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Conversion of preferred stocks to common shares

The conversion of preferred stocks into common shares may be reflected by footnotes in the corporation’s financial statement and by amendment of the articles of incorporation upon conversion. (SEC Opinion, May 14, 1975.)

Nature and function of par value stock—

The function of the par value share is to fix its minimum subscription price. However, the par value does not necessarily reflect the true value of the share. The book value of a share which may be higher or lower than the par value cannot be definitely fixed in the articles of incorporation or in the certificate of stock.

Advantages of par value shares—

The advantages of par value shares are:

(1) Ease of sale;

(2) Greater protection to creditors;

(3) Unlikelihood of sale of subsequently issued shares at a lower price;

(4) Unlikelihood of the distribution of dividends that are ostensible profits;

(5) Reduced danger of surplus becoming “frozen” in a merger or consolidation.

Disadvantages of the par value shares—

They are:

(1) Liability by subscribers for unpaid subscription;

(2) Inaccurate representation as to its true value.

Effect of issuance of no par value shares—

The issuance of no par value shares shall result in the shares being 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.

Advantages of no par value shares—

The advantages of no par value shares are the following:

(1) Less likely to mislead naive investors who may take the par value printed on the certificate as a representation of its present actual value;

(2) Flexibility of price;

(3) Disappearance of personal liability for unpaid subscription;

(4) Affords remedy for or relief from the evil of over-capitalization;

(5) Stock dividends are more easily’ issued, simplifying accounting procedure;

(6) No par value share tells no untruth concerning the value of the shareholder’s contribution.

Disadvantages of no par value shares—

They are:

(1) Large issues of stock for property;

(2) Concealment of money or property represented by the shares ;

(3) Promotes issuance of watered stock;

(4) Lesser protection to creditors.

Voting rights of shares of stock—

As already stated, shares of stock may, among others, differ on voting rights subject to the limitation that where there are shares denied the right to vote as stated in the articles of incorporation (and in the certificates of stock), there must always exist along with those non-voting shares, stocks or shares fully entitled to vote.

But non-voting shares are entitled to vote on certain matters that may affect directly or indirectly the proprietary rights or interest in the corporation of the holders of non-voting shares. These matters on which non-voting shares are entitled to vote are:

(1) Amendment of the articles of incorporation;

(2) Adoption and amendment of by-laws ;

(3) Sale, lease, exchange, etc. of all or substantially all of the corporate property;

(4) Incurring, creating or increasing bonded indebtedness;

(5) Increase or decrease of capital stock;

(6) In cases of corporate mergers or consolidations;

(7) Investment of corporate funds in another corporation, or other corporations;

(8) Dissolution of the corporation.

In all cases other than the above, like election and removal of directors, approval of declaration of stock dividends, delegation to the board to amend or repeal by-laws, etc., non-voting shares are not entitled to vote.

Situs of shares of stock—

The rules on situs (location) of shares of stock are the following:

(1) In general, the situs of shares of stock shall be the owner’s domicile.

(2) For purposes of execution, attachment and garnishment, the situs of shares of stock is the domicile of the corporation

(3) For purposes of registering the chattel mortgage over shares of stock, the situs of shares of stock shall be the province in which the corporation has its principal place of business.

(4) For purposes of taxation, it is the domicile of the corporation that is generally controlling.

Shareholder is not creditor on his stock investment—

It is settled that when a person makes an investment as a shareholder in a corporation, he is not a creditor of the latter. He is a plain investor who may rise nd fall with the financial success or failure of the corporation. Thus, the Supreme Court held that a shareholder cannot compensate his shareholding with what he owes the corporation by way of an ordinary loan. Upon demand of the corporation for payment of the loan, the shareholder must pay the same and he cannot claim extinguishment of the debt by com-
pensating the same with his shareholding. (See Garcia vs. Lim Chu Sing, 59 Phil. 562.)

Sec. 7. Founders’ shares.—Founders’ shares classified as such in the articles of incorporation 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 Securities and Exchange Commission. The five (5) year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission.

Rights and privileges of founders’ shares—

Where a corporation is organized by few persons (may be five or nine) who may be close friends or relatives, and where they have high hopes that he corporation will succeed, these organizers create what is called as founders’ shares with special rights and privileges (a) assto dividend payments; and (b) as to voting rights. In order to retain control of the corporation, these founders’ shares owned by the organizers are the only shares entitled to vote for directors and of course, these founders are the ones voted as directors of the corporation. And the above section provides that if the exclusive privilege to vote and be voted for in the election of directors is granted to owners of founders’ shares, this exclusive privilege must be good for a period not exceeding five years, and subject to approval by the Securities and Exchange Commission, the five-year period being reckoned from the date of the SEC approval.

Sec. 8. Redeemable shares.—Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation 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, which terms and conditions must also be stated in the certificate of stock representing said shares. (n)