Corporation

Law
PROF.: ATTY. LUCKS MAE DIGAUM-YBIERNAS

REPORTER: REMER KHARLA T. MEDRANO

 CONTENTS

Section 6. Classification of Shares

Section 7. Founder’s Share
Section 8. Redeemable Shares
Section 9. Treasury Shares
Section 10. Number and
Qualifications of Incorporators
Section 6
Classification of Shares. – The classification of shares, their
corresponding rights, privileges, or restrictions, and their stated par
value, if any, must be indicated in the articles of
incorporation.
Each share shall be equal in all respects to every other share,
except as otherwise provided in the articles of incorporation and in
the certificate of stock.
The shares in stock corporations may be divided into classes or
series of shares, or both. No share may be deprived of
voting rights except those classified and issued as
“preferred” or “redeemable” shares, unless
otherwise provided in this Code:
Provided, That there shall always be a class or series of shares
with complete voting rights.
Section 6
Holders of nonvoting shares shall nevertheless be
entitled to vote on the following matters:
a) Amendment of the articles of incorporation;
b) Adoption and amendment of bylaws;
c) Sale, lease, exchange, mortgage, pledge, or other disposition
of all or substantially all of the corporate property;
d) Incurring, creating, or increasing bondedindebtedness;
e) Increase or decrease of authorized capital stock;
f) Merger or consolidation of the corporation with another
corporation or other corporations;
g) Investment of corporate funds in another corporation or
business in accordance with this Code; and
h) Dissolution of the corporation.
Section 6
Except as provided in the immediately preceding
paragraph, the vote required under this Code to approve a
particular corporate act shall be deemed to refer only to
stocks with voting rights.
The shares or series of shares may or may not have a
par value:
Provided, That banks, trust, insurance, and preneed
companies, public utilities, building and loan associations,
and other corporations authorized to obtain or access
funds from the public, whether publicly listed or not, shall
not be permitted to issue no-par value shares of stock.
Section 6
Preferred shares of stock issued by a corporation may be
given preference in the distribution of dividends and in the
distribution of corporate assets in case of liquidation, or such
other preferences:
Provided, That preferred shares of stock may be issued only
with a stated par value.
The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof:
Provided, further, That such terms and conditions shall be
effective upon filing of a certificate thereof with the Securities
and Exchange Commission, hereinafter referred to as
“Commission”.
Section 6
Shares of capital stock issued without par value shall be
deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in
respect thereto:
Provided, That no-par value shares must be issued for a
consideration of at least Five pesos (P5.00) per share:
Provided, further, That the entire consideration received by the
corporation for its no_x0002_par value shares shall be treated
as capital and shall not be available for distribution as dividends.
A corporation may further classify its shares for the purpose
of ensuring compliance with constitutional or legal requirements.
 CASE LAW
Gamboa v Teves. June 28,
Facts: 2011
 In 1969, General Telephone and Electronics Corporation sold 26% of PLDT’s
outstanding common shares to the Philippine Telecommunications Investment
Corporation (PTIC). By virtue of assignment, PrimeHoldings, Inc. became the owner
of 111,415 shares of PTIC; these shares were later sequestered by thePCGG, and
later declared to be owned by the Republic.
 In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
acquired the remaining 54%capital stock of PTIC.
 In 2006, the Inter-Agency Privatization Council of the Government announced that it
would sell the 111,415 shares through a public bidding. Parallax Venture Fund won
the auction.
 Later, First Pacific announced that that it would exercise its right of first refusal as a
PTIC stockholder and but those shares by matching the bid price of Parallax.
 CASE LAW
Gamboa v Teves. June 28,
Facts: 2011
 Although it initially failed, First Pacific eventually was able to buy the said shares.
 With that sale, First Pacific’s ownership of the common stock of PLDT increased from
30.7 to 37 percent, and the total foreign ownership of common stock rose to 81.47 per
cent.
 Thus, Wilson P. Gamboa, later joined by Pablito and Arno Sanidad, claimed that
PLDT’s stock ownership contravened the foreigners’ 40% rule laid out in the
Constitution.
 In response, Finance Sec. Margarito Teves, USec. John Sevilla, and PCGG
Commissioner Ricardo Abcede alleged that the 100% ownership of the PTIC shares
by First Pacific did not contravene the Constitution because this only led to a 13.847%
ownership of the outstanding capital stock of PLDT.
 This led to the filing of this petition for prohibition, injunction, declaratory relief and
declaration of nullity ofsale of shares of stock of PTIC by the Rep. of the Philippines to
Metro Pacific Assets Holdings.
 CASE LAW
Gamboa v Teves. June 28,
Issue: 2011
WON the term “capital” in Section 11, Article XII of the Constitution refers to total
common shares only or and not to the total outstanding capital stock of PLDT, a public
utility.
 CASE LAW
Gamboa v Teves. June 28,
Ruling: 2011
 The controversial provision in the Constitution is the ff. (Section 11, Art. XII):
“No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws
of the Philippines, atleast sixty percentum of whose capital is owned
by such citizens.”
 This provision is substantially the same as the equivalent provisions in the 1973 and
1935 Constitutions. Fr. Bernas says that this provision provides for the Filipinization of
public utilities.
 This is a recognition of the sensitive and vital position of public utilities both in the
national economy and for national security.
 The problem, however, lies with the definition of the word capital.
 More specifically, the question is whetherit means common shares or total
outstanding capital stock (the total of common and preferred shares).
 CASE LAW
Gamboa v Teves. June 28,
Ruling: 2011
 Constitutionally, the problem is that, undisputedly, most of the common, and thus
voting, shares are ownedby foreigners, while such foreigners only own a small part of
the total outstanding capital stock.
 The guiding state policy is that of an independent national economy effectively
controlled by Filipinos. The SC ruled that capital means only the shares
of stock that can vote in the election of directors.
 The intent of the framers of the Constitution in imposing the 40% nationality
requirement was for Filipino nationals to always be in control of the corporation
undertaking the provision of public utilities.
 Thus, to consider “capital” as total outstanding capital stock would allow foreigners to
own all the common shares, and thereby assume all voting rights by owning all the
common shares.
 The Corporation Code states that “no share may be deprived of voting rights except
those classified andissued as “preferred” or “redeemable” shares, unless otherwise
provided in the Code.
 CASE LAW
Gamboa v Teves. June 28,
Ruling: 2011
 One of the rights of a stockholder is the right to participate in the control or
management of a corporation, exercised through his vote in the board of directors.
 While preferred or redeemable shares may be denied this right to vote, under no
circumstance may a common shareholder be deprived of his right to vote.
 Generally, preferred shares are not given the right to vote.
 Thus, it is only the common shares that are given control of the corporation. However,
if the preferred shares also have the right to vote, then capital includes them too.
 Looking at the records of the Constitutional Commission, capital refers to the
“controlling interest” of a corporation, according to Mrs. Villegas, Bengzon, and
especially Azcuna.
 Further, under the definition of a “Philippine National” in the Foreign Investments act
of 1991, only a “corporation organized under the laws of the Philippines of which at
least 60% of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines.”
 CASE LAW
Gamboa v Teves. June 28,
Ruling:
 Under the IRR of 2011with the required Filipino
the said law, compliance ownership of a
corporation shall be determined on the basis of outstanding capital stock whether fully
paid or not, but only such stocks which are generally entitled to vote are considered.
 Mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership
of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting
rights of which have been assigned or transferred to aliens cannot be considered held by
Philippine citizens or nationals.
 Here, the PLDT preferred shares are not entitled to vote, as per the Articles of
Incorporation. The right to vote is given exclusively to holders of common [Link] is not
disputed that foreigners hold a majority of the common shares of PLDT, to the tune of
64.27%.
 CASE LAW
Gamboa v Teves. June 28,
Ruling:
2011
 It is thus clear that foreigners exercise control over PLDT past the 40% limit provided
for in the Constitution. They even get more dividends than common shareholdres,(in a
completely irrelevant obiter designed only to make the shareholders look bad.)
 Thus, not only do Filipinos hold less than 60% of the voting stock, they also earn less
than 60% of the dividends.
 Lastly, the said provision of the Constitution is self-executing. No legislation is needed
to make it effective.
 The SEC has been given regulatory and adjudicative functions. Thus, it may
disapprove or reject the AOI of any corporation, where the required percentage of
ownership of capital stock by Filipinos has not been complied with. By this petition for
declaratory relief/mandamus, the SC directed the SEC to examine the ownership of
the capital of PLDT.
 Petition partly granted. SEC directed to apply above definition of capital to determine
extent of allowable foreign ownership of PLDT.
Section 7
Founders’ Shares. – Founders’ shares may be given
certain rights and privileges not enjoyed by the owners of
other stocks.
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:
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.
CASE LAW:
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Section 8
Redeemable Shares. --Redeemable shares may be
issued by the corporation when expressly provided in the
articles of incorporation.
They are shares which may be purchased by the
corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of
stock representing the shares, subject to rules and
regulations issued by the Commission
 CASE LAW:
DE LEON V. PLDT, G.R.
211389
Facts:
 In 1973, the State adopted the concept of "telephone subscriber self-financing" through
PD No. 217, by which a telephone subscriber had to purchase shares of PLDT—the
sole telephone utility at the time—to partly finance the corporation's capital investments
in telephone installations. If preferred shares were issued under the subscriber self-
financing plan, PD No. 217 required that the subscriber be guaranteed "in all cases. . .
a fixed annual income from his investment" as well as the ability to convert " preferred
capital stocks. . . into common shares, after a reasonable period and under reasonable
terms, at the option of the preferred stockholder."
 De Leon and Yasay acquired under the Subscribers Investment Plan a total of 360 10%
Cumulative, Convertible Preferred Shares.
 In 2011, PLDT Board of Directors authorized the redemption of Subscribers Investment
Plan preferred shares effective January 19, 2012, covering all outstanding shares of
10% Cumulative Preferred Stocks, Series A to FF, as well as Series GG, HH, and II as
soon as they became redeemable.
 CASE LAW:
DE LEON V. PLDT, G.R.
211389
Facts:
 PLDT mailed redemption notices 18 to the affected preferred shareholders, informing
them that it had redeemed their shares. They were also given the option of either: (1)
claiming their redemption payments; or (2) converting their preferred stocks to common
shares on or before January 9, 2012. PLDT then published the redemption notices in
newspapers, including the Philippine Daily Inquirer, Bandera, and the Philippine Star.
 De Leon and Yasay, Jr. then filed a Complaint before the RTC Makati seeking the
nullification of the PLDT’s plan of redeeming the shares.
Petitioner’s contention:
 PLDT violated the preferred shareholders’ right to remain equity holders by redeeming
its Subscriber Investment Plan preferred shares.
 PD No. 217 explicitly provides that the option to convert the preferred shares issued by
a telephone utility, such as PLDT, belongs to the preferred stockholder. They further
argue that respondent exercised an option not belonging to it when it redeemed the
Subscriber Investment Plan preferred shares.
 CASE LAW:
DE LEON V. PLDT, G.R.
211389
Facts:

Respondent’s Contention:
 nothing in Presidential Decree No. 217 prohibits the imposition of other terms and
conditions, including the redemption, of preferred shares issued under its subscriber
self-financing plan. Presidential Decree No. 217 even provides that the
shareholder'soption to convert the preferred shares into common shares is subject to
"reasonable terms."

Ruling of the RTC:

 granted the motion of the respondent declaring the petition a nuisance and harassment
suit.

Ruling of the CA:

 CA affirmed. Hence, the petition.
 CASE LAW:
DE LEON V. PLDT, G.R.
211389
Issue:

WON the PLDT may redeem convertible shares despite the objection of the preferred
shareholder.
 CASE LAW:
DE LEON V. PLDT, G.R.
211389
Ruling:

 Yes. From the text of Presidential Decree No. 217, nothing prohibited the respondent
from redeeming the preferred shares of stock it had issued under its subscriber self-
financing plan, which it called the Subscriber Investment Plan. Further, PLDT's 1973
Amended Articles of Incorporation provided that the Subscriber Investment Plan
preferred shares it had issued were redeemable.
 The redeemability of the Subscriber Investment Plan preferred shares was reiterated in
the dorsal portion of the stock certificates issued to the subscribers, providing that "the
Corporation at the option of the Board of Directors may redeem the Series [T] 10%
Cumulative Convertible Preferred Stock at the time outstanding.”
 Since they were informed of these terms and conditions when they acquired their
shareholdings, petitioner and Yasay, Jr. may not belatedly object to them. respondent
actually gave the Subscriber Investment Plan preferred shareholders the option to
convert their preferred shares to common shares " after a reasonable period and under
reasonable terms."
Section 9

TreasuryShares. --Treasury shares are shares of stock

which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation
through purchase, redemption, donation, or some other
lawful means.
Such shares may again be disposed of for a reasonable
price fixed by the board of directors.
 CASE LAW:
SALIDO V. ARMAYAN CORP. G.R. NO.
233857
Facts:

 Sometime in April 2005, Cerlito San Juan (San Juan), Ernesto Mangune (Mangune),
and Agapito Salido, Jr. (Salido), along with four other individuals (collectively, Salido
faction), agreed to form two mining corporations, namely Aramaywan and Narra Mining
Corporation (Narra Mining). San Juan was tasked to finance the initial operations of the
intended corporation, Mangune was in charge of the technical aspect of the operations,
while Salido and the Salido faction were in charge of the mining site and securing the
necessary permits.
 They entered into an Agreement to Incorporate (Agreement), wherein it was stipulated
that San Juan would advance the paid-up subscription for Aramaywan amounting to
P2,500,000.00 and would assure the payment of the subscription of the capital stock of
Narra Mining. In exchange, San Juan would own 55% of the stocks of Aramaywan and
35% of the stocks of Narra Mining.
 CASE LAW:
SALIDO V. ARMAYAN CORP. G.R. NO.
233857
Facts:

 To comply with his obligation, San Juan advanced the P2,500,000.00 paid-up
subscription of Aramaywan. This is evidenced by a Standard Chartered Bank Certificate
indicating that the amount of P2,500,000.00 was deposited in San Juan's name as
treasurer, held by him in trust for the corporation.
 In its first Board Meeting, Salido claimed that San Juan delivered only P932,209.16 in
cash during the incorporation process of the corporation. Because of the supposed
breached of of obligation, Salido made a proposal to reduce San Juan's shares in
Aramaywan from 55% to 15%. 40% of San Juan’s share was held in treasury.
 This prompted San Juan to file a case before the RTC. RTC decided in favor of Salido
stating that the reduction of San Juan’s ownership was valid and binding between the
parties.

CA reversed the RTC decision.

 CASE LAW:
SALIDO V. ARMAYAN CORP. G.R. NO.
233857
Issue:

WON the reduction of San Juan’s share and holding it as treasury shares was valid.
 CASE LAW:
SALIDO V. ARMAYAN CORP. G.R. NO.
233857
Ruling:

 No. The corporate acts on the matter was invalid.

 Batas Pambansa Blg. 68, or the Corporation Code, the law applicable at the time the
events in this case occurred, clearly sets out the parameters when a corporation may
reacquire its shares and convert them into treasury shares. According to Section 9 of
the Corporation Code, "[t]reasury shares are shares of stock which have been issued
and fully paid for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means." Apart from reacquiring the
shares through some lawful means, the Corporation Code is also explicit that while a
corporation has the power to purchase or acquire its own shares, the corporation must
have unrestricted retained earnings in its books to cover the shares to be purchased or
acquired. In addition, in cases where the reason for reacquiring the shares is because
of the unpaid subscription, the Corporation Code is likewise explicit that the corporation
must purchase the same during a delinquency sale.
 CASE LAW:
SALIDO V. ARMAYAN CORP. G.R. NO.
233857
Ruling:

 The corporation do not have an unrestricted retained earnings as required by law. In

addition, the reacquisition of the alleged unpaid subscribed shares were not made in a
delinquency sale.
 The trust fund doctrine backstops the requirement of unrestricted retained earnings to
fund the payment of the shares of stocks of the withdrawing stockholders. Under the
trust fund doctrine, "the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors, who are preferred in
the distribution of corporate assets." Thus, "[t]he creditors of a corporation have the
right to assume that the board of directors will not use the assets of the corporation to
purchase its own stock for as long as the corporation has outstanding debts and
liabilities. There can be no distribution of assets among the stockholders without first
paying corporate debts."
 Subscription receivables are in the form of corporate asset. Thus, Trust Fund Doctrine
applies.
 CASE LAW:
SALIDO V. ARMAYAN CORP. G.R. NO.
233857
Ruling:

 In this case, there was no showing that, at the time the reduction of San Juan's shares
was made, Aramaywan had unrestricted retained earnings in its books. Neither was it
shown that it did not have creditors or that they were already paid before the agreement
to release San Juan was made.
 In any event, if it were true that San Juan had unpaid subscriptions, the Corporation
Code has provided a procedure for the demand of such payment and the holding of a
delinquency sale in case of continued non-payment. Thus, even assuming it was true
that San Juan had unpaid subscriptions, simply agreeing in a meeting for their
reduction, thereby releasing the stockholder from his obligation to pay the unpaid
subscriptions, cannot be the mode by which said unpaid subscriptions are settled. To
allow corporations to do such an act would violate the aforementioned trust fund
doctrine in corporation law.
Section 10
Number and Qualifications of Incorporators. Any person,
partnership, association or corporation, singly or jointly with others but
not more than fifteen (15) in number, may organize a corporation for
any lawful purpose or purposes:
Provided, That natural persons who are licensed to practice a
profession, and partnerships or associations organized for the purpose
of practicing a profession, shall not be allowed to organize as a
corporation unless otherwise provided under special laws.
lncorporators who are natural persons must be of legal age.

Each incorporator of a stock corporation must own or be a subscriber to

at least one (1) share of the capital stockA corporation with a single
stockholder is considered a One Person Corporation as described in
Title XIII, Chapter Ill of this Code
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