CHAPTER 6

INTRODUCTION
TO CORPORATION
Learning Objectives:
1. Define corporation and related terms
2. Discuss the characteristics of corporation
3. Differentiate the various classes of corporation
4. Enumerate the steps in organizing a corporation
5. Identify the various kinds of shares of stocks.
 WHY ARE CORPORATIONS FORMED?
The need to expand business operations brought about by the industrial
revolution during the mid-eighteenth to the mid-nineteenth century
required increasingly large amounts of money to build factories and
purchase machineries and equipment.

These amounts that must be raised generally require contributions from

many individuals which the sole proprietor or the partners may not be
able to raise.
WHY ARE CORPORATIONS FORMED?
• Many businesses in the Philippines are organized as
corporation since the ownership interests are readily
transferable shares of stocks.
• Shares of corporation can be traded freely without
interrupting the business operations
• By incorporating, the enterprise is communicating efforts
for stability or permanence to clients and vendors.
• The many advantages of corporation led to the increasing
formation of corporation in the country
Revised Corporation Code of the Philippines
• RA 11232, otherwise known as “The Revised Corporation
Code of the Philippines” was approved on February 20, 2019.
• It repealed the Batas Pambansa Blg. 68, or “The Corporation
Code of the Philippines”
DEFINITION OF CORPORATION

Section 2 of the new Code, defined 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 incident to its existence.
CHARACTERISTICS OF A CORPORATION
1. Separate legal entity
A corporation is a legal or juridical person with a
personality separate and apart from its
individual members or stockholders who, as
natural persons, are merged in the corporate
body.

Corporation -
artificial being shareholders
2. Created by operation of law

The corporation cannot come into existence by

mere agreement of the parties. It is created by
law.

LAW –(CORPORATIONS MUST BE

MERE
REGISTERED IN THE APPROPRIATE
AGREEMENT
GOVERNMENT AGENCY
3. Continuing Lifespan or perpetual existence

A corporation has the capacity of continuous existence

irrespective of the death, withdrawal, insolvency or
incapacity of the individual members or stockholders, and
regardless of the transfer of their interest or shares of stock.

Section 11 of the new Code states that a corporation shall have

perpetual existence unless its Articles of Incorporation
provides otherwise.

Ownership may change anytime but

the corporation is not dissolved
4. Powers, attributes and properties
authorized by law

A corporation, being a mere creation by law has

only the powers, attributes and properties
expressly authorized by law or incident to its
existence.
5. Transferability of ownership

A stockholder (owner) may sell his share of stock without the consent of the other
stockholders.

For example, Mrs. Lind has a 30% interest (200,000 shares) in Trust Co. Mrs. Lind may sell
either a portion or all of his ownership interest to other parties through a broker without
getting permission from other shareholders.

I WILL SELL MY
INTEREST NOW.

OWNERSHIP MAY BE
TRANSFERRED
Broker
6. Limited liability

If ever the business falls, the loss that a stockholder could possibly suffer is limited
to his investment.

They will not be liable to pay for the debts of the corporation beyond their
investments.

The maximum loss that shareholders may incur will only be to the amount of their
investments to the corporation.

I invested $20,000 worth of stocks.

The company went bankrupt. I lost
$ 20,000
ADVANTAGES OF A CORPORATION

1. The corporation has a continuous existence.

2. Transfer of ownership or share of stocks can be

transacted without the consent of the other
stockholders.

3. Owners of a corporation have limited liability.

4. Financing is easier to obtain

 ADVANTAGES OF A CORPORATION

5. A corporation is well adapted to large-scale business that

requires large investment of capital.

6. It has the advantage of efficiency and flexibility in its

management because of its ability to hire the best in
managerial talent. Its management is centralized in the
board of directors.

7. The stockholders are not general agents of the business.

 DISADVANTAGES OF THE CORPORATION
1. The corporation is relatively complicated and costly to
organize.

2. Its credit is weakened by the limited liability of the

stockholders.

3. It is subject to a greater degree of governmental control

and supervision than the sole proprietorship and
partnership.
DISADVANTAGES OF THE CORPORATION

4. The stockholders’ voting rights have become theoretical

particularly in large corporations because of the use of
proxies and widespread ownership.

5. The power struggle in a corporation between the

majority and minority stockholders would usually
results to the overruling of the minority in
policymaking and other important management
matters.

Majority – Minority –
80% 20%
 CLASSES OF CORPORATION

A. Corporations formed and organized under the Corporation Code maybe:

1. Stock corporations are corporations that have share capital divided into shares
and are authorized to distribute to the holder of such shares dividends or allotments
of the surplus profits on the basis of shares held. Owners of stock corporations are
called stockholders or shareholders
(Examples: Jollibee Corporation, San Miguel Corporation,
Nestle, PLDT)

2. Non-stock corporations are private corporations which do not issue stocks but
whose capital comes from fees paid by the individuals composing it. They are created
not for profit but for public good and welfare. The owners of the non-stock
corporation are called members.
(Examples: Central, Philippine University, Filamer Christian University)
B. OTHER CLASSIFICATIONS OF CORPORATION

1. As to whether they are for religious purpose or not.

 Ecclesiastical corporation is a corporation organized for religious

purposes.

 Lay corporation is a corporation organized for a purpose other than

for religion

i. Eleemosynary corporation is a corporation which is organized for

charitable purpose.
ii. Civil corporation is a corporation organized for business or profit.
2. As to Law of Creation

 Domestic corporation is one which is organized under the

Philippine laws (Queenbank, Mabuhay Satellite Corporation)

 Foreign corporation is a corporation formed, organized or

existing under any law other than those of the Philippines, and
whose laws allow Filipino citizens and corporations to do business in
its own country or State (Sec 140)
3. As to whether they are open to the public or not

 Close corporation is a corporation which is

limited to selected persons or members of family. The
stockholders shall not exceed 20 persons.

 Open corporation is a corporation which is open to

any person who would like to be a stockholder or member
thereto.
4. As to their legal right to corporate existence.

 De jure corporation is a corporation which exists

both in fact and in law. It exists in fact because it is
operating as a corporation. It exists in law because it has
complied with the legal requirements.

 De facto corporation is a corporation which exists

in fact but not in law.
5. As to their relation to another corporation

 Parent or holding corporation is a corporation which

is so related to another corporation that it has the power
either, directly or indirectly to, elect the majority of the
directors of such corporation.

Subsidiary corporation is a corporation which is so

related to another corporation that the majority of the
directors can be elected either directly or indirectly, by such
corporation.
6. As to purpose

a. Public corporation is a corporation formed or organized for the

government of a portion of the state. In the Philippines, the public
corporations are the provinces, cities, municipalities and barrios.

b. Private corporation is formed for some private purposes,

benefit, aim or end. Private corporations include:
i. Stock corporation
ii. Non- stock corporation
iii. Quasi-public corporations – private corporations
performing public functions (MERALCO)
7. One Person Corporation

The new Code states that a One Person Corporation is a

corporation with a single stockholder, Provided, that only a natural
person, trust or an estate may form a One Person Corporation. A
One Person Corporation shall indicate the letters “OPC”, either
below or at the end of its corporate name

The OPC is not required to submit and file corporate by-laws.

Many corporations which are organized in one state
or country extend their corporate business in other
territories or countries.

They have become multi-national corporations.

MANAGEMENT OF A CORPORATION

The governing body of the corporation is the Board of Directors.

The board unless restricted by its by–laws shall have full control and
management of the corporate business and property.

The board of directors is responsible for the formulation of the overall

policies of the corporation.

If the corporation is a non-stock corporation, the

governing body is the Board of Trustees.
COMPONENTS OF A CORPORATION
1. Corporators - those who compose the corporation, whether
stockholders, or members.

2. Incorporators are those corporators originally forming and

composing the corporation, & are signatories thereof. Each
incorporator must own or be a subscriber to at least one
share of capital stock.

3. Stockholders or shareholders are owners of the shares

of stock in a stock corporation either by subscription or by
direct purchase or by transfer of stock from another
stockholder

4. Members are corporators of a non-stock corporation

Persons who play important roles in the formation of a
corporation

• Promoters - brings about the formation of a corporation

• Subscribers - agrees to take and pay for the orginal
unissued shares of a corporation
• Underwriters - usually an investment bankers who have
agreed, alone or with others, to buy at stated terms an
entire or substantial part of an issue of securities
STEPS IN ORGANIZING A CORPORATION

The Corporation Code of the Philippines provides that five or

more persons, not exceeding fifteen, majority of whom are
residents of the Philippines, may form a private
corporation.
STEPS IN ORGANIZING A CORPORATION
1. Promotion – involves a number of business operations by which a
company is generally brought into existence. This involves
preliminary arrangements.
2. Incorporation – process of formalizing the organization of the
corporation. It includes:
a. Drafting and execution of the Articles of Incorporation
b. Filing of Articles of Incorporation
c. Payment of the filing and publication fees.
d. Issuance by the SEC of the certificate of incorporation

The Code states that a corporation may be formed by asingle

stockholder. This corporation is the “One Person Corporation”.
Only a natural person, trust or an estate may form a OPC.
3. Commencement of Operation

• The corporation commences to have a juridical personality and legal

existence from the time the Certificate of Incorporation is
issued.

• Sec 21 provides that if a corporation does not formally organize and

commence the transaction of its business within 5 years from the
date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the 5 year period.
• If the corporation has commenced the transaction of its
business but subsequently becomes inoperative for a
period of at least 5 years, the Commission may after due
notice and hearing, place the corporation under the
deliquent status. A period of 2 years is given to
corporation to resume operations and comply with all the
requirements that the commission prescribes.
MANAGEMENT OF CORPORATION
• Sec 22 of the New Code states that the board of directors or
trustees shall exercise the corporate powers. conduct all
business and control all properties of the corporation.

• The Board of Directors is the managing body of a stock

corporation while the Board ofTrustees is the managing
body of a non-stock corporation.
ARTICLES OF INCORPORATION

The Articles of Incorporation - document prepared by

the persons establishing a corporation and are filed with
the Securities and Exchange Commission containing the
matters required by the code.

A copy of the articles filed, together with the certificate of

incorporation returned to the corporation, becomes its
corporate charter.
The Articles of Incorporation contain
the following information:
1. The name of the corporation
2. Purpose or purposes
3. Principal place of business
4. Term of existence
5. Name, residence and nationalities of the incorporators
6. Number of directors or trustees, which shall not be more than 15
7. Names, nationalities and residence of the persons who act as
Directors or Trustees until the first regular directors or trustees
are elected and qualified
8. If it be a stock corporation, the amount of its authorized capital
stock in lawful money of the Philippines, the number of shares
into which it is divided, and in case the shares are par value
shares, the par value of each, the names, nationalities and
residences of the original subscribers and the amount subscribed
and paid by each on his subscription and a statement that some
or all of the shares are without par value if applicable.

9. If it is a non-stock corporation, the amount of its capital, the

names, nationalities and residence of the contributors and the
amount contributed by each.

10. Other matters consistent with law and which the incorporators
may deem necessary or convenient
STOCK CERTIFICATE OR SHARE CERTIFICATE

A stock certificate or share certificate is the instrument or

document that evidences the ownership of a share of stock.

Section 63 of the Corporation Code states that no certificate of

stock shall be issued to as subscriber until the full amount of his
subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
BY-LAWS
When the certificate of incorporation is issued, the
corporation comes into existence.
Then, the corporation needs to take actions to
accomplish its purpose.
The corporation must have the executive officers
charged with the tasks of managing the business as
well as the rules to govern the internal affairs of the
corporation.
It must have the means to accomplish its purpose.
Thus, the need of the by-laws.
By-laws are the rules of actions adopted by the
corporation for its internal government and for
the government of its officers and of its
stockholders or members.
The following must be stated in the by-laws:

1. The time, place and manner of calling and conducting regular or

special meetings of the directors or trustees.
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members.
3. The required quorum in meetings of stockholders or members and
the manner of voting there in.
4. The modes by which the stockholders, members, directors, trustee
may attend meetings and cast their votes.
5. The form of proxies of stockholders and members and the manner
of voting them.
The following must be stated in the by-laws:

6. The directors’ or trustees’ qualifications, duties and

responsibilities, the guidelines
for setting the compensation of directors or trustees and
officers, and the maximum
number of other board representations that an independent
director or trustee may
have which shall, in no case, be more than the number
prescribed by the
Commission.
7. The time for holding the annual election of
directors or trustees and the manner of giving notice
thereof.
8. The manner of election and the term of office of all
officers other than directors or trustees.
9. The penalties for violation of the by-laws.
10. In the case of stock corporation, the manner of
issuing stock certificates.
11. Such other matters as may be necessary for the
proper or convenient transaction of the corporate
business and affairs.
RIGHTS OF THE STOCKHOLDERS
1. Right to vote at stockholders’ meeting
2. Right to share in the profits by receiving dividends
as declared by the Board of Directors
3. Right to the net corporate assets after liquidation
4. Right of pre-emption in the issuance of new shares
5. Right to inspect the books of the corporation and
subsidiary corporation
6. Right to request financial statements and reports
7. Right to sue the corporation
8. Right to sell or otherwise dispose of his share of
capital stock
9. Right to adopt and amend by-laws
10. Right to elect and remove directors.
PRE-EMPTIVE RIGHT
Section 38 of the Revised Corporation Code provides that all stockholders
of a stock corporation shall enjoy pre-emptive right to subscribe to
all issues or disposition of shares of any class, in proportion to
their respective holdings, unless such right is denied by the Articles
of Incorporation or an amendment thereto.

So, whenever the capital stock of a corporation is increased and new

shares of stocks are issued, the new issue must be offered first to
the existing stockholders before they are offered to the general
public to preserve their proportionate influence and interest in the
corporation and the relative value of their holdings.
Illustration:

RR Corporation has authorized share capital of P 5,000,000

divided into 5,000 shares with par value of P 1,000.
Subsequently, the share capital is increased to P7,500,000 (to
2,500 more shares). Ruby Lee owns 500 shares (10%). Upon
the increase of the authorized share capital, Ruby Lee must be
given the right to subscribe to 250 new shares before they are
offered to the public so that she can maintain her
proportionate interest.
 Before After the increase

Authorized share capital and P5,000,000 P7,500,000

authorized shares 5,000 shares 7,500 shares

No. of shares held by Ruby 500 500+250=750

Lee
Interest of Ruby Lee 500 500 + 250
--------- = 10% ---------------- =
5,000 10%
5,000+2,500
MINIMUM CAPITAL STOCK NOT REQUIRED OF STOCK
CORPORATIONS (Sec 12).

Stock corporations shall not be required to have a minimum

capital stock, except as otherwise specifically provided by special
law. However, the 25% subscription and 25% paid up capital rule is
required in case of increase of the authorized capital stock. The 25%
minimum paid up capital requirements earned does not apply to
subsequent subscription of the unsubscribed shares of the
corporation.
CORPORATE BOOKS AND RECORDS
Section 73 requires every private corporation, stock or non-stock, to
keep books and records at its principal office. These records
include:

1. Articles of incorporation and by-laws of the corporation

and all their amendments
2. The current ownership structure and voting rights of the
corporation
3. Names and addresses of all members of the board of directors
or trustees and the executive officers
4. A record of all business transactions. Books of accounts such
as journals and ledger represent the records of business
transactions.
CORPORATE BOOKS AND RECORDS

5. Minutes books which contain the minutes of all meetings

of shareholders, members or of the board of directors or
trustees.
6. Stock and transfer book which is the record of all names
of the shareholders, installment paid and unpaid by the
stockholders and dates of payments, alienation, sales or
transfer of stocks, the dates thereof, and by and to whom
made.
7. Subscription book which is a book of printed blank
subscription forms
CORPORATE BOOKS AND RECORDS

8. Subscriber’s ledger which is a subsidiary record

containing accounts of individual subscribers. The controlling
account pertaining to this is the Subscriber’s receivable
account
9. Shareholders’ ledger which is a subsidiary for the capital
stock issued reporting the number of shares issued to each
shareholder.
10. Share certificate book which is a book of printed blank
share certificate.
TERMINOLOGIES

The Philippine Accounting Standards (PAS) has adopted

terminologies used in the International Accounting
Standards.

Some terms related to accounting for corporate business

transactions are:
International Accounting Equivalent Terms in the
Standard Terms Philippines
Equity Stockholders’ Equity
Share capital Capital stock
Subscribed share capital Subscribed capital stock
Preference share capital Preferred stock
Ordinary share capital Common stock
Share premium Additional paid in capital
(APIC)
Accumulated profits (losses) Retained earnings (deficit)
Appropriation reserve Retained earnings
appropriated

Revaluation reserve Revaluation surplus

Treasury share Treasury stock
 Capital stock or Share Capital
Capital stock or share capital is the amount fixed in the articles of
incorporation, to be subscribed and paid in or secured to be paid in by the
shareholders of a corporation, either in money or property, labor or
services, at the organization of the corporation or afterwards and upon
which it is to conduct its operation.

The share capital limits the maximum amount or number of shares

that may be issued by the corporation without formal amendment of
the articles of incorporation.
Share capital remains the same even though the actual
value of the shares as determined by the assets of
the corporation is diminished or increased.

The share capital is divided into shares.

A share represents the interest or rights of a

shareholder. The share certificate is an evidence of
the ownership of shares.
 Authorized capital stock or Authorized
Share Capital

It is synonymous with share capital where the shares of the

corporation have par value.

But, if the shares of stocks have no par or stated value, the

corporation has no authorized share capital but it has capital
stock or share capital, the amount of which is not specified in
the articles of incorporation as it cannot be determined until
the shares have been issued.
 Subscribed capital stock or Subscribed
Share Capital

It is the amount of the capital stock subscribed whether fully paid

or not.

It connotes an original subscription contract for the acquisition

by a subscriber of the unissued shares in the corporation
 Outstanding capital stock or Outstanding
Share Capital
It is the portion of the share capital which is issued and on the
hands of the stockholders.

Revised Corporation Code Sec. 173 defines outstanding capital

stock as the total shares issued to subscribers or stockholders,
whether or not fully or partially paid (as long as there is a
binding subscription agreement), except treasury shares.
Paid-up capital

It is the portion of the subscription or outstanding

share capital that is paid.
Contributed or Paid-in Capital

Contributed capital represents amount invested or contributed by

owners.

This category is composed of

a) share capital
b) share premium.

Share capital represents the contribution equal to the par or

stated value of the shares purchased by owners or the total
contribution by owners, in case of no-par shares.
Share premium

Share premium represents contribution in excess of the

par or stated value of the share capital.

This may arise from various share capital transactions and other
transactions with shareholders such as: issuance of share
capital in excess of par, resale or retirement of treasury share,
distribution of stock dividends, issuance of detachable stock
purchase warrants, changes in par value (stock
recapitalization), donation of assets to the corporation, and
transactions resulting to corporate readjustment or quasi-
reorganization
Unissued share capital
It is the portion of the share capital that is not issued to
stockholders or held as treasury shares
Legal capital
Is that portion of the paid in capital arising from issuance
of capital stock which cannot be returned to the
stockholders in any form during the life time of the
corporation.

Capital stock represents the legal capital. The capital stock

is considered as a trust fund for the protection of
creditors according to the trust fund doctrine.

It is illegal to return such legal capital during the lifetime

of the corporation.

The corporation can pay dividends but limited only to the

retained earnings balance except when the corporation is
a wasting asset corporation.
The amount of legal capital is determined as follow:

a. In the case of par value stock, legal capital is the aggregate

par value of the shares issued and subscribed.

b. In the case of no par value stock, legal capital is the total

peso amount of consideration received or receivable on
shares issued and subscribed from stockholders including
the excess over the stated value.
Illustration:
The Articles of Incorporation of JUST Corporation
provides that the authorized share capital is
P2,000,000 divided into 20,000 shares of P100
par value share capital. Ten thousand shares were
subscribed at par and one thousand shares were
subscribed at P 110. A total of P 600,000 was
received: P 550,000 from the subscriptions of the
10,000 shares and P 50,000 from the
subscriptions of the 1,000 shares.
The legal capital is P 1,100,000 which is equal to the
aggregate par value of the shares issued and
subscribed.

10,000 shares x P 100 = P 1,000,000

1,000 shares x P 100 = 100,000
Total P 1,100,000
=========

The paid up capital is P 600,000

2. Assume that the corporation is a no par but with
a stated value share.

The legal capital is P 1,110,000 which is equal to

the total peso amount of consideration received
or receivable.

10,000 shares x P 100 = P 1,000,000

1,000 shares x P 110 = 110,000
Total P 1,110,000
==========
 CLASSIFICATION OF SHARES
Section 6 of the Corporation Code states that the shares of stock
of a stock corporation may be divided into classes or series of
shares, or both, any of which classes or series of shares may
have such rights, privileges of restrictions as may be stated in
the articles of incorporation, provided that no share may be
deprived of voting rights, except those classified and issued as
preferred or redeemable shares, unless otherwise
provided in the Code.
These classes or series are grouped as follows:

1. Voting and non-voting shares

Voting shares are those entitled to vote in all business
matters affecting the corporation which require the
vote of the stockholders.

Non-voting shares as a rule are not allowed to vote

except in the following cases: amendment of the
Articles of Incorporation, adoption, amendment, or
repeal of by- laws, sale or mortgage of all or most of
corporate property, increase or decrease of capital
stock, investment of corporate funds in other
corporation or business, and dissolution of the
corporation.
2. Par value and No-par Value shares
Par value share is a share that has a fixed or definite
value in the articles of incorporation

The amount per share is printed on the stock certificate.

The par value establishes the nominal value per share and
is the minimum amount that must be paid in by each
stockholder.

Banks, trust companies, insurance companies, public

utilities, and building and loan associations issue only
par value shares of stock.
A no-par value share is a share with no par amount
printed on the share certificate.

These no par value shares may be issued from time to

time at different prices, as the law provides, at no
less than P 5.00 per share.

All proceeds from the issue or sale of such no-par

value shares received by the corporation shall be
treated as capital and shall not be available for
distribution as dividends to stockholders.
The Corporation Code of the Philippines states that
the no-par stocks shall not be issued for an amount
less than P 5.00 per share.

It may be issued from time to time at different prices

at an amount no less than P 5.00 per share.

All proceeds from the issue or sale of such no-par

value shares received by the corporation shall be
treated as capital and shall not be available for
distribution as dividends to shareholders.
Kinds of Is there a value Is there a Minimum
shares printed in the value issuance
articles of printed in price
incorporation? the share
certificate?
Par value share Yes Yes Par value

No par value Maybe printed None P5.00

share
3. Ordinary share and Preference share
In the absence of classification made in the Articles of
Incorporation, all shares of stock are considered
ordinary shares, the stockholders of which enjoy the
same equal rights and privileges.

Ordinary share or Common stock is a class of

ownership interest in a corporation which exercises
no special preference over any other class of stock.
It does not have a fixed or specific return on
investment. Its return on investment depends on the
operations of the corporation.

It is usually called the risk stock in that it is the first

to shoulder the losses but benefits the most in case
there is big profit.

It represents the residual ownership interest in the

corporation.
Preference share or Preferred stock is a special class
of share that possesses certain preferential rights that
are not found in ordinary shares.

It is usually issued with a par value and the dividend of the

preference share is expressed as a percentage of the par
value.

Preference shares are offered by the corporation to induce

moneyed people to invest in the corporation by giving
them certain preferential rights.

The most attractive of the rights are the first preference in

the distribution of dividends and in the distribution of
corporate assets in the event of dissolution.
The preferred shareholders have only a limited or fixed
return on investment.

A holder of P100 par value, 10% preference share is

entitled to an annual dividend if declared of 10% of P
100 or P 10.

For no-par stock an amount may be declared as dividend

per share like P5/Preference share.

A stockholder holding 100 shares of preferred stock will

receive P500 (100 shares x P5) as dividends.

Preference shareholders are not allowed to vote their

shares in corporate business matters.
4. Promotion shares are issued to promoters or
entrepreneurs for services rendered in the organization,
promotion and launching of the corporation.

5. Treasury shares are shares which have been issued by the

corporation as fully paid and later reacquired by the
corporation through purchase, redemption, donation, or other
lawful means.

6. Escrow shares are shares of stock subject to an escrow

agreement wherein such stocks are deposited by the seller or
his agent with a bank or a third party, and to be delivered by
said bank or third party to the buyer or subscriber only upon
the fulfillment of the stipulated suspensive condition.
7. Founder’s shares of stock – one issued to the
founders of the corporation which enjoy certain rights
and privileges as stipulated in the Articles of
Incorporation and which are not ordinarily given to
owners of other stocks.

8. Redeemable shares are otherwise known as callable

shares. These are usually preference shares which are
issued only under terms and conditions provided in the
Articles of Incorporation and in the share certificate.
They are subject to redemption after the lapse of a
specified period of time by the corporation or the
stockholder or both at a price as may be agreed upon.
 CLASSIFICATION OF PREFERENCE SHARES

A. Preferred shares as to dividends – It is a share the

holder of which is entitled to receive dividends on said shares to
the extent agreed upon before any dividends are paid to
ordinary shareholders.
1. Cumulative preference share is a share which
entitles the holder thereof not only to the
payment of current dividends but also to the
dividends in arrears.
The holder of the share is entitled to the
receipt of previous years unpaid dividends before
the ordinary shareholders will receive payment.
2. Non-cumulative preference share entitles the
holder of the receipt of current dividends only
upon declaration.
Unpaid dividends of the previous years are
not considered.
3. Participating preference share is a share which
gives the holder thereof not only the right to receive
the stipulated dividends at the preferred rate but also
to participate with the holders of ordinary shares in
the remaining profits prorata after ordinary shares
have been paid the amount of the dividends at the
preferred rate.

4. Non-participating preference share is a share

which entitles the holder thereof to receive the
preferred dividends stipulated but the balance, if any,
is given entirely to the ordinary share.
B. Preferred shares as to asset – It is a share
which gives the holder thereof preference in the
distribution of the asset of the corporation in
case of liquidation.
C. Other Classification of Preference Shares

1. Convertible preference share entitles the holder the

option to exchange the stock for some other security of
issuing corporation.

2. Callable preference share is one which can be called

in for redemption at a specified price at the option of the
corporation. Technically, if the preference share is
redeemable at the option of the holder or if the
preference share has a mandatory redemption, it is
known as redeemable preference share.
 AUTHORIZED SHARES, ISSUED SHARES AND
OUTSTANDING SHARES

Authorized shares refer to the maximum number of shares

that the corporation may issue as stated in the articles of
incorporation

Issued shares represent the number of shares that the

corporation has issued to its shareholders as of a specific date

Share capital ÷ par value = issued shares

Outstanding shares are shares that have been
issued and are still in the hands of the shareholders
as of a specific date.

Issued shares - Treasury shares = Outstanding

shares
For example, Sunshine Corp. is authorized to issue P
1,000,000 ordinary share capital divided into 10,000
shares at P 100 par on January 3, 2020. It issued 7,000
shares at par from January to May 2020. On December
2, Sunshine Corporation reacquired 100 shares at par.

Determine the total number of

a. authorized shares
b. issued shares
c. treasury shares
d. outstanding shares
Authorized shares - 10,000 shares
Issued shares - 7,000 shares
Treasury shares - 100 shares
Outstanding shares - 6,900 shares

Issued shares 7,000

Treasury shares ( 100)
Outstanding shares 6,900
=====
 CAPITAL DISTINGUISHED FROM CAPITAL
STOCK OR SHARE CAPITAL
1. Capital is the actual corporate property. It is a concrete thing.
Capital stock is an amount. It is something abstract.
2. Capital fluctuates or varies from day to day as there are profits or
losses or depreciation of corporate assets. A capital stock is an
amount fixed in the Articles of Incorporation and is unaffected by
the profits and losses.
3. Capital belongs to the corporation while the capital stock when
issued belongs to the shareholders.
ADVANTAGES OF NO PAR VALUE OVER
THE PAR VALUE STOCK
1. The no–par value share does not pretend to place a definite money
value on the share, and therefore is less likely to mislead investors.

2. There is flexibility of the price of the shares to met market prices.

3. There is a disappearance of personal liability for the unpaid stock

subscription as may be encountered in the case of par value stock.

4. No-par value share provides a remedy of the over-capitalization and

stock watering of the corporation.
ADVANTAGES OF PAR VALUE SHARE

1. Par value shares are easily sold as the public is more

attracted to buy this kind of share.

2. There is a greater protection to creditors and there is an

unlikelihood of sale of subsequently issued shares at a
lower price.