distribution as dividends. Example: The Articles of Incorporation of X acto Corporation fixes the amount of P100,000, divided into 1,000 shares with a par value of P100 each, as the amount to be subscribed, and to be paid to the corporation. At its incorporation, 250 shares with an aggregate par value of P25,000 are subscribed; and of the subscription, P6,250 are paid to the corporation. The corporation, borrowed P5,000 from a bank and in a business | venture obtained a profit of P3,000. x Capital Stock P100,000 Subscribed capital stock P 25,000 Paid-up capital stock: P 6,250 Capital...... P 33,000 ‘Unissued capital stock P 75,000 22. Classes of shares of-stock 1. Common stock ~— The ordinary stock of the corporation entitling the owner to pro rata dividends, without any ptiority or preference over any other shareholder or class of shareholders but equally with all other stockholders except preferred stockholders. (18°C.J.S. 648) 2. Preferred stock — A class of stock which is entitled certain preferences over common’stock. (13 Am. Jur.)A. ‘Preferred stock as to assets — a class of stock.which is entitled to preference in the distribution of assets in case.of liquidation over common stock. B. Prefered stock as to dividends — a class of stock which is entitled to preference in the payment of dividends Over common stock. a. Cumulative preferred stock —a class of stock which entitles the holder, before any dividends whatever are paid'to’the holders of the common stock, to a dividend measured not only by the contract amount for the current divided period, but also by any deficiency or arrearages in the payment of dividends accrued in former dividend periods. (13 Am. Jr. 703) b. Non-cumulative preferred stock — a class of stock which entitles the holders to take a dividend ifthere are profits for a certain period sufficient to pay their dividend, and if there are no. profits, they lose it forever. (13 Am. Jur. 702) . ¢. Participating preferred stock — a class of share which, after the stipulated dividend has been paid on-the common stock as well as on the preferred, any surplus is to be paid upon all without distinction. @ailey vs. Hannibal & St. J.R. Co. 17 Wall. (U.S.) 96, 21 L. Ed, 611) d. Non-participating preferred stock —a class of stock which entitles the holder to receive no more than the stipulated dividend.3. Guaranteed stock — preferred stock on which payment of the dividend is guaranteed. (18 C.J.S. 650) 4, Par value stock — a class of stock with a stated value appearing on the face of the certificate of stock. 5. Non par-value stock—a class of stock without any nominal or par value. (18 C.J.S. 648) 6. Voting stock —a class of stock which entitles the holder to vote in the meeting of the corporation. 7. Non-voting stock —a class of stock which cannot be voted in a meeting of the corporation. 8. Original or formative stock — such stock as may be authorized and required by the charter. (18 C.J.S. 648) 9.. Increased stock — such new or additional stock issued by an existing and completely organized corporation under legislative authority to increase its capital stock. (19 C.I.S. 648) x 10. Overissued or spurious stock — stock issued in excess of the authorized capital stock and is therefore void. (8 C.ILS. 648) : 11, Treasury stock — stock lawfully issued by the corporation for money, proeprty, or services and subsequently teacquired by it. (18 C.J.S. 645) 12. Watered stock — stock which has been issued by a corporation as fully paid up when in fact it is not, because it has been issued as bonus or otherwise, without any consideration at all, or for. less than par, or for property, labor, or services at an over valuation. (18 C.J.S. 683)13. Bonus stock — stock issued to persons who subscribe for bonds of a corporation under the condition that they shall receive an equal amount of stock therewith, the money paid on the subscription is payment for the bonds alone. (178 C.J.S. 684) 14. Promotion stock — stock issued to those who, in the case of * mining company, may originally own the mining ground or valuable rights connected therewith, in consideration of the same to the mining company when the company is incorporated, or it may mean such stock as issued to promoters or those in some way interested in the company, for incorporation of the company, or for services rendered in launching or promoting the welfare of the company, such as advancing the fees for incorporation, attorney’s fees, surveying, advertising, etc. (Enright vs. Hecksher, 240 Fed. 863) 15. Convertible stock — stock which may be converted by the stockholder from one class to another class, at a certain price and within a certain period. 16. Founders’ stock — stock issued to the founders or organizers of a corporation. 17. Redeemable stock — stock which may be redeemed at a fixed date or at the option of the corporation or the stockholder or both at a certain redemption price. 18. Shares in escrow — shares subject to an agreement under which the shares are deposited by the grantor or his agent with a third person, to be delivered by the depositary to the grantee (buyer) or subscriber upon the happening of certainconditions. The issuance of the shares is Subject to a suspensive condition. (Lusk vs. Stevens, 64 Phil, 1054 Title to the stock does: not pass to the grantee UNtil the conditions are performed, or perhaps, until delivery of the stock to the grantee, and it does not tetroact to the date of deposit of the stock. (Taken from B, Paulino, Law on Business Organization) 23. Power to classify shares and its limitation The shares of stock.of a corporation may be divided into shares or classes of shares, or both, and of which classes or series of shares may have such tights, privileges or restrictions as may be stated in the Articles of Incorporation. (Sec. 6) The limitation on power to classify shares is that, there shall always be a class or series of shares which have complete voting rights, It is therefore not possible for a corporation to classify all its share as tion voting shares. 24. Consideration for the issuance of no-par value shares. a. For such consideration. fixed in the Articles of Incorporation. b. As may be fixed by the Board of Directors pursuant to the authority conferred in the Artiéles of Incorporation or by- laws. c. For such consideration approved by the holders of majority of the voting shares at a Meeting called for that purpose. (Sec. 62)25. Limitations in the inssuance of no-par value shares. a. No-par value shares cannot be issued for a consideration less than P5.00. b._ No-par value shares cannot be issued with preference as to assets or as to dividend. : c ve value shares cannot be issued without being fully paid. d. No-par value shares cannot be issued by the following corporations: a) bank b) trust companies c) insurance companies d)_ building and loan association e) public utilities (Sec. 6) Be it noted that any or all shares (no-par value) so issued shall be deemed fully paid and non-assessable and the holders of suchshares shall not be liable to the corporation orits creditors. Likewise, the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution. as dividends. (Sec. 6) 26. Advantages of no-par value shares a. Disappearance. of personal liability of stockholders for unpaid subscription.-b. Stock having a nominal value is misleading in the case of ‘a corporation whose stock has a market value either more oy less than its nominal par value, while stock having no par value is a true statement of the conditions of the d. corporations. » ‘ Flexibility of its price enabling the corporation to obtain money by the issue of no-par without increasing its bonded indebtedness. It affords a possible remedy or relief from the evil of over- capitalization and stock watering. 27. Disadvantages of no-par value a. It legalizes instead of restricting large issue of stock for property. No-par share conceals what money or Property a share represents. It permits the issuance of maximum watered stock at a minimum risk. 28. Advantages of par-value shares. a. The holder is certain of the amount he invested. b. There is greater protection to creditors. ce Saleable to the public29. 30. 31. 32. Disadvantages of par-value shares a. The value appearing on its face might not be the true value. b. Sub: -ribers are liable to the creditors of the corporation for their unpaid subscription. Be it noted that preferred shares, whether as to assets or as to dividends, may be issued only with a stated par value. There : can never be a preferred no-par value shares. Preferred stockholders are not creditors of the corporation. Preferred stockholders do not havea lien upon the property of the corporation or considered as creditors of the corporation. However, stockholders, both common and preferred, are risk takers who invest canital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. (SEC. Opinion), © Non-voting shares No share maybe deprived of voting rights except those classified and issued as: a. Preferred shares b. Redeemable shares When non-voting shares may be voted The vote necessary to approve a particular corporate act shall be deemed to refer only to voting shares. However, non- voting shares are not absolutely disqualified from voting. The33. 34. holders of non-voting shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the Articles of Incorporation; 2. Adoption and amendment of by-laws; 2 Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; Incurring; creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation; NawSs Investment of cor rporate funds in. another corporation or business; 8. Dissolution of the corporation. Founder’s share, to whom given. Founder’s share is given’to the corporation. Holders of the foi rights and privileges not enjoyed such as preference in the payme: right to vote and. be voted in the the organizers or founders of under’s share are given special by the owners of other shares, nt of dividends and exclusive election of directors. The exclusive right to vote and be voted as director when granted, must be for a limited Period not to exceed five (5) years subject to the approval of the SEC. Redeemable shares Redeemable shares may be issued only when expressly so provided in the Articles of Incorporation. Those shares may be deprived of voting rights and are classified as non-voting shares in the Articles of Incorporation. (Sec. 6)35. When redeemable 36. 37. 38. Redeemable shares may be redeemed, purchased or taken up by the corporation upon the expiration of the period fixed, regardless of the existence of. unrestricted retained earnings in the books of the Corporation. Unless retired or cancelled, shares redeemed by the Corporation are considered treasury shares. Acquisition and sale of treasury shares. Shares of stock which have been issued and fully paid may be reacquired as treasury shares by the issuing corporation by: Purchase Redemption Donation Other lawful means. ers These shares may again be disposed of for a reasonable Price, even at less than par, by the Board of Directors. Likewise, treasury shares have no voting right as. long as they remain in the treasury. Treasury shares not entitled to dividend. Treasury shares are not entitled to participate in the distribution of dividend. These shares are not part of the outstanding capital stock. Creation of corporation is not a matter of right. The right to be and to act as a corporation is not a natural or civil right, but a mere privilege granted by the state by means of a franchise. Corporation cannot be created nor exist, nor corporate powers be assumed by mere agreement of the parties. (18 C.J.S..404)39. Steps in the creation of corporation There are three (3) steps in the formation of a corporation; - Promotion 1 2. Incorporation 4 : : 3. Organization and commencement of business operations. 40. Promotion a. Concept of promotion It is not a legal, but a business term, used for summing up in asingle word a number of business operations familiar to the commercial world by which a company is generally brought into existence. (13 Am. Jur. 244) - es b. : Steps in promotion — 1. . Bringing together persons who are interested in the formation of the corporation as incorporators. 2.” Procuring subscriptions to its capital stocic. 3. Making arrangement to finance the ‘enterprise. 4. Preparation of incorporation’s contracts. 41. Incorporation A.. Steps in incorporation a. Verification — verify from the records of the SEC, whether or not there is already a corporation or Partnership name, which is the same, or similar to, the name intended to be adopted. If there.is already such Corporate name, the proposed Corporate name’ should be changed. . :. Drafting and execution of the Articles of Incorporation by the. Incorporators. The temporary treasurer elected by the incorporators must also execute the following affidavits: 1. An affidavit regarding the capital stock subscribed and paid up. 2. A sworn statement of the assets and liabilities of the corporation. . Deposit by the temporary treasurer of the cash paid for the shares subscribed by the incorporators in the bank in the name of the treasurer in trust for and to the credit of the corporation, for which deposit the bank is required to issue a certificate of deposit. . Filing of the Articles of Incorporation with the SEC together with the following documents: ‘Treasurer’s affidavit Statement of assets and liabilities Certifieate of bank deposit Certificate as to the name of the corporation Certificate of authority from the Monetary Board of the Central Bank in cases of banking corporation. WRYNS . Payment of the filing fee and publication fee Issuance by the SEC of the certificate of incorporation.B. Incorporator 1. Composition - not less than 5 nor more than 15. 2. Residence — majority of the incorporators must be residents of the Philippines. 3. Citizenship — citizenship is not a requirement to form a corporation in the Philippines, what is required is only residence. However, by constitutional or statutory provisions, citizenship is sometimes made as. a requirement. Example: Corporation to engage in mining or agriculture, or in the disposition, exploitation, ‘development, or utilization of the natural resources of the Philippines or in the operation of Public utilities, 60% at least of its capital stock must be owned by the Filipinos. (Sec. 5 and 8, Art. XIV, Philippine Constitution). 4. Capacity — the formation of a corporation involves the making of a:contract, hence minors, insane and other incapacitated persons cannot become incorporators. Neither can an incorporation become an incorporator of another corporation because incorporators should be natural persons, By way of, exception, cooperatives can be incorporators of Rural Banks. 5. Ownership of share — stock corporation mus} least 1 share of the corporation, Each of the incorporators of a it own or be a subscriber to at Capital stock of the Proposed42. Organization a. Concept of organization Organization, in reference to corporations, means executive structure, election of officers, providing for subscription and payment of capital, adoption of by-laws, and all steps necessary for a corporation to transact business. b. Steps: 1. Adoption of by-laws within one month from the issuance of the certificate of incorporation. - = 2. Election of the Board of Directors. (Sec. 24) 3. Election of the officers of the corporation, namely the president, secretary, treasurer, and other officers stated in the by-laws. 4. Commencement of business operations. c. Effect of failure to organize Witbin 2 years after.the issuance. of the certificate of incorporation by the SEC, the corporation must formally organize and transact business otherwise the corporate powers shall cease by operation of law, the corporation is automatically dissolved. 43. Franchise a. Kinds 1. Corporate or primary franchise, the right and privilege, granted by the state, of being a corporation, this is the privilege granted to the persons to form a corporation.i 2. Secondary franchise ~ is the right granted to the | corporation to exercise its powers. | Example: To construct and maintain a railroad or water Works for the use of the corporation. (18 C.J.S. 455) b. Primary franchise distinguished from secondary franchise, 1. Primary franchise is granted to the incorporators to form a corporation; while secondary franchise is granted to the corporation in-order to exercise its powers. 2. Primary franchise cannot be sold or assigned; while secondary franchise can be sold or assigned if sale is ordered and confirmed by the court. 44. Period of existence of a corporation. The corporation, shall exist for the period specified in the Articles of Incorporation not exceeding 50 years, unless sooner dissolved or ‘unless said period is extended by amending the Articles of Incorporation. (Sec. 11 B.P. 68) NOTE: Condominium corporations can be organized for 200 years. : 45. Extension of period of existence The Articles of Incorporation shall specify the period or term of existence of the Corporation which can be extended subject to the following limitations: ; |_The extension shall not exceed 50 years in ariy one instance. The extension must be made within 5 years prior to the expiry date unless there are justifiable reasons for an earlier extension as determined by the SEC. 46. Required minimum capital stock ‘The new Corporation Code does not require any minimum authorized capital stock as long as the paid-up capital is not less than P5,000. (Sec. 13 B.P. 69) 47. Corporation in which Philippine citizenship is required. By provisions of law, Filipino ownership of a certain percentage of the capital stock or capital is required in the following cases: lL. Public utilities — at least 60% of the capital of which is owned by Filipinos. (Sec. 11, Art: XII, Constitution) . Corporations for development or exploitation of natural resources — at least 60% of the ‘capital of which is owned by Filipinos. (Sec. 2, Art. XI, Constitution) Corporations engaged in mass media — wholly owned and managed by Filipinos. (Sec. 1:(1), Art XVI, Constitution) Educational institutions — other than those established by religious orders, mission boards and charitable organizations, at least 60% of the capital of which is owned by Filipinos. (Sec. 4(2) Art. XIV, Constituuon)..i i ise shipping — at least 60% 5. Corporations engaged in coastwise s! ~at of the capital stock of which is owned by Filipinos. (P.D, No. 1464) 6. Civil aeronautics corporations — at least 60% of the capital stock of which is owned by Filipinos. (R.A. No. 776) 7. Corporations engaged in retail trade — wholly owned by "Filipinos. (R.A. No. 1180): 68. Corporations engaged in cottage industries — at least 75% “of the capital of which is owned by Filipinos. (R.A. No. 3470, as amended by R.A. No. 5326) ; 9. Financing companies —at least 60% of the capital of which _ is owned by Filipinos. (R.A: No. 5980) 10. Pawnshops —at least 70% of the capital of which is owned by Filipinos: (P.D. No. 114) 1 . Corporations engaged in the rice and corn industry - wholly owned by Filipinos. (R.A. No. 3018, as amended by P.D. 194) 12. Security, watchman or detective agencies — wholly owned by Filipinos. (R.A. No. 5487, as amended by P.D. No. 11) 13. Atomic energy corporations — at least 60% of the capital of which is owned by Filipinos. (R.A. No. 5207) 14, Banking corporations — at least 60% of its voting stock is owned by Filipinos. (R.A. No. 8791)48. 15. Rural banks — Capital stock shall be 100% owned and held by Filipinos. (R.A. No. 8791) 16. Savings and loans associations — At least 70% of the voting stock to be owned by Filipinos. (R.A. No. 3779, as amended by R.A. No. 4378, and by P.D. No. 113) The minimum capital stock subscribed and paid required from stock corporations. At least 25% of the authorized capital stock must be subscribed and at least 25% of the total subscription must be paid upon subscription, the balance to be paid on a date or dates fixed in the contract of subscription without the need:of. a call, or in the absence of'a fixed date or dates, upon call for payment by the Board of Directors. In no case shall the paid up capital be less than Five Thousand (P5,000) Pesos (Sec 13) Note: There is no required minimum authorized capital stock As long as the paid-up capital is not less than P5,000, any stock corporation may be incorporated. Example: Authorized-capital is P200,000, divided into 2.000 shares with a par value of P100 per share. 25% of 200,000 is 500 shares x P100 = P50,000 25% of P50,000 is P12,500 th this illustration, the incorporators must deposit with a banking institution through the corporate treasurer P12.500(in