STOCKHOLDERS AND SHAREHOLDERS b.
Covered Warrant: entitles holders to the right to purchase from the
PRE INCORPORATION SUBCRIPTION
• Irrevocable for at least 6 months from subscription date.
• Revocation: (1) all other subscribers consent to the revocation before 6
months or (2) the incorporation of said corporation fails to materialise
within said period or a longer period as stipulated in the contract
• A pre-incorporation subscription may be revoked after the submission
of the AOI to the SEC.
• In this case, one of the parties is still non-existent so not all can given
consent. Despite this, the subscription contract before incorporation is
valid and binding; and irrevocable for a period of 6 months and after the
filing of the AOI to the SEC. If the SEC released the Certificate of
Incorporation, there can be no revocation since they are already covered
by the TFD.
SUBSCRIPTION CONTRACT: any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be
formed. Notwithstanding the fact that the parties refer to it as a purchase
or some other contract. A contract by which the subscriber agrees to take
a certain number of shares of the capital stock, paying the consideration
or expressly or impliedly promising to pay he same.
Stock Option and Warrant: hybrid securities that should be distinguished
from subscription contracts.
• Stock Option: a privilege granted to a party to subscribe to a certain
portion of unissued capital stock of a corporation within a specified
period and under the terms and conditions of the grant, exercisable by
the grantee at any time within the period granted.
• Warrant: a type of security which entitles the holders the right to
subscribe to the unissued capital stock or to purchase issued shares in
the future, evidence by a warrant certificate which may be sold but
does not apply to a right granted under an option plan duly approved by
the SEC for the benefit of the employees, officers and/or directors of the
issuing corporation. The period to subscribe is not less than one year,
but not more than 5 years.
a. Subscription Warrant: right to subscribe pre-determined number of
shares out of the unissued capital stock of the issuer
issuer a pre-determined number of shares that are already issued
c. Warrant Certificate: certificate representing the right to a Warrant,
which may be detachable or not, duly issued by the Issuer to the
Warrant holder.
d. Warrant Instrument: document or deed containing the terms and
conditions of the issue and exercise of a warrant which includes the:
(1) maximum underlying shares that can be produced; (2) exercise
period and (c) other terms and conditions SEC may require
e. Detachable Warrant: warrant that may be sold, transferred or
assigned to any person by Warrant holder separate from and
independent of the corresponding beneficiary securities.
f. Non Detachable Warrant: warrant that may be sold transferred or
assigned to any person by Warrant holder separate from and
independent of the beneficiary securities.
g. Beneficiary Securities: shares of stock and other securities of the
issuer which form the basis of the entitled in a Warrant
h. Underlying Shares: unissued shares of a corporation that may be
purchased by a warrant holder upon the exercise of a right granted
under the warrant.
Parties:
1. Subscriber
2. Corporation: owner of the subject matter of the transaction
NOTE: in a sent, the subscription contract is also a contract among
subscribers. An original subscriber cannot withdraw from the pre-
incorporation subscription agreement without the consent of all
shareholders.
Agreement to form a corporation in a JVA may be an agreement between
the parties only, while the terms and conditions may involve the
corporation, the corporation is not a party thereto.
The shares may be issued in trust for another person. The shares may be
registered in the name of one person, but the beneficial ownership may
belong to another. The trustee may even be a nominee who holds the
shares for another to qualify said nominee as director. A nominee is a
person whose name a stock certificate is registered but who is not the
actual owner thereof.

Number of Shares Covered:
• It may cover one or more shares; the subscription agreement is
considered an indivisible contract.
• A subscriber need not enter into only one subscription agreement if he
will take two or more shares. He may subscribe to the capital stock
under several subscription contracts.
Form:
• No requirement written under law
• If a person accepts a certificate of stock in his name or if he exercises
the rights of shareholders, he is liable for unpaid subscription even if
there was no express contract
Kinds:
• Pre Incorporation Subscription Contract
• Post Incorporation Subscription Contract
• May pertain to shares that are part of the original Authorised Capital
Stock in the AOI or those which involve the increase of capital stock
• Conditional: subscription upon a condition precedent is a subscription
that does not take effect so as to make the subscriber a stockholder or
confer rights until the condition is satisfied
• Unconditional
TRUST FUND DOCTRINE: the subscribed capital stock of a
corporation is a trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy their credits. The
corporation may not dissipate this and the creditors may sue stockholders
directly for the unpaid subscriptions.
• Not limited to the unpaid portion of the subscribed capital. The capital
stock, property and other assets of the corporation are regarded as equity
in trust for the payment of the corporate creditors.
• The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and
assets generally regarded in equity as a trust fund for the payment of
corporate debts.
• All assets and property belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full payment of their subscriptions, may be
reached by the creditor in satisfaction of its claim.
NOTE: money received for subscription of increase of authorised capital
is not covered by the TFD prior to the approval of such increase by the
SEC.
Trust Fund Doctrine Violation
(1) when the corporation releases or condones payment of the unpaid
subscription and the stockholder has not right to demand the refund
of his investment
(2) when there is payment of dividends without unrestricted retained
earnings
(3) when properties are transferred in fraud of creditors
(4) when properties are disposed or undue preference is given to some
creditors even if the corporation is insolvent
(5) when the capital stock is decreased which has the effect of relieving
the stockholders of the obligation to pay their respective subscription
Under the TFD, a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares,
in whole or in part, without a valuable consideration or fraudulently, to
the prejudice of creditors.
TFD provides that subscriptions to the capital stock of a corporation
constitutes a fund to which the creditors have a right to look for the
satisfaction of their claims.
(1) Procedure for the distribution of capital assets embodied in the
Corporation Code which allows the distribution of corporate capital
only in three instances: (a) amendment of AOI to reduce the
authorised capital stock; (b) purchase of redeemable shares; (c)
dissolution and eventual liquidation.
(2) Power of a corporation to acquire its own shares
(3) The distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the corporation, or even for that
matter in the earnest desire of the court a quo to prevent further
 squabbles and future litigations unless indispensable conditions and (1) Procedure for the distribution of capital asserts embodied in the
procedures for the protection of corporate creditors are followed. Corporation Code which allows the distribution of corporate capital
in three instances:
A subscription contract is formed by an offer by one of the parties, the (1) Amendment of AOI to reduce ACS
corporation or subscriber as the case may be and an acceptance of this (2) Purchase of redeemable shares
offer by the other. There is binding contract as soon as the offer to take (3) Dissolution and eventual liquidation of the corporation
shares made by a person (2) Power of a corporation to acquire own shares
(3) Power of a corporation to acquire its own shares
Acquisition of Shares by Stockholders (4) The distribution of corporate assets and property cannot be made to
Voluntary Onerous Acquisition of Shares depend on the whims and caprices of the corporation, or even for that
A. Purchase: may be by corporation or other shareholders matter in the earnest desire of the court a quo to prevent further
B. Subscription squabbles and future litigations unless indispensable conditions and
procedures for the protection of corporate creditors are followed.
Purchase Subscription
• A stockholder has no right to demand for the rerun of his investment
Entered after incorporation Entered before or after incorporation (his investment is locked in until liquidation)
• It cannot compel the corporation to return his investments without the
Must fully pay at the time the shares Payment need not be made unless consent of all stockholders
are transferred there is a call if there is no time
• Neither does he have the right to withdraw even when all stockholders
agreed upon
assent if there is prejudice to creditors
A stockholder who sells his can Cannot be released from his
condone the obligation to pay obligation to pay Alternative to TFD: Fraud Theory: if shares are issued to shareholders
who have not yet pad the subscription price, the corporate creditors have
SOF applies if the price is not less No SOF the right to go after the shareholders in case of insolvency. If this is
than P500
applied, the liability of the shareholder is explained by submitting to the
proposition that there is deemed to be representation to the creditor to the
effect that the shares were paid before their issuance.
• Stockholders of Record: only persons registered in the stock and
transfer book; the rights accrue upon the entry of his name in the books Treasury Shares: are not subject to subscription contracts because
of the corporation. Section 60 of the Corporation Code covers only acquisition of unissued
• Mere inclusion in the GIS is insufficient shares. However, when treasury shares are re-issued the shareholders are
• Original stockholders in the AOI even if not reflected in the Stock and entitled to exercise their pre-emptive right.
Transfer Book are entitled to such rights
• One can become an owner by succession through gratuitous means like Escrow Shares: corporation may impose the conditions that the shares to
donation. (Acquisition under the CC) be issued shall be held in escrow until actual payment is receiver by
corporation. Title does not pass to the subscriber until the performance of
This doctrine is the underlying principle and/or articulated in the the condition. A holder of escrow shares does not become entitled to the
following: rights pertaining to a stockholder until the conditions for the release of
such shares are fully met. The subscriber is not yet the owner of the said
shares and consequently he cannot be accorded the rights belonging to a
regular shareholder.
Balancing Interests
Manning: provisions of corporation law on legal capital are addressed to
resolving or at least accommodating the combination of the creditors
perspective and the shareholder’s perspective namely:
(1) the creditors of the company desires that the enterprise have large
quantities of assets against which only other claimants are those who
rank junior to him. The shareholders, by contract, would like to have
as little aspkossible of their own assets tied up in the enterprise and
exposed to the jeopardy of creditors claim.
(2) The creditor does not ordinary welcome the creation of additional
creditor’s claim against the limited assets of the enterprise. The
shareholder investor will often (not always) be willing for the for the
incorporated enterprise to incur further debt in order to benefit from
leverage, especially when his own equity investment position is small.
(3) The creditor would prefer that the junior investment claimant, the
shareholder, receiver nothing as a return on his investment for so long
as time as the creditor’s claim has not been paid. The shareholder, on
the other hand, would prefer a concurrent return paid out to him as
the enterprise earns profits.
(4) The creditor wants protection against all manner of asset distributions
to shareholders— particularly since he sees the board of directors as
a creature of shareholders. The shareholder wants maximum freedom
to receive such distribution
(5) Each shareholder wants assurance that each other shareholder has
contribution to the corporate pot a proprietorship investment
proportionate to his shareholdings.
Sources of Capital:
• Capital includes all properties and assets of the corporation that are used
for its business or operate.
• Authorized Capital Stock: amount fixed in the AOI to be subscribed and
paid by the stockholders.
• Subscribed Capital: portion of authorised capital stock that is covered
by subscription agreements whether fully paid or not. Increase: (1) by
issuing the raining balance of ACS, or (2) by increasing the ACS that
necessarily involves additional subscription.
• Paid Up Capital: that portion of the authorised capital stock that has
been subscribed and actually paid.
• Initial capital of the corporation at its birth: Paid Up Capital. If the
authorised capital and the subscribed capital remain constant, the paid
up capital the subscribed capital remain constant, the paid up capital
may be increased by making the subscriber make additional payment or
price may be made voluntary without need of call.
NOTE: issuance of unsubscribed shares only need BOD approval.
The advantages of debts include:
(1) current shareholders (who cannot exercise their pre-emptive right) do
not have to dilute or surrender their control of the corporation when
funds are obtained by borrowing rather than issuing more shares of
stocks
(2) Depending on the current tax law, it may be less expnsive to issue
debt rather than additional stock if the interest payments made to
bondholders are tax deductible while dividends are not
(3) The issue of bonds may increase the earnings of the corporation
through favourable financial leverage; a corporation has favourable
financial leverage when the borrowed funds are used to increase the
earnings per share of common stock
The disadvantages of obtaining funds by borrowing include the folloing:
(1) The borrower has a fixed interest payment that must be met each
period to avoid default
(2) The use of debt may reduce a company’s ability to withstand a major
loss (compared to a situation where there is more equity to meet the
losses)
(3) It also causes the company to experience unfavourable financial
leverage when income from operation falls below a certain level
unfavourable financial leverage results when the cost of borrowing
funds exceeds the revenue they generate
(4) Loan agreement usually require maintenance of a certain amount of
working capital and place limitations on dividend and additional
borrowings
Creditors: those who supply additional funds to the corporation.
1. Commercial Creditors: short-term creditors including banks and
and other institutional leaders who extend revolving lines of short
term credit.
2. Investment Creditors: those who acquire bonds or debentures by a
corporation.
The consideration for bonds are also limited to the considerations that the
CC allows for subscription agreements.
CONSIDERATION FOR STOCKS
Consideration: not the same as in the Civil Code which refers to the value.
Here, it is the property or right or service to be actually exchanged or
received.
Rule: It may be any or a combination of:
(1) Actual cash paid
(2) Property, tangible or intangible, received by the corporation and
necessary for its use and lawful purpose at a fair valuation equal
to the par or issued value of the stock issue
(3) Labor performed for or services actually rendered to the
corporation [bonus takes form of additional expenses on the part of
the paying coporation for services rendered by the grantee] * cannot
be future contracts *
Intangible Properties:
• Must be submitted with a copy of the certificate of registration of the
intellectual property right together with an appraisal report by an
accredited appraisal company that is not more than 6 months old and a
deed of assignment.
• Mining claim must be with a mining permit; the actual value of the
mining claim must appraised and determined by the Bureau of Mines
and Geo Sciences and confirmed directly to the SEC
Undivided Interest:
• Something that the corporation may acquire and hold in carrying out its
purpose or reasonable necessary or convenient in the business
• Interest of the co-ownership must have a peculiars value capable of
ascertaining (at fair valuation equal to par or issued value of the stock)
• The right over the property must actually be transferred to the
corporation and no creditors of the property held in common shall be
prejudiced
• There must be waiver of rights signed by all possible co-owners stating
that they waive their right of redemption or pre-emption in relation to
the transfer. Co-owner transferring shall execute an affidavit that he
gave notice to other co-owners and the 30 day redemption period had
already expired
Conversion: the corporation may accept as consideration the outstanding
shares exchange for stocks in the event of reclassification or
reconsideration. It also includes conversion of a single proprietor or
partnership into a corporation or vice versa or spin off or one or more
divisions. [Required: Articles of Dissolution and Deed of Assignment;
List of Debtors with amount and consent]
(4) Previously incurred indebtedness rendered
• Acknowledged by the board
• Subject to approval by the SEC
• To prevent watering of stocks, the amount of indebtedness or
liabilities to be settled should be at least equal to the par value of
shares of stock which the corporation intends to issue
• It is legally acceptable for one block of shareholders to be allowed
to pay through a previously incurred indebtedness while other pay
in cash. The set off debt is equivalent to the payment of stock in
cash.
(5) Amounts transferees from unrestricted retained earnings to
stated capital [occurs when there is declaration of stock dividends]
(6) Outstanding shares exchanged for stocks in the event of
reclassification or conversion
• It cannot be paid only through dividends that will be declared later
(will operate as fraud)
Conditions:
(1) Cannot be issued for a consideration less than the par or issued price.
(2) If not cash: the valuation shall be determined by the BOD subject to
the approval of the SEC
(3) Cannot be issued in exchange for PN’s or future service (applicable
to bonds)
NOTE: A bank certificate in the form prescribed by the BSP to prove the
existence of inward remittance is required but only with respect to those
corporations with foreign subscribers who want to registered their
investments with the BSP.

Requirements for Tangible or Intangible Property:

a. The property is actually received by the corporation
b. Necessary and convenient for its use and lawful purpose
c. Subject to a fair valuation equal to the par value or issued value of
stock issued
d. The valuation shall initially be determined by the incorporators or the
board of directors
e. Valuation shall be subject to the approval of the SEC (prevent’s
watering of stocks)
• Watered Stocks: stocks issued for a consideration less than the par
value or issued price thereof
• Issued Price of No Par Value: (1) fixed in the AOI or (2) fixed by
the BOD pursuant to the bylaws or in the absence, (3) by the
stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for that purpose.
• The issued value may be higher than the par value; FMV may be
greater than the par value.
• If the shares have no par value, no authorised capital stock is stated
and the stated capital is fixed by the issuance of no-par value shares
with fixed issued value.

Deposit on Subscription: an amount of money received by the

corporation as a deposit with the possibility of applying the same as
payment for the future issuance of capital stock. It is not subject to
documentary stamp tax. The depositor is not standing as a stockholder and
he is not entitled to dividends, voting rights or other prerogatives and
attributes of a stockholder.