Financing the Corporation

Capital Structure
GLADYS ANTONIO
WENLYN ESPINOSA
 Sources of Financing
in a Corporation
(Sec.62 diss., De Leon)

1. Funds furnished by
shareholders
2. Borrowings
3. Profits and stock
dividends
 Borrowings
Corporate bond- written promise by a
corporation to pay a definite sum of
money at a future date, at a fixed rate of
interest.
 The Code expressly empowers a
corporation to incur, create, or increase
any bonded indebtedness.(Sec.38)
What are bonds?
 Power to classify shares
(Sec.6)
• General Rule:
– The shares of stock corporations may be
divided into classes or series of shares, or
both, any of which classes or series of
shares may have such rights, privileges or
restrictions as may be stated in the AOI.
(Sec. 6,para.1)
– A share represents the interest or right of a
shareholder in the corporation.
Classification of Shares
1. Common Shares
– the ordinary stock of the
corporation entitling the
owner to pro rata dividends,
without any priority or
preference over any other
shareholder or class of
shareholders but equally
with all other stockholders
except preferred
stockholders.
Classification of Shares
1. Common Shares (cont.)
• Generally, the common share gives the owner
the right :
• to vote,
• to share in the income,
• and in the event of liquidation, to share in all
the assets after satisfying creditors’ and
preference shareholders’ claims.
Classification of Shares
2. Preferred Shares
– One that entitles
the holder to
certain preferences
over other
stockholders.
Classification of Shares
2. Preferred Shares (cont.)
Such preferences may be as follows:
a) Preferred shares as to asset
b) Preferred shares as to dividends
– Cumulative preferred stock
– Non-cumulative preferred stock
– Participating preferred stock
– Non-participating preferred stock
Classification of Shares
3. Par Value Shares
– is one with a
specific money
value fixed in the
AOI and appearing
in the certificate of
stock for each
share of stock of
the same issue.
Classification of Shares

3. Par Value Shares (cont.)

a) the primary purpose of par value is to
fix the minimum issue price of the
shares thus assuring creditors that the
corporation would receive a minimum
amount of its stock.
b) It is not usually the price at which
investors buy or sell the stock.
Classification of Shares

4. No par Value Shares

– Is one without any stated or par value
appearing on the face of the certificate of
stock. In other words, it is a stock which
does not state how much money it
represents.
– Under section 6, a no par value share
may not be issued for less than 5.00 per
share.
Classification of Shares
4. No par Value Shares (cont.)
a) While a no par value share has no par value,
it has always an “issued value,” i.e., the
consideration fixed by the corp for its
issuance.
b) A corp may issue no par value shares only, or
together with par value shares.
c) No par value stockholders have the same
rights as holders of par value stock.
Classification of Shares
5. Voting share
– is a share with right to vote.
a) It is generally customary to give the right to
vote to the common stock and to withhold it
from the preferred.
Classification of Shares
5. Voting share (cont.)
b) Under the code, whenever a vote is necessary
to approve a particular corporate act, such
vote refers only to stocks with voting rights
except in certain cases when even non-voting
shares may also vote.
c) The rule is not “one stockholder, one vote”
but “one share, one vote” because
representation in a corporation is
commensurate to extent of ownership.
Classification of Shares
6. Non-voting share
– is a share without right to vote.
a) If stock is originally issued as voting stock, it
cannot thereafter be deprived of the right
without the consent of the holder.
b) Under the Code, no share may be deprived of
voting rights except those classified and issued
as “preferred” or “redeemable” shares, unless
otherwise provided in the Code. (Sec. 6,
para.1)
Classification of Shares
6. Non-voting share (cont.)
c) Sec.6 para. 5[1-8] :
Where the AOI provide for non-voting shares in the case
allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the AOI
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property
4. Incurring, creating or increasing bonded indebtedness
5. Increase or decrease of capital stock
Classification of Shares
6. Non-voting share (cont.)
6. Merger or consolidation of the corporation with
another corporation or other corporations
7. Investment of corporate funds in another corporation or
business in accordance with this Code
8. Dissolution of the corporation
d) Note that the enumeration in Sec. 6 does not include
the election of directors or trustees (Sec.24) as one of
the matters on which non-voting shares may vote.
e) Where non-voting shares are provided for, the Code
requires that there shall always be a class or series of
shares which have complete voting rights.
Classification of Shares
7. Founders’ Share (Sec.7)
General Rule: (Sec.7)
– Founders’ shares classified as such in the AOI may be
given certain rights and privileges not enjoyed by the
owners of other stocks,
– provided that 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
subject to the approval of the SEC.
– The five-year period shall commence from the date of
the aforesaid approval by the SEC.
Classification of Shares
7. Founders’ Share (cont.)
– Defined as shares issued to the organizers and
promoters of a corporation in consideration of
some supposed right or property.
– Such shares usually share in profits only after a
certain percentage has been paid upon the
common stock, but are often given special
privileges over other stock as to voting and as
to division of profits in excess of a minimum
dividend on the common stock.
Classification of Shares
8. Redeemable Shares (Sec.8)
– Is share, usually preferred, which by its terms is
redeemable at a fixed date or at the option of
either the issuing corporation or the
stockholder or both at a certain redemption
price.
– When redeemable shares may be issued
• May be issued only when expressly so provided in the
AOI
Classification of Shares
8. Redeemable Shares (cont.)
– Redemption regardless of existence of
unrestricted retained earnings
– Where corporation insolvent
• Redemption may not be made
– Terms and conditions
• Must be stated in AOI and certificate of stock
– Voting rights
• May be deprived in the AOI, unless otherwise
provided in this Code.
Classification of Shares
9. Treasury Shares (Sec.9)
– It is share which has been lawfully issued by the
corporation and fully paid for and later
reacquired by it either by purchase, redemption
(Sec.8), donation, forfeiture or other lawful
means.
– may be disposed of for a reasonable price fixed
by the BOD and it again become outstanding
stock and regains whatever dividends and voting
rights is originally held.
– Have no voting rights as long as it remains in the
treasury.
Classification of Shares
9. Treasury Shares (Sec.9)
Limitations:
The Corporation Code provides that “no corporation
shall redeem, repurchase, or reacquire its own shares,
of whatever class, unless it has adequate amount of
unrestricted retained earnings to support the cost of
said shares.
-Treasury shares are not considered as part of the
earned or surplus profits, and therefore not
distributable as dividends, either in cash or stock.
COMMISSIONER OF INTERNAL REVENUE VS. MANNING
(66 SCRA 14; Aug. 6, 1975)

• FACTS:
– Julius Reese owned 24,700 of the 25,000 authorized capital
stock of Manta Trading and Supply Co., the rest are owned by
herein respondents.
– Upon Reese’ death, his shares was held in trust by the law firm
Ross, Carrascoso and Janda for the private respondent, who
were to continue management of the corporation.
– These shares considered by the respondents as treasury
shares, prior to full payment, were declared as stock dividends.
– Such declaration was assessed by the BIR as distribution of
assets subject to income tax.
• ISSUE: WON the subject shares are treasury shares?
Classification of Shares
10. Convertible Shares
– Is a stock which is convertible or changeable by
the stockholder from one class to another class,
such as from preferred to common, at the
conversion ratio, i.e., the price at which the
common is to be valued as against the
preferred.
• Except as may be restricted by the AOI, the
stockholder may demand conversion at his pleasure.
• The conversion ratio is the price at which the
common is to be valued as against the preferred.
 DOCTRINE OF EQUALITY OF SHARES

 Where the articles of incorporation do not

provide for any distinction of the shares of
stock, all shares issued by the corporation are
presumed to be equal and enjoy the same rights
and privileges and are also subject to the same
liabilities. (Sec. 6)
Subscription Contract
Section 60: Any contract for
the acquisition of unissued
stock in an existing
corporation or a corporation
still to be formed shall be
deemed a subscription within
the meaning of this Title,
notwithstanding the fact that
the parties refer to it as a
purchase or some other
contract.
 Persons entitled to
subscribe
Any person capable of entering to binding
a contract may become a subscriber. A
corporation, however, cannot be one of its
own members, and cannot subscribe for
shares of its own stock. It can be a subscriber
or corporator of another corporation.
 Kinds of Subscription
1. Pre-subscription- those made before
incorporation.
2. Post-subscription- those made after
incorporation.
Note: The Corporation Code
provides that shares are issued
only when subscriptions is fully
paid.
Revocation of subscription
2. After filing the articles with the SEC-
no pre-incorporation subscription may be
revoked.
b. After incorporation:
1. Before acceptance- it may be revoked
by the subscriber before it is accepted by or
on behalf of the corporation.
Revocation of subscription
a. Before incorporation:
1. Before filing the articles with the SEC-
cannot be revoked within 6 months from the
date of subscription, unless consented by the
other subscriber, or unless to the
incorporation fails to materialize within said
period or within a longer period as may be
stipulated in the contract of subscription.
Revocation of subscription
2. After acceptance- the subscriber
cannot, without the consent of the
corporation, withdraw or surrender his shares,
or substitute another contract, or another
subscriber, and avoid liability on his
subscription.
 Mode of Stock Issuance
• By subscription
• By sale of unissued stock
• By increasing the amount of capital stock
• By making stock dividend.
 Rights of subscribers
a. Equity on the total number of shares
subscribed and upon payment of the unpaid
portion he is entitled to the issuance of a
certificate of stock.
b. Right to assign his equity in the total
number of shares subscribed. This is
accomplished by endorsement of receipt plus
delivery.
 Rights of subscribers
c. Right to vote the total number of shares
subscribed even before full payment is made,
provided they are not yet delinquent.
d. Unless prohibited in the by-laws, to demand
issuance of certificate of stock corresponding to
the amount of the subscription already paid for.
If issued, the subscriber may vote the number of
shares corresponding to the amount already
paid to the corporation and only the remaining
unpaid shares are to be declared delinquent.
Liabilities of subscribers

• For the unpaid

subscription, the subscriber
is considered a debtor of a
corporation and he is bound
to pay such amount plus
interest from the date of
subscription, if so stated in
the by-laws.
Release of subscribers
• The BOD or for that
matter, the corporation,
has no legal capacity to
release a subscriber to its
capital stocks from the
liability to pay for his
shares, and any agreement
to this effect is void.
 Release of subscribers
The release to be valid must meet the ff.
requirements:
a. It must be with the consent of all
stockholders.
b. No creditor is prejudiced.
c. It must be based upon adequate and
legal consideration.
 Pre-incorporation
Subscription
Section 61: A subscription for share of stocks of a
corporation to be formed shall be irrevocable for
a period of at least six(6) months from the date of
subscription, unless all of the other subscribers
consent to the revocation, or unless the
incorporation of said corporation fails to
materialize within said period or within a longer
period as may be stipulated in the contract of
subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission
of the article of incorporation to the Security and
Exchange Commission.
 Pre-incorporation
Subscription
Under Sec 13 and 14 (last para.), the SEC
shall not accept thte AOI of any stock
corporation unless;
At least 25% of the authorized capital stock
must be subscribed at the time of
incorporation and at least 25% of the total
subscription must be paid upon
subscription.
 Pre-emptive right of
stockholders
• This is a right of existing
stockholders of a
corporation to subscribe to
or purchase shares of stock
and proportion to their
respective shareholdings,
before the shares of the
corporation are offered to
the general public.
 Pre-emptive right of
stockholders
The right of pre-emption given to stockholders
of a corporation shall apply to all issuance or
disposition of shares of any class, such as:
a. When the capital stock of a corporation
is increased and new shares are issued.
b. When shares from the unsubscribed
portion of the original or authorized capital
stock are issued.
 Pre-emptive right as
to treasury shares
• In close corporations, the pre-emptive
right of stockholders extend to all stock to be
issued, including reissuance of treasury
shares, whether for money or for property or
personal services, or in payment of corporate
debts, unless the articles of incorporation
provides otherwise. (Sec.103)
 Pre-emptive right as
to treasury shares
• In widely held corporations, it would seem
that existing stockholders have also pre-
emptive right as to treasury shares (sec.9)
in view of the use of the
phrase “disposition of shares
of any class” in section 39.
 Limitation to the right of
pre-emption
a) When such right is denied by the AOI or
an amendment thereto.
b) Shares are issued in compliance with laws
requiring stock offering or minimum stock
ownership by the public.
c) In exchange for property needed for
corporate expansion with the approval of at
least 2/3 of the outstanding capital stock.
 Limitation to the right of
pre-emption

d) In payment of a previously contracted debt

with the concurrence of at least 2/3 of the capital
stock.

e) In remaining unsubscribed share of one

shareholder within the period fixed for the
exercise of his pre-emptive right, does not follow
that said shares should again be offered on a pro-
rata basis to stockholders who took advantage of
their right of pre-emption.