SEC PH1: MOD 1 - MOCK TEST Flashcards
A __________________ proprietorship is a type of business organization in which one individual, known as the sole proprietor, owns and operates the business. It is the simplest and most common form of business ownership, and it is often used by small businesses or entrepreneurs who are just starting out.
SOLE
A ____________________ is a business owned and operated by two or more individuals or entities. Partnerships are often informal, with no formal structure or organization. Partners share the profits and losses of the business, and each partner has a say in decision-making.
PARTNERSHIP
it is also called a Limited Liability Company
PARTNERSHIP
right of succession, powers, attribute, properties
CORPORATION
artificial being; juridical person; created by law
CORPORATION
if a stockholder dies, __________ continues
CORPORATION
- 5-15 natural persons of legal age
- Residents of PH; grandfather rule 60-40
FORMATION OF CORPORATION
▪ at the time of incorporation = at least 25% of ACS = subscribed ▪ 25% of ACS = 25% of that should be PAID upon subscription
25-25 rule in Capitalization
- 25-25 rule
- Php 5,000 minimum paid up capital
- Classes of shares
Capitalization in Forming a Corporation
What’s the Difference Between Corporator and Incorporator?
1) Corporator = Shareholders
2) Incorporator = Original Corporators in the AOI
What are the TYPES OF CAPITAL?
1) AUTHORIZED CAPITAL STOCK
2) CAPITAL STOCK
3) PRE-INCORP SUBSCRIPTION
4) SUBSCRIBED CAPITAL STOCK
4.1) PAID-UP CAPITAL STOCK
4.2) ADDITIONAL PAID-IN CAPITAL (SURPLUS)
5) UNSUBSCRIBED/UNISSUED
6) ISSUED CAPITAL
6.1) OUTSTANDING CAPITAL STOCK
6.2) TREASURY SHARES
7) TRUST FUND DOCTRINE
What is the minimum paid up capital?
Php 5,000 minimum
*must be evidenced by: TREASURER’S AFFIDAVIT
What are the CLASSES OF SHARES?
1) COMMON
2) PREFERRED
3) FOUNDERS OF SHARES
4) PAR VALUE SHARES
5) NO-PAR VALUE SHARES
6) VOTING SHARES
7) NON-VOTING SHARES
8) REDEEMABLE SHARES
9) RETIREABLE SHARES
10) TREASURY SHARES
11) WATERED STOCK
What are the TYPES OF CORP FORMATION?
1) STOCK
2) NON-STOCK
3) CLOSE CORP
4) LIMITED LIABILITY CORP
5) PUBLIC / LISTED COMPANY
5) DE JURE
6) DE FACTO
NO VOTING RIGHTS
Issued BUT NOT outstanding
NO DIVIDENDS
Can be disposed of for a reasonable price
Reduces capital
TREASURY SHARES
COMMON vs PREFERRED?
COMMON = Has Voting Rights, Can have both PAR VALUE and NO PAR VALUE
PREFERRED = No Voting Rights, Never No Par Value, Can have Preference over ASSET & DIVIDENDS
Preferred is also called __________________ shares
REDEEMABLE
o Stated value
o Cannot be issued for < P5/share
o Authorized capital = authorized # of shares
o Non assessable and deemed fully paid upon issuance
No Par Value
redeemed regardless of UNRESTRICTED RETAINED EARNINGS
Redeemable shares
Classified in AOI
Exclusive right to vote; max period of 5 yrs (subj to SEC approval)
HAS VOTING RIGHTS
FOUNDERS SHARES
Subscribed; paid or unpaid
Subscribed Capital Stock
max no. of shares; par value (trust fund doctrine)
Authorized Capital Stock
max no. of shares; not par value; authorized shares but not authorized capital stock
Capital stock
Subscribed; paid
Paid-up Capital Stock
Premium over par value of stock
Paid-in surplus
Unsubscribed; unissued
Unissued Capital Stock
Issued shares; par value (trust fund doctrine)
Issued Capital
- subscribed capital stock = held in trust for creditors
- No distribution of assets unless creditors are paid
Except: redeemable/preferred shares
Trust Fund Doctrine
Issued; outstanding; subscribed; paid or unpaid
Outstanding Capital
Issued; NOT outstanding; subscribed; fully paid
Treasury Shares
Pre-Requirement in Forming a Corp
ARTICLES OF INCORPORATION
What are the Grounds for Rejection (AOI) ?
o Grounds for Rejection:
- Failed in proper format
- Illegal, immoral purpose
- False treasurer’s affidavit
- Ownership by citizens
when does a corporation start to exist?
UPON ISSUANCE OF SEC CERT
corporation by law; w/in proper confines of law
DE JURE
corporation by estoppel; no proper form
DE FACTO
o All issued stocks —- issued to not >20 people
o Subject to >= 1 specified restriction/s on transfer
o Not listed publicly
o Voting stocks must be < 2/3
CLOSE CORPORATION
o Class of equities – listed in an exchange
o Assets > 50MM
o Holders > 200 (with at least 100 shares of class of its equity securities)
PUBLIC COMPANY / LISTED COMPANY
- Perpetual unless AOI provides otherwise
- OLD: max 50 yrs, extendible by another 50 yrs (cannot be made 5 years before expiration)
CORPORATE EXISTENCE
- WITHIN 2 YEARS – no formal organization from date of incorp; deemed dissolved
- STOPPED OPS FOR 5 CONS YEARS – delinquent; within 2 YEARS resume ops; otherwise revoke certificate
UNUSED CORPORATE CHARTER
POWERS OF CORPORATION
- To sue and be sued in its corp name
- Succession
- Adopt and use a corp seal
- Amend AOI
- Adopt By-laws
- Enter into merger or consolidation
- Establish pension, retirement, and other plans
- STOCK CORP (issue stocks subscribers); NONSTOCK (admit members)
- Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
- Make reasonable donations BUT NOT to political activity
- Treasury shares
- ONLY IF there is unrestricted retained earnings (after all NEEDS have been paid)
- Scenarios:
o Eliminate fractional shares from stock dividends
o Collect or compromise an indebtedness
o Pay dissenting or withdrawing stockholders
ACQUIRE OWN SHARES
- Undistributed profits = part of equity
- Availability of dividends = unrestricted retained earnings
- Maximum amount allowed: 100% of CAPITAL STOCK or SHARE CAPITAL
RETAINED EARNINGS
What are the exceptions in utilizing RETAINED EARNINGS
o Corporate expansion
o Loan covenants
o Reserve for contingencies
- Condition needed for incorporation
- How a corp deals with the public/outsider
ARTICLES OF INCORPORATION
- Internal government and operations
- Not needed to be submitted before incorporation
- Adoption? Can be filed with AOI or 1 month after receipt of official notice of cert of incorporation
BY-LAWS
What are the CORPORATE DOCTRINES?
1) DOCTRINE OF CORPORATE OPPORTUNITY
2) DOCTRINE OF CORPORATE ENTITY
3) PIERCING VEIL OF CORPORATE FICTION
4) RIGHT OF SUCCESSION
5) ULTRA VIRES DOCTRINE
- aka limited liability company
- if company violates any law then members cannot be held liable
DOCTRINE OF CORPORATE VEIL
- disregarded when used to justify wrong or cover fraud
PIERCING THE CORPORATE VEIL
- Continuity of corporate life
- Regardless of any change in stockholders/members
RIGHT OF SUCCESSION
- Beyond authority
- Corp shall only exercise corp powers granted by the AOI / code
ULTRA VIRES ACTS OF A CORP
- opposite of ultra vires
- within authority
intra vires
- Director attempts to acquire for himself a business opportunity which should belong to the corp
- He must refund the profits to the corporation
DOCTRINE OF CORPORATE OPPORTUNITY
WHAT ARE THE SPECIFICATIONS ON BEING ELECTED AS A DIRECTOR?
- elected by stockholders
- 1 year until successors are elected
- own at least 1 share of stock
- BAWAL MAGING DIRECTOR:
o final judgement: > 6 yrs offense
o committed within 5 yrs prior to appointment
o person declared as insolvent
o person elected as ID becomes employee, officer, consultant
o refusal to comply with disclosure requirements
o absence in > 50% of all regular and special mtgs
o dismissal or termination
o exceeds > 2% of shares
WHAT ARE THE SPECIFICATIONS ON BEING ELECTED AS AN INDEPENDENT DIRECTOR?
- independent of management; free from any business
- not own > 2% of shares; at least 1 share of stock
- beneficial ownership not > 2%
- attends at least 50% board mtgs
- not a director or officer of the covered company/ subs
- not DOSRI
- not employed in any executive capacity within last 2 years by the corp
- director
- can never be a treasurer or secretary
PRESIDENT (CEO)
- can be foreigner
- can also be secretary if PH resident
TREASURER (CFO)
- must be a PH resident
SECRETARY
How to BECOME A STOCKHOLDER
- actual cash
- property (tangible or intangible)
- service rendered to corp
- prev incurred indebtedness of the corp
- amounts transferred from URE to stated capital
- outstanding shares exchanged for stocks
- NEVER BECOME CONSIDERATION IN BECOMING A STOCKHOLDER
- Future service
- Promissory notes
- Issuance of bonds
- ISSUANCE FOR LESS THAN CONSIDERATION
o aka WATERED SHARES
o violation of trust fund doctrine
What are the Rights of Shareholders ?
- To vote or be voted into the board
- Vote in Corporate Acts
- Right to of first refusal
- Preemptive Right
- Right to Inspect Corporate Books and Documents
- Dispose, designate proxy or voting agreement
- Receive Dividends
- Appraisal Right
- Derivative Suit
What are the General Rules on Voting?
▪ Shares with voting shares (ordinary, founders)
▪ Delinquent shares, preferred/redeemable – non-voting
▪ Appraised rights – suspended rights except if not paid within 30 days
When can non-voting shares vote?
(DAAIIIMS)
A = Adoption / Amend By-Laws
When does majority of BOD + 2/3 shareholders vote?
(DAEIIIMS)
E = Extend/shorten corporate term
When does majority 2/3 shareholders vote?
(RCBDSM)
▪ R = Remove directors
▪ C = Contracts with director/officer provided reasonable
▪ B = Business opportunity
▪ D = Delegation to BOD of power to amend/repeal/adopt new bylaws
▪ S = Stock dividends
▪ M = Management contract
o Stockholders = first option to subscribe to any issuance
o right to maintain % ownership to the corp
Preemptive rights
- first offered to existing stockholders before 3rd parties
Right of First Refusal
Types of Dividends
1) ORDINARY
2) CUMULATIVE
3) NON-CUMULATIVE
4) PARTICIPATING
5) NON-PARTICIPATING
paid out of UNRESTRICTED RETAINED EARNINGS
Dividends
guaranteed dividends
ORDINARY
urrent dividends & dividends in arrears (not given in prior years)
CUMULATIVE
or preferred shares; right to participate in the divs to ordinary shares
PARTICIPATING
norm; only current dividends
NON-CUMULATIVE
entitled to payment of the stipulated preferred dividends
NON-PARTICIPATING
What is the sequence of dates for dividends?
1) DECLARATION DATE
2) EX DATE
3) RECORD DATE
4) PAYMENT DATE
first business day = share will trade without its dividend
EX DATE
receive divs
Before ex date
will not receive divs
After ex date
Not an inherent right; only if there is URE, otherwise violation of trust fund doctrine
Appraisal Right
▪ Extend or shorten corp term
▪ Invest corp funds in another corp
▪ Amendment to AOI
▪ Sale, lease, exchange, transfer, mortgage, pledge
▪ Withdrawal of stockholder or dissolution of corp
GROUNDS FOR APPRAISAL RIGHT
SEQUENCE OF PAYMENTS DURING VOLUNTARY CORPORATE DISSOLUTION
- Secured creditors
- Employees – priority creditors
- Suppliers
- Government
- Unsecured external creditors
- Shareholders
During Dissolution – can continue to exist for 3 YEARS – settle affairs
TRUE OR FALSE
TRUE
How To Raise Capital?
(DEBT SECURITIES)
- issuer borrows MONEY, investor lends money (ACQUIRES CLAIM)
- income stream: fixed
- debtor: ranks above shareholders in cases of dissolution
- short-term: overnight to 1 yr (TD, T-bills)
- long-term: >1 yr (FXTNs, ROPs)
How To Raise Capital?
(EQUITY SECURITIES)
- issuer issues SHARES, investor lends money (OWNER)
- income stream: variable (dividend is not guaranteed)
- shareholder: receive dividend only after all other claims on the company have been met
- indefinite tenors
