Classification of Corporation

QUESTION:
The Authorised Capital Stock of ABC Corporation is 1Million. Is it a stock or non-
stock corporation?

QUESTION:
ABC Company was established by act of congress. Is it de jure or de facto? Why is
it not de jure nor de facto?
Article XII, Section 16 of the 1987 Constitution provides that Congress shall not,
except by general law, provide for the formation, organization, or regulation of
private corporations. Government- owned and controlled corporations may be
created or established by special charters in the interest of the common good and
subject to the test of economic viability.
QUESTION:
What about Red Cross?

Q: In Liban, et al. v. Gordon (July 15, 2009) the Court held that Richard Gordon did
not forfeit hisseat in the Senatewhen he accepted the chairmanship of the Philippine
National Red Cross Board of Governors, as the office of the PNRC Chairman is neither
a government office nor an office in a government-owned or controlled corporation
for purposes of the prohibition in Section 13, Article VI of the 1987 Constitution.
However, the decision declared void the PNRC Charter as it creates the PNRC as a
private corporation and ruled that the PNRC should incorporate under the
Corporation Code and register with the SEC if it wants to be a private corporation. Is
PNRC a private corporation?

A: NO. Although the PNRC was created by a special charter, it cannot be considered
as a GOCC in absence of the essential elements of ownership and control by the
government.
  It does not have government assets and does not receive any appropriation
from the Philippine Congress.
 It is a non-profit, donor-funded, voluntary organization
 Its mission is to bring timely, effective and compassionate humanitarian
assistance for the most vulnerable without consideration of nationality, race,
religion, gender, social status or political affiliation.

This does not mean however that the charter of PNRC is unconstitutional. PNRC is
sui generis.

 Although it is neither a subdivision, agency or instrumentality of the

government nor a GOCC or a subsidiary thereof, so much so that Gordon was
correctly allowed to hold his position as Chairman thereof concurrently
while he served as a Senator, such a conclusion does not ipso facto imply that
the PNRC is a private corporation within the contemplation of the provision
of the Constitution that must be organized under the Corporation Code.
(Liban v. Gordon)
 QUESTION: What if Red Cross employee is dismissed, where will he go, LA or Cvil
Service Commission?
Torres vs. De león (2016)
As correctly mentioned by Justice Roberto A. Abad, the sui generis character of
PNRC requires us to approach controversies involving the PNRC on a case-to-
case basis.
In this particular case, the CA did not err in ruling that the CSC has jurisdiction over
the PNRC because the issue at hand is the enforcement of labor laws and penal
statutes, thus, in this particular matter, the PNRC can be treated as a GOCC, and as
such, it is within the ambit of Rule 1, Section 1 of the Implementing Rules of Republic
Act 67135, stating that:
Section 1. These Rules shall cover all officials and employees in the government,
elective and appointive, permanent or temporary, whether in the career or non-
career service, including military and police personnel, whether or not they receive
compensation, regardless of amount.
 QUESTION:
Difference between Corporation and Incorporators.
Incorporators are those stockholders mentioned in the AOI originally forming and
composing the corporation.
Incorporators are only corporations if they remain as stockholders or members.
But even if they are no longer SH or members, they will remain to be incorporators.
Number of incorporators cannot exceed 15.

Corporations are those who compose the corporation whether as stockholders in

Stock corporation, or members in a non-stock corporations.
Incorporators cease to be Corporations if they are no longer stockholders.
No restriction as to number

QUESTION:
Stock vs. Non Stock Corporations
Stock Corporation Non Stock Corporation
Stock corporations - are those which: A nonstock corporation is:

 have capital stock divided into shares  one where no part of its
and income is distributable as
 are authorized to distribute to the dividends to its members,
holders of such shares, dividends, or trustees, or officers.
allotments of the surplus profits on
the basis of the shares held.

QUESTION:
Purpose of Non Stock Corporations
Nonstock corporations may be formed or organized for:

 charitable,
 religious,
 educational,
 professional,
 cultural,
 fraternal,
 literary,
 scientific,
 social,
 civic service, or
 similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title governing
particular classes of nonstock corporations.
QUESTION:
Chartered vs. Non Chartered GOCC

The Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to GOCCs created by
special charters. Congress cannot enact a law creating a private corporation with a
special charter. Such legislation would be unconstitutional. Private corporations may
exist only under a general law. The Constitution authorizes Congress to create GOCCs
through special charters. Since private corporations cannot have special charters, it
follows that Congress can create corporations with special charters only if such
corporations are government-owned or controlled.

QUESTION:
Charter vs. Corporation Code
Carandang vs. Desierto

PNRC vs. Ganza

QUESTION:
Open vs. Close Corporations

QUESTION:
Close Corporation Articles of Incorporation
QUESTION:
Kinds of Shares

CLASSIFICATIONS OF SHARES

1. PAR VALUE SHARES

Shares with a value fixed in the articles of incorporation and the certificates of stock.
The par
value fixes the minimum issue price of the shares.
Rules on the issuance of shares less than its par value
GR: A corporation cannot issue shares at less than its par value.

XPN: The prohibition applies only to original issuance of shares and not to the
subsequent sale of treasury shares and sale of shares made by stockholders.
 2. NO PAR VALUE SHARES

These are shares having no stated value in AOI.

Limitations on no par value shares

 Shares which have no par value, cannot have an issued price of less than
P5.00.
 The entire consideration for its issuance constitutes capital so that no part
of it should be Distributed as dividends.
 They cannot be issued as Preferred stocks.
 They cannot be issued byBanks, Building and loan association, trust
companies, Insurance companies, and Public utilities.
 The Articles of incorporation must state the fact that it issued no par value
shares as well as the number of said shares.
 Once issued, they are deemed fully Paid and non-assessable.
 3. COMMON SHARES

These are ordinarily and usually issued stocks without extraordinary rights and
privileges, and entitle the shareholder to a pro rata division of profits.

 It represents the residual ownership interest in the corporation.

 The holders of this kind of share have complete voting rights and they cannot
be deprived of the said rights except as provided by law.
 4. PREFERRED SHARES

These entitle the shareholder to some priority on distribution of dividends and assets
over those holders of common shares. Preferred shares may be issued only with a
stated par value.

Holders of preferred shares cannot compel the corporation to give them dividends.
The preference only applies once dividends are declared.
Preferred cumulative participating share of stock - a kind of share which gives
the holder preference in the payment of dividends ahead of common stockholders
and to be paid the dividends due for prior years and to participate further with
common stockholders in dividend declaration.
Kinds of Preferred Shares
Preferred shares as to assets –gives the holder preference in the distribution
of the assets of the corporation in case of liquidation.
Participating preferred shares – Entitled to participate with the common
shares in excess distribution
Non-participating preferred shares – Not entitled to participate with the
common shares in excess distribution.
Preferred shares as to dividends–entitled to receive dividends on said share
to the extent agreed upon before any dividends at all are paid to the holders of
common stock.
Cumulative preferred shares – If a dividend is omitted in any year, it must
be made up in a later year before any dividend may be paid on the common
shares in the later year.
Non-cumulative preferred shares – There is no need to make up for
undeclared dividends
 5. REDEEMABLE SHARES

These are shares of stocks issued by a corporation which said corporation can
purchase or take up from their holders upon expiry of the period stated in certificates
of stock representing said shares.

Kinds of Redeemable Shares

1. Compulsory - the corporation is required to redeem the shares.

2. Optional - the corporation is not mandated to redeem the shares.
Limitations on redeemable shares

 Issuance of redeemable shares must be expressly provided in

the Articles of incorporation;
 The Terms and conditions affecting said shares must be stated both in
the articles of incorporation and in the certificates of stock
 Redeemable shares may be deprived of Voting rights in the articles of
incorporation, unless otherwise provided in the Code.
 Redemption cannot be made if it will cause Insolvency of the
corporation.

Reissuance of redeemed shares

Redeemable shares, once redeemed are retired unless reissuance is expressly
allowed in the AOI.
6. TREASURY SHARES
Shares that have been earlier issued as fully paid and have thereafter been acquired
by the corporation by purchase, donation, and redemption or through some lawful
means (CC, Sec. 9).
NOTE: Treasury shares are not retired shares. They do not revert to the unissued
shares of the corporation but are regarded as property acquired by the corporation
which may be reissued or resold at a price to be fixed by the Board of Directors.

NOTE: When treasury shares are sold below its par or issued value, there can be no
watering of stock because such watering of stock contemplates an original issuance
of shares.
Other means in which a
corporation may acquire its own Limitations on treasury shares
shares:
 To collect or compromise  They may be re-issued or sold again
unpaid indebtedness to the as long as it is for a reasonable price
corporation; fixed by the BOD.
 To eliminate fractional  Cannot participate in dividends.
shares;  It has no voting right. It cannot be
 To pay dissenting or represented during
withdrawing stockholder’s meetings.
stockholders entitled to  The amount of URE equivalent to
payment for their shares; the cost of treasury shares being
 Redemption held shall be restricted from being
 Close corporation. declared and issued as dividends.
Treasury shares distributed by way of dividends

 They can be distributed only as property dividends.

 They cannot be declared as stock or cash dividends because they are not
considered part of earned or surplus profits.
 The distribution of cash or stock dividends out of treasury shares would be
converting the corporation into both a debtor and creditor for the same
amount at the same time, or requiring it to take money or stock from one of
its pockets and putting it in another, which is absurd.
 Treasury shares may be declared as property divided to be issued out of the
retained earnings previously used to support their acquisition provided that
the amount of the said retained earnings has not been subsequently
impaired by losses.
7. FOUNDERS SHARES
Shares classified as such in the articles of incorporation and which may be given
special preference in voting rights and dividend payments.
NOTE: Where the exclusive right to vote and be voted for in the election of directors
is granted, such right must be for a limited period not exceeding 5 years subject to
approval of the SEC, the period to commence from the date of said approval.

 Where the exclusive right to vote and be voted for in the election of directors
is granted, it must be for a limited period not to exceed five (5) years from
the date of incorporation:
o Provided, That such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108, otherwise known
as the “Anti-Dummy Law”; Republic Act No. 7042, otherwise known
as the “Foreign Investments Act of 1991”; and other pertinent laws.
ROUND 2
QUESTION:
ABC Bank issued shares. Corporations experienced liquidity problems. Is the
corporation required to issue dividends?

QUESTION:
Are interest bearing stock valid or void?
Valid

QUESTION:
Is guaranteed dividend preferred shares valid or void?
Valid provided there is unrestricted retained earnings
 QUESTION:
Can the holder of Preferred Shares redeem the shares even if it is experiencing
liquidity problems?
While redeemable shares may be redeemed regardless of the existence of
unrestricted retained earnings, this is subject to the condition that the corporation
has, after such redemption, assets in its books to cover debts and liabilities inclusive
of capital stock. Redemption, therefore, may not be made where the corporation is
insolvent or if such redemption will cause insolvency or inability of the corporation
to meet its debts as they mature.

QUESTION:
What if you’re a holder of a Founder’s Share with 1 share to be
elected/voted as Director of Corporation?
What if it’s a foreigner?
 QUESTION:
Does the law say the holder of a Founder’s Share subject to the Anti-Dummy Law?
Only as to the exercise of the exclusive right to vote and be voted for in the election
of directors.

Sec.7
Where the exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years from the date of
incorporation:

o Provided, That such exclusive right shall not be allowed if its

exercise will violate Commonwealth Act No. 108, otherwise known
as the “Anti-Dummy Law”; Republic Act No. 7042, otherwise known
as the “Foreign Investments Act of 1991”; and other pertinent laws.
 QUESTION:
Can Founder’s share be given preference in dividends? Is there a limit in years?
Yes. Shares classified as such in the articles of incorporation and which may be given
special preference in voting rights and dividend payments.
Limitation: Must not exceed 5 years
QUESTION:
Is a par value of 1 centavo valid or not?
QUESTION:
What are the limitations of issuance of non par value share?

 Shares which have no par value, cannot have an issued price of less than
P5.00.
 The entire consideration for its issuance constitutes capital so that no part
of it should be Distributed as dividends.
 They cannot be issued as Preferred stocks.
 They cannot be issued byBanks, Building and loan association, trust
companies, Insurance companies, and Public utilities.
 The Articles of incorporation must state the fact that it issued no par value
shares as well as the number of said shares.
 Once issued, they are deemed fully Paid and non-assessable.
ROUND 3
QUESTION:
When should he pay the balance of subscription?

 on the date specified in the subscription contract or on the date stated in the
call made by the board.
 Failure to pay on such date shall render the entire balance due and payable
and shall make the stockholder liable for interest at the legal rate on such
balance, unless a different interest rate is provided in the subscription
contract.
 The interest shall be computed from the date specified, until full payment of
the subscription.
 If no payment is made within thirty (30) days from the said date, all stocks
covered by the subscription shall thereupon become delinquent and shall be
subject to sale as hereinafter provided, unless the board of directors orders
otherwise.
 QUESTION:
Due date on August15, Aug 19 balance is still not paid, BOD called for a meeting.
Can he vote? How much can he vote?
Yes he can vote up to his entire share regardless if it has not been fully paid. (Because
not yet delinquent)
If no payment is made within thirty (30) days from the said date, all stocks covered
by the subscription shall thereupon become delinquent and shall be subject to sale
as hereinafter provided, unless the board of directors orders otherwise.

SEC. 70. Effect of Delinquency. – No delinquent stock shall be voted for, be entitled to
vote, or be represented at any stockholder’s meeting, nor shall the holder thereof be
entitled to any of the rights of a stockholder except the right to dividends in
accordance with the provisions of this Code, until and unless payment is made by the
holder of such delinquent stock for the amount due on the subscription with accrued
interest, and the costs and expenses of advertisement, if any.
 QUESTION:
Is he entitled to dividends? How much?
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of subscribed shares not
fully paid which are not delinquent shall have all the rights of a stockholder.

SEC. 70. Effect of Delinquency. – No delinquent stock shall be voted for, be entitled to
vote, or be represented at any stockholder’s meeting, nor shall the holder thereof be
entitled to any of the rights of a stockholder except the right to dividends in
accordance with the provisions of this Code
QUESTION:
Can the shareholder apply the dividends to unpaid shares?
QUESTION:
Is there a provision in the Code that says so? ^
None.
QUESTION:
Balance not paid on due date, can the corporation participate in the bidding to buy
Delinquent shares?

Section 69
Should there be no bidder at the public auction who offers to pay the full amount of
the balance on the subscription together with accrued interest, costs of
advertisement, and expenses of sale, for the smallest number of shares or fraction of
a share, the corporation may, subject to the provisions of this Code:

 bid for the same, and the total amount due shall be credited as fully paid in
the books of the corporation.
 Title to all the shares of stock covered by the subscription shall be vested in
the corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of this Code.
SEC. 69. Court Action to Recover Unpaid Subscription. – Nothing in this Code shall
prevent the corporation from collecting through court action, the amount due on any
unpaid subscription, with accrued interest, costs and expenses.

QUESTION:
What if the corporation has surplus profits, can the corporation buy back shares on
piece-meal basis? What is the reason if not allowed.