Module 1 Flashcards
Three Forms of Business Organization
- Sole Proprietorship
- Partnership
- Corporation
The law that governs the rules and regulations in the establishment and operation of stock and non-stock corporations in the Philippines.
“The Corporation Code of the Philippines”
“The Corporation Code of the Philippines” characteristics
- Application for a Charter / Articles of Incorporation
- Shareholders (stock corporation)
- Members (non-stock)
- Life span of 50 years
T or F. A corporation is a juridical person and is created by operation of law
T. under Section 2 of the Corporation Code of the Philippines
“Section 2. Corporation defined – A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incidence to its existence.”
Breakdown of the Corporation definition:
- Artificial: not a natural person (living breathing person)
- Right of succession: continuity of operations. If a stockholder dies does that mean the corporation dies also? In partnerships, if a partner leaves the partnership, the relationship changes and therefore dissolves.
How is a Corporation formed?
a. 5-15 (15) natural persons of legal age and majority are residents of the PH – Sec. 10
i. Grandfather rule: 60-40; 60% Filipino owned
b. Corporator vs Incorporator – Sec. 5
i. Corporator – Shareholders (existing, involved in the ongoing ops)
ii. Incorporator – original corporators mentioned in the Articles Of Incorporation (founding team, getting everything setup legally)
A corporation can exercise only the powers expressly conferred upon it by _____ and its __________________, those implied from such powers expressly granted, and those that are incident to its existence.
law; articles of incorporation
How long can a corporation live?
a. Corporate term is for a period of max 50 years from date of incorporation
b. Extendible by another 50 years
c. Extension cannot be made 5 years before expiration. – Sec. 11
d. Perpertual unless AOI provides otherwise
What happens if the corporate charter is not used? – Sec. 22
a. Within 2 years – no formal organization or operations from date of incorporation
i. Deemed dissolved
b. If operations have started but stopped operations for 5 CONTINUOUS years
i. Ground for suspension or revocation of franchise or certificate of incorporation
ii. Delinquent, then 2 year to resume operation,if not certificate is revoked
Specific Express Powers of a Corporation under the Corporation Code
- Power to extend or shorten corporate term.
- Power to increase or decrease capital stock.
- Power to incur, create or increase bonded indebtedness
- Power to deny pre-emptive right.
- Power to sell, lease, exchange, mortgage, pledge or otherwise dispose all or substantially all of its property
- Power to acquire its own shares
— AKA treasury shares
— Allowed as long as there is unrestricted retained earnings - Power to invest corporate funds in another corporation or business or for any other purposes.
- Power to declare dividends
- Power to enter into management contracts
What are the powers of a corporation?– Sec. 36
a. To sue and be sued in its corporate name;
b. Of succession
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation;
e. To adopt by-laws,
f. In case of stock corporations: to issue or sell stocks and/or treasury stocks to subscribers
i. Nonstock: to admit members;
g. To enter into merger or consolidation;
h. To establish pension, retirement, and other plans
i. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations,
j. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;
k. To exercise such other powers as may be
essential or necessary
A corporation being a juridical person means that
- The debts of the corporation are not the debts of the stockholders, nor are the debts of the stockholders the debts of the corporation.
- In taxation, the income of the corporation is not the income of the stockholders who may be required to pay taxes on the dividends that they may derive from such income.
- In connection with corporate property or affairs, stockholders cannot maintain actions in their own name and they have no right to recover possession of property belonging to the corporation or to recover damages for injury thereto.
The company is responsible for all debt that is contracted in its name. Therefore, the stockholders cannot be held personally liable for these debts, though the percentage of the company they own might decrease in value. In that case, they are indirectly affected by debt.
Corporate Liability
Types of Corporation
- De Jure Corporation
- Stock Corporation
- Limited Liability Corporation
- Closed Corporation
- Public Company
One that has been created in strict compliance with all the legal requirements and whose right to exist as a corporation cannot be successfully attacked in a direct proceeding for that purpose by the State.
De Jure Corporation
One that is defectively created but there is an exercise of corporate rights and franchise resulting from an attempt in good faith to incorporate
De Facto Corporation
Difference of De Jure Corporation and De Facto Corporation
De Jure Corporation (by law)
* Real
* Genuine
* Nothing wrong with it
* corporation within the proper confines of the law
De Facto Corporation (by estoppel)
* Appears real
* Genuine
* With a sincere intent to form a corporation and an attempt to comply with all the requirements
* no proper form but holds themselves as such
One which has exercised corporate powers for such a length of time without interference by the State, and which, by fiction of law, is given the status of a corporation.
Incorporation by Prescription
One which is in reality not a corporation but is considered as one with respect to those who are precluded by their admission or conduct denying its existence
Corporation by Estoppel
As, a general rule, in a corporate form of business organization, the stockholders are not personally liable for corporate obligations and cannot be held liable to third persons who have claims against the corporation beyond their agreed subscriptions/contributions to the corporate capital. However, this privilege may be disregarded under the” Doctrine of Piercing the Corporate Veil.
Limited Liability Company
Close Corporation characteristics
1) All the corporation’s issued stocks of all classes shall be held of record by not more than a specified number of persons, not exceeding 20
2) All of the issued stocks of all classes shall be subject to one or more specified restrictions on transfer permitted by the corporation code
3) Not listed on any stock exchange or make any public offering of any of its stock of any class
Public Company/Listed Company
Listed on an exchange
OR
1) With assets in excess of 50,000,000
2) Has at least 200 shareholders which are holding at least 100 shares of a class of its equity securities
Classes of Corporation
- Stock Corporation
- Non-stock Corporation
One that has capital stock divided into shares and is authorized to distribute dividends or allotments of the surplus profits on the basis of shares held by its stockholders
Stock Corporation
a corporation that does not have owners represented by shares of stock
Non-Stock Corporation
Differentiate/Summarize Stock/ Non-Stock Corporation
Stock Corporation
- Capital stock are divided into shares.
- Authorized to distribute dividends on the basis of shares held.
- Can either be a preferred or common share.
Non-Stock Corporation
- All other corporations which are not stock corporations.
- Institutions/Association for charitable, religious, educational, professional, etc.
Formation of a Corporation
- Articles of Incorporation
- By-Laws
- Certificate of Incorporation / Juridical Personality Commences
- Powers of a Corporation
The articles of Incorporation of a corporation is a contract between the parties:
A.Between the State and the corporation
B. Between the stockholders (members in case of non-stock corporation) and the State
C.Between the corporation and the stockholders (members)
The articles of Incorporation do not become effective and binding as the charter of the corporation, unless they have been ______________________________ in accordance with the provisions of the __________________.
filed and registered with the SEC; Corporation Code
Articles of Incorporation include:
Name of the Corporation
Location
Term of existence (if not elected perpetually)
Incorporators / Owners / Proponents (names, nationalities, & residence)
Purpose and Nature (Primary and Secondary, if many)
Maximum Number of Shares
Par Value
Board of Directors
Rights of Stockholders
When can SEC reject/disapprove an AOI?
(FIFO) – Sec. 17
a. Failed in proper format
b. Illegal, immoral purpose
c. False treasurer’s affidavit
d. Ownership by citizens
if there is a special law or charter (banking, quasi banking, building and loan, education, insurance, public utilities), there should be a recommendation first
Differentiate Articles of Incorporation and By-Laws
Articles of Incorporation: sets the framework of the corporation (birth certificate)
a. How a corporation deals with the public/ outsiders
b. Condition needed for incorporation
By-Laws: the actual picture of what really happens (rules and regulations)
a. Internal government and operations
b. Not needed to be submitted before incorporation
c. Can be filed with AOI OR 1 month after receipt of official notice of cert of incorporation
What are By-laws? – Sec. 47
a. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or special meetings of the stockholders or members;
c. The required quorum in meetings of stockholders or members and the manner of voting therein;
d. The form for proxies of stockholders and members and the manner of voting them;
e. The qualifications, duties and compensation of directors or trustees, officers and employees;
f. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;
g. The manner of election or appointment and the term of office of all officers other than directors or trustees;
h. The penalties for violation of the by-laws;
i. In the case of stock corporations, the manner of issuing stock certificates; and
j. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
The by-laws differ from the articles of incorporation in that the by-laws are the following EXCEPT:
a. The rules of action adopted by a corporation for its internal government.
b. Adopted before or after incorporation.
c. Approved by the stockholders if adopted after incorporation.
d. A condition subsequent in the acquisition by a corporation of a juridical personality
d. A condition subsequent in the acquisition by a corporation of a juridical personality -AOI
When to adopt by-laws?
The Corporation Code requires that every corporation formed under the Corporation Code, must within one (1) month after receipt of the official notice of the issuance of the certificate of incorporation by the SEC, adopt by-laws for its government not inconsistent with the provisions of the Code
Characteristics of a Corporate Existence
• A private corporation commences to have a corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a certificate of incorporation under its official seal.
• Requires a separate permit or license or approval from other government agencies.
• The registration of a corporation with the SEC only constitutes a grant by the government of the power to act as a corporation, but does not preclude the government from exercising its police power over such corporation whenever public interest demands it.
Their names are mentioned in the articles of incorporation as originally forming the corporation and are signatories thereof.
a. Corporators
b. Stockholders
c. Members
d. Incorporators
d. Incorporators
Corporate Doctrines
- Doctrine of Corporate Entity
- Piercing Veil of Corporate Viction
- Right of Succession
- Ultra Vires Doctrine
- Doctrine of Corporate Opportunity
The Doctrine of Corporate Entity states that
• The “________________________” of a corporation from that of the stockholders/members is a basic attribute attached to a corporation which gives rise to fundamental principles in corporation law that, the stockholders/members of a corporation are not the same as the corporation itself.
• The property belonging to a corporation cannot be __________________________________ of the stockholders thereof.
• Because of the separate personality of the corporation from the stockholders, ___________________, _____________, and ___________ of a stockholder should not in any way affect the ______________________ of the corporation.
• separate and distinct personality;
• attached nor held answerable for the debt;
• personal transactions, obligations, liabilities; ordinary operations
the principle on separate identity of a corporation from its stockholders may be disregarded when it is used to defeat public convenience, justify wrong, protect or cover fraud or defend crime or work an injustice.
Doctrine of Piercing the Corporate Veil
granted by law to a registered corporation means that a corporation has a continuity of corporate life during its term of existence stated in the articles of incorporation, independent from that of its stockholders or members.
Right of Succession
This doctrine states that there should be No corporation under the Corporation Code should possess or exercise any corporate powers except those conferred by the the Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers as conferred
Ultra vires acts of a corporation
Under the Doctrine of Corporate Opportunity: When a director attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, or when by virtue of his office. What action should be made?
He acquires for himself a business opportunity which should belong to the corporation, he must account for all such profits derived by him from the said business opportunity by refunding the profits to the corporation.
Under this doctrine, the capital stock and assets of the corporation are held in trust for the creditors. Accordingly, there shall be no distribution of assets to shareholders until the claims of creditors have been paid or an appropriation of such assets has been made for the payment of such claims.
Trust Fund Doctrine
Summarize the Doctrines
- Doctrine of Corporate Entity: “Separate and distinct personality”
- Doctrine of Piercing the Corporate Veil: The principle on separate identity of a corporation from its stockholders may be disregarded when it is used to defeat the law
- Right of Succession: A corporation has a continuity of corporate life during its term of existence stated in the articles of incorporation
- Ultra Vires Acts of Corporation: No corporation under the Corporation Code shall possess or exercise any corporate powers except those conferred by the the Code
- Doctrine of Corporate Opportunity Director: attempts to acquire for himself a business opportunity that should belong to the corporation
- Trust Fund Doctrine: The capital stock and assets of the corporation are held in trust for the creditors
Shareholders’ Rights
✅VOTE to elect Board of Directors
✅RECEIVE dividends
✅EXAMINE books of accounts
✅RECEIVE remaining assets
✅RECEIVE stock certificate
✅TRANSFER shares
Capital Structure
- Authorized Capital Stock
- Pre-Incorporation Subscription
- Subscribed Capital Stock
- Paid-Up Capital
- Additional Paid-In Capital
- Unissued/Unsubscribe Capital Stock
- Outstanding Capital Stock
This refers to the total amount of shares which a corporation is allowed to issue if the shares have a par value. If the shares do not have par value, the corporation does not have an authorized capital stock but it has authorized number of shares which it may issue.
Once issued, the corporation shall have a capital stock but not an authorized capital stock.
Authorized Capital Stock
3 Main Types of Capitalization:
- Authorized Capital
- Subscribed Capital
- Paid-Up Capital
Note: Min. paid-up capital should be 5k
Authorized capital formula (capitalization)
the maximum number of shares that the corporation may issue
x the par value of each share
T or F. The Board of Directors cannot increase the corporation’s authorized capital even with the approval of the stockholders and the SEC
F. The Board of Directors may increase the corporation’s authorized capital with the approval of the stockholders and the SEC
Subscribed Capital is __% of __________________.
25%; Authorized Capital
Paid-Up Capital is ___% of _______________.
25%; Subscribed Capital
Problem#1: The ABC Company can issue a maximum of 2,000,000 shares and the par value per share is P10.00. What is Authorized Capital, Subscribed Capital, Paid-Up Capital?
Authorized Capital
= 2,000,000 x 10.00
= 20,000,000
Subscribed Capital
= 25% of 20,000,000
= 5,000,000
Paid-Up Capital
= 25% of 5,000,00
= 1,250,000
Problem#2: The XYZ Company can issue a maximum of 10,000,000 shares and the par value per share is P5.00. Determine the authorized, subscribed, and its paid-up capital.
Authorized Capital
= 10,000,000 x 5.00
= 50,000,000
Subscribed Capital
= 25% of 50,000,000
= 12,500,000
Paid-Up Capital
= 25% of 12,500,00
= 3,125,000
Refers to the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is a binding subscription agreement) , except treasury shares.
Outstanding Capital Stock
Part of the capital stock which is not issued or subscribed
Unissued Capital Stock
Issued Capital formule
Issued shares x par value
Amount paid in excess of par value
additional paid-in capital/paid-in surplus
Problem #3: If price paid per share is above par value, say P12.00 with 125,000 shares. How much would be recorded in the books of the corporation as additional paid-in capital?
P250,000 = P12.00-P10.00 = P2.00 x 125,000 shares
Problem #4: The articles of incorporation of ABC Corporation provide for the issuance of 100,000 shares without par value and an issued price per share of P10.00. At the time of incorporation, the subscription and paid-up capital should not be less than:
a. P250,000.00 and P62,500.00 respectively.
b. P1,000,000.00 and P250,000.00, respectively.
c. P250,000.00 and P125,000.00, respectively.
d. P250,000.00 and P250,000.00, respectively.
d. P250,000.00 and P250,000.00, respectively
What section of the Corporation Code supports Problem #4?
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation.
– At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five percent (25%) of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos.
Which of the following subscriptions does not comply with the subscription and paid-up capital requirements at the time of incorporation?
Authorized | Subscribed | Paid-up
1.1,000,000.00|P250,000.00|P62,500.00
2. 300,000.00 | 75,000.00 | 50,000.00
3. 100,000.00 | 100,000.00 |100,000.00
4. 50,000.00 | 12,500.00. |. 3,125.00
- 50,000.00 |12,500.00 | 3,125.00
Problem #6: The authorized capital of ABC Company is P20,000,000 divided into 2,000,000 common shares with a par value per share of P10.00. Find the minimum amount of subscribed capital and paid-in capital.
- The subscribed capital must be at least P5 million
(P20,000,000 x 25%)
_____________________________________________________________________ - The paid-up capital must be at least P1.25 million
(P5,000,000 x 25%)
Capitalization: Ways to raise new funds
- Issue more shares
- Issue debt instruments
- Borrow from a bank
1 & 2 are securities
Classification/Kinds of shares
- Common Shares
- Preferred Shares
- Rights Shares
- Treasury Shares
- Outstanding Shares
- Par Value Shares
- Non-Par Value Shares
- Redeemable Shares
- Founders Shares
- Watered Shares
- Voting Shares
- Non-Voting Shares
- Retireable Shares
Differentiate Stock Certificate and Share of Stock
Stock Certificate
• The written evidence of such right
• Tangible personal property
• Issued only if the subscription is fully paid
Share of Stock
• Represents the rights and interest of a stockholder in the corporation
• Intangible personal property
• May be issued even if not fully paid, except shares without par value which are deemed fully paid and non-assessable upon issuance
The ordinary stock of a corporation which entitles the holder to a pro rata division of the dividends, without any preference or advantage over any other stockholders
Common Stock
Common Stock is a form of equity security because they represent ____________ in a corporation.
ownership
A Common Stock indicates different kinds of value such as:
- Par Value
- Book Value
- Market Value
the stated value of stock
Par Value
• tangible net asset value per share (NAVPS)
• amount per share if a corporation is to be liquidated
Book Value
price someone is willing to pay for every share
Market Value
Common Stock Formula
(No. of shares / Total No. of Issued Shares) x 100
Problem #7: Mr. Reyes owns 10,000 shares out the total 100,000 shares issued by the XYZ company. How many percent of the company does he own?
= (10,000/100,000) x 100
= (0.10) x 100
= 10%
Problem #8: (Cont. of Problem #7) Suppose the company decided to issue additional 50,000 shares to increase funds. What will happen to the ownership of Mr. Reyes?
Ownership of Mr. Reyes will be diluted
= (10,000/150,000) x 100
= (0.067) x 100
= 6.67%
Kind of shares which entitles the holder to certain preferences over other shareholders.
Preferred Shares
Preferred Shares are shares that has a preference over common stocks as to dividends and claims upon liquidation of a company. It does not have ____________ but offers __________________.
voting rights; fixed dividend rates
Preferred stock which entitles the holder to preference in the distribution of dividends over common stock upon the liquidation of the corporation.
Preferred stock as to asset
Preferred stocks that entitles the holder to preference in the distribution of dividends over common stock
Preferred as to dividends
T or F. Preferred stocks can be par or no par value
F. Can never be no par value
Types of Preferred Shares
- Participating Preferred
- Cumulative Preferred
- Callable Preferred
- Convertible Preferred
Preferred Shares: Parity Formula
Parity = Price of Common Stock x Conversion Ratio
Differentiate Common Stocks and Preferred Stocks
Common Stocks:
• 2nd in line to receive dividends; dividends vary
• With voting rights
• Last to receive payout upon liquidation
Preferred Stocks
• 1st in line to receive dividends; fixed dividend rate
• Without voting rights
• 2nd in line to receive payout upon liquidation
• stockholders are given the first option to subscribe to all issues or disposition of shares.
• allows shareholders to maintain the proportionate shares of ownership.
Rights Shares: Pre-emptive rights
Problem #9: Mr. Reyes owns 10,000 shares (at P20.00 / share) out of the total 100,000 shares issued by the XYZ company. The company has a stock rights offer/issue to have additional 50,000 shares issued at P18.50 / share.
______________________________________________________________
|Stock Rights Offer Period | 100,000 shares x P20 = P2M
50,000 shares x P18.5 = P925k
New Market Capitalization = 2.925M
= 2.925M / 150,000 shares
= P19.5/share
Options of Mr. Reyes during the stock rights offer period:
1. IGNORE THE OFFER – his ownership of the company will be diluted.
2. AVAIL HIS PREEMPTIVE RIGHT - Mr. Reyes currently owns 10% of the company thus, he can purchase 10% of the additional 50,000 shares.
3. SELL HIS RIGHTS – 2 ways to compute the intrinsic value of shares
2 Ways of computing the intrisic value of shares
(Rights Shares: 3rd Option - Sell his Rights)
1. Cum Rights = DURING the stocks right offer period
=(Market Price - Subscription Price) / (No. of rights/share + 1)
2. Ex-Rights = AFTER the stocks right offer period
=(Market Price - Subscription Price) / (No. of rights/share)
Compute for the Cum Rights and Ex-Rights of Problem #9
Step 1: Compute how many rights are needed to purchase a share.
= 100,000/50,000
= 2 rights per share
Cum Rights
=(Market Price - Subscription Price) / (No. of rights/share + 1)
= (20-18.5) / (2+1)
= 1.50/3
= P 0.50
Ex-Rights
=(Market Price - Subscription Price) / (No. of rights/share)
= (20-18.5) / 2
= 1.50/2
= P 0.75
Problem #10: Mrs. Chua owns 100,000 shares (at P50.00 / share) out of the total 1,000,000 shares issued by the LKG company. The company has a stock rights issue to have additional 800,000 shares issued at P45.00 / share. Compute for the cum rights and ex-rights.
Step 1: Compute how many rights are needed to purchase a share.
= 1,000,000 𝑠ℎ𝑎𝑟𝑒𝑠 / 800,000 𝑠ℎ𝑎𝑟𝑒𝑠
= 1.25 rights per share
Cum Rights:
= (50-45) / (1.25+1)
= 5/2.25
= P 2.22
Ex-Rights:
= (50-45) / 1.25
= 5/1.25
= P 4
Differentiate Voting Shares and Non-Voting Shares
Voting Shares
Those entitled to vote in the meetings of the corporation.
Non-Voting Shares
Those without voting rights, except in certain cases.
Differentiate Par Value Shares and No Par Value Shares
Par Value Shares
One the nominal value of which appears on the articles of incorporation and on the stock certificate.
Non-Value Shares
One without any nominal or par value appearing in the articles of incorporation or on the stock certificate.
Shares without PAR Value
✅ Cannot be issued by _______, _______________, _________________, _____________, and _______________________.
✅ Deemed __________ and non-assessable
✅ Not liable to the _____________ and its _____________
✅ May not be issued for a consideration less than _________
✅ Treated as __________ and shall not be available for ___________
✅ banks, trust companies, insurance companies, public utilities, building and loan associations
✅ fully paid
✅ corporation, creditors
✅ Php 5.00
✅ capital, dividends
Those which grant the issuing corporation the power to redeem or purchase on a agreed/fixed period.
Redeemable Shares
T or F. redeemable shares can be redeemed regardless of existence of unrestricted retained earnings.
T
Issued shares and owned by persons other than the corporation.
Outstanding Shares
Issued with a value much greater than the value of the issuing company’s assets.
Watered Shares
Those that grant to the founders special rights and privileges not enjoyed by other shares for not more than 5 years.
Founders’ Shares
Rules on Founders Shares
a. Founders shares must be classified as such in the _______________________.
b. They may be given rights and privileges not enjoyed by other shares subject to the following limitations:
1. If the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not exceeding ________ subject to the approval of the SEC.
2. The _________ period begins from the approval of SEC.
a. articles of incorporation
b.
1. 5 years
2. five-year
Shares that were reacquired by the corporation. It does not have voting rights.
Treasury Shares
Rules of Treasury Shares
a. They shall have ________________ as long as they remain in the _________.
b. Although they are part of the subscribed stock, they are not considered ___________________.
c. Being owned by the corporation, they are not entitled to ____________.
d. They may again be disposed of for a reasonable ____________ by the ______________.
e. Reduces __________.
a. no voting rights; treasury
b. outstanding shares
c. dividends
d. price fixed; board of directors
e. Capital
ISSUANCE OF SHARES: Where the corporation had previously issued the entire authorized capital stock, it cannot issue additional stock in excess thereof. What happens if there is an over-issuance?
Where there is an over-issuance, the increase and the certificates issued are void because of the fact that it is beyond the power of the corporation to create and issue the additional stock, and therefore, holders of the certificates, whether they be the original holders or their bona fide transferees, do not become stockholders.
Shares of stock cannot be issued by a corporation gratuitously under an agreement that nothing at all shall be paid to the corporation for this would result in the __________________.
watering of shares
A corporation may issue shares of stock at any price, provided it is not less than _____.
par
T or F. Where the consideration for stocks is other than actual cash, or consists of intangible property, the valuation thereof shall be determined by the incorporators or board of directors.
T
______________ is one of the method used to determine the amount spent per stock.
Cost basis
How do YOU earn from stocks?
- Capital Gains / Appreciation
- Dividends
- Capitalization
Another way for a shareholder to earn income from his equity securities.
Capital Gains / Appreciation
Problem 11: Mr. Reyes bought his 10,000 shares for P12/share and sold it at P20/share. Compute for his capital gains.
= (Selling Price - Original Price) x No. of shares
= (20-12) x 10,000 shares
= 8 x 10,000 shares
= P 80,000
is a corporate action that increases the number of shares in a company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur
stock split
Before the Stock Split vs. After the Stock Split
Before the Stock Split
✔️Market Cap= Earlier no. of Total shares x Earlier price per share
✔️Php 50 Million = 2 million shares x Php 25/share
✔️ Reason/s for doing:
- Price is too high compared to similar companies of the same sector.
- Hard to sell
After the Stock Split
✔️ Market Cap= New no. of Total shares x Earlier price per share
✔️ Php 50 Million = 10 million shares x Php 5/share
✔️ Effect:
Decrease in Par/Price
- makes it attractive to smaller investors
- Increased liquidity because shares are easily traded
Increase in Total number of Shares or Outstanding Shares
When the stock price sinks too low, a reverse split combines more shares into a single share with a higher share price
Reserve Stock Splits
Before the Reverse Stock Split vs. After the Reverse Stock Split
Before the Reverse Stock Split
✔️Market Cap= Earlier no. of Total shares x Earlier price per share
✔️Php 50 Million = 10 million shares x Php 5/share
✔️ Cause: Price sinks too low
- Low price makes it vulnerable to further market pressure which would cause them to be delisted in an exchange.
After the Reverse Stock Split:
✔️Effect:
- Increase in Par/Price: because shares are combined to a single share with a higher price.
- Decrease in Total number of Shares or Outstanding Shares
Summarize STOCK Splits vs. REVERSE Splits
STOCK Splits
• Divides its existing shares into multiple shares to boost liquidity.
• Also known as forward stock split
• Market Capitalization is still the same.
REVERSE Splits
• Reduces the total number of its outstanding shares and increases its price.
• Also known as stock consolidation or share roll back
• Market Capitalization is still the same.
Problem #12: A 2-for-1 Stock Split 20M Outstanding Shares trading at P10 each
20 M shares x 2 = 40 M shares
P 10 per share / 2 = P 5 per share
40 M shares x 5 pesos = 200M Market Capitalization
Problem #13: A 1-in-10 Reverse Split 200M Outstanding Shares trading at P1 each
= 200 M shares / 10 = 20 M shares
= Php 1 x 10 per share = Php 10
= 20M shares x 10 pesos = 200M Market Capitalization
These are declared out of the accumulated profits (unrestricted retained earnings) of the company. The Board of Directors will decide whether dividends will be declared or not.
Dividends
Three Types of Dividends:
- Cash Dividends
- Property Dividends
- Stock Dividends
It does not mean an increase in the market value of the investment.
Stock Dividend
Adjusted Market Price Formula
= Price before declaration of stock dividend / 1 + stock dividend rate
Problem #14: The shares of XYZ company were trading at P20/share and the total market value of Mr. Reyes’ 10,000 shares is P200,000. Suppose the company declares a 25% stock dividend, compute for the adjusted market price of a share.
= Price before declaration of stock dividend / 1 + stock dividend rate
= 20 / 1 + 0.25
= P 16
4 dates to remember for dividends:
- Declaration Date
- Ex-Dividend Date
- Record Date
- Payment Date
Two Methods of Voting
A holder of 500 shares with 5 directors to be elected
1. Statutory
- All 5 directors have 100 shares each
2. Cumulative
- Director A have 200 shares, Director B have 300 shares and the rest do not have any.
Understanding Voting Rights
- Warrants
- Options or Contracts
- Proxy
- Exercise or Strike Price
- Voting Trust Agreement
rights to subscribe or purchase new shares on or before a predetermined date.
Warrants
gives the buyer the right, but not the obligation to buy or sell, at a predetermined price.
options or contracts
somebody will vote on behalf of the shareholder.
proxy
fixed price at which the owner can buy or sell.
exercise or strike price
more than one shareholders transfer their voting rights to a trustee
Voting Trust Agreement
Considerations for the Issuance of Shares
- Cash
- Property
- Previously incurred indebtedness
- Deposit for future subscription
- Outstanding shares of stock
- Unrestricted retained earnings to stated capital
- Actual services rendered
SUBSCRIPTIONS
1. The subscribers may in their own personal capacity and acting in good faith, _______________ for payment of their ________________.
2. Corporations are not restricted from receiving only __________________ in payment of subscription of capital stock. The Corporation Code allows payment in exchange for shares of stock in the form of ______________.
3. Shares of stock may be accepted as ___________________ payment in exchange of shares of stock of a corporation, provided that the same is necessary or convenient in carrying out the corporate business for which the corporation is organized
- borrow money; subscriptions
- money/cash; property
- capital contributions
Rights of a Stockholder
- Right to vote in the election of the board
- Right to be voted
- Right to vote in corporate acts
- Pre-emptive right/stock rights offerings
- Right to first refusal
- Right to recieve dividends
- Right to inspect corporate books
- Appraisal Right
- Right to dispose, designate proxy, voting trust agreement
- Derivative Suit
How to become a stockholder? – Sec. 62
- Actual cash;
- 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 unrestricted retained earnings to stated capital; and
- Outstanding shares exchanged for stocks in the event of reclassification or conversion.
- Intangible property that is properly valued
Stockholders:
*Can never become the consideration:
*Issuance for less than consideration
*Can never become the consideration:
Future service
Promissory notes
Issuance of bonds
*Issuance for less than consideration
Called watered shares
Violation of trust fund doctrine
Solidarily liable (1 for all, all for 1)
General Rule– Voting
• The _______________ is a stockholder’s most basic and fundamental right
• Each share of stock is entitled to vote, unless denied in the _____________________ or declared __________under Section ___ of the Corporation Code.
• Only stockholders of record as of date fixed in the _________ shall enjoy the right to vote at stockholders’ meeting.
• The ____________________ is the best evidence to establish the stockholders who are entitled to vote at stockholders’ meeting
• right to vote
• articles of incorporation; delinquent; 67
• by-laws
• stock and transfer book
Vote or be voted into the board - When can non voting shares vote? (DAAIIIMS)
i. Dissolution
ii. Amendment of the articles of incorporation
iii. Adoption and amendment of by-laws
iv. Incurring, creating or increasing bonded indebtedness
v. Increase or decrease of capital stock
vi. Investment of corporate funds in another corporation or business in accordance with this Code
vii. Merger or consolidation of the corporation with another corporation or other corporations
Vote or be voted into the board - When does majority of BOD +2/3 shareholders vote? (DAEIIIMS)
i. Dissolution
ii. Amendment of the articles of incorporation
iii. Extend/shorten corporate term
iv. Incurring, creating or increasing bonded indebtedness
v. Increase or decrease of capital stock
vi. Investment of corporate funds in another corporation or business in accordance with this Code
vii. Merger or consolidation of the corporation with another corporation or other corporations
viii. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property
When does majority 2/3 shareholders vote?
(RCBDSM)
i. Remove directors
ii. Contracts with director/officer provided reasonable
— If officer; has to be approved by BOD
iii. Director business opportunity
iv. Delegation to BOD of power to amend/repeal/adopt new bylaws
v. Stock dividends
vi. Management contract where majority of managing is managing of managed corporation
Who votes for pledged/mortgaged etc?
- Pledged/Mortgaged shares —> Pledgor/ Mortgagor
- Executors/ Administrators/Receivers —> Executors/ Administrators/Receivers – no need for written proxy
- Jointly owned —> ALL co-owners unless with written proxy OR owned in an “and/or” capacity
- Treasury Shares —> No voting rights
- Proxies —> If stockholder is present – Proxy is invalidated
- Voting Trust —> Trustee votes even if shareholder is present
- Delinquent Shares —> Cannot vote until fully paid
Stockholders: What are proxies and voting trust agreements? – Sec. 55, 56, 71
i. Proxies
ii. Voting trusts
iii. Delinquent shares
i. Proxies – valid only for the meeting; no longer than 5 years
— If the stockholder is present, the proxy is invalidated
ii. Voting trusts – should not exceed 5 years; can be longer if related to debt but should be co-terminus
— Voting right and ownership are effectively split
iii. Delinquent shares – cannot vote until fully paid
— Can still receive dividends (applied to
unpaid balance)
a stockholder may vote for every directorship, a maximum number of votes equal to the number of shares he owns
Statutory Voting
• the stockholder may spread his total votes among the number of positions to be filled in any manner
• affords minority shareholders their best opportunity of gaining representation on the Board of Director
Cumulative voting
Section 71 of the Corporation Code
Delinquent shares: Section 71 of the Corporation Code is explicit that the moment a stock becomes delinquent, the holder thereof loses his right to vote. Therefore, no delinquent stock for unpaid subscription shall be voted or entitled to vote or represented at any stockholders’ meeting.
