Components of a corporation

Corporators: Those who compose a corporation, whether as stockholders or members. The moment these persons cease to own stocks in stock corporations, or terminate membership in non-stock corporations, they cease to be corporators.

Stockholders: This refers to owners of shares of stock in a stock corporation. Members: This refers to the corporators of a corporation which has no capital stocks.

Components of a corporation
Incorporators: They are those mentioned in the Articles of Incorporation as originally forming and composing the corporation and who are signatories thereof. An incorporator remains as such although no longer connected with, or no longer having an interest in the corporation.

Qualifications of incorporators
1.

2.
3. 4. 5.

Natural person. Not less than 5 but not more than 15. Of legal age. Majority must be residents of the Philippines. Each must own or subscribe to at least one (1) share.

General Rule: Only natural persons can be incorporators. Exception: When otherwise allowed by law.

Promoters
This

refers to a person who, acting alone or with others, undertakes to form a corporation and to produce for it the rights, instrumentalities and capacity by which it is to carry out the purposes set forth in its charter, and to establish it as fully able to do its business.
promoter is considered an agent of the incorporators.

Promoters considered agents of a corporation

Promoters

are not agents of the corporation that comes into existence. Upon incorporation, the practice is for Board of Directors to pass a resolution ratifying contracts with the promoter. Then they became the agents of the corporation.

Subscribers
This

refers to persons who have agreed to take and pay for original unissued shares of a corporation formed or to be formed.

Underwriters
This

refers to a person who guarantees on a firm commitment and/ or declared best effort basis the distribution and sale of securities of any kind by another company.

Distinctions between corporators and incorporators

INCORPORATORS Necessarily a corporator CORPORATORS Not necessarily an incorporator

Signatory of the articles of incorporators.

Not signatory of the articles of incorporation

Does not cease to be an Cease to be a corporator by sale of incorporator upon sale of his shares. his shares. 5 to 15 persons. Exceptions: in case of cooperative incorporator of rural bank. Originally forms part of the corporation. No limit.

Not necessarily.

Filipino citizenship is not a requirement. Exceptions: when engaged in a business which is partly or wholly nationalized where they must be residents.

Share of stock
It

is an integral unit of a capital stock which represents proportionate interest to the corporations assets, profits, dividends and management.

Capital stock
The

amount fixed in the articles of incorporation to be subscribed and paid in or secured to be paid in by the stockholders, either in money, or property or services at the organization of the corporation, or afterwards and upon which the corporation is to conduct its operations.

Stated capital
The

capital stock divided into no par value shares.

Paid up capital
The

portion of the authorized capital stock which has been subscribed and actually paid.

Legal capital
Is

the portion of the paid in capital arising from the issuance of capital stock which cannot be returned to the stockholders in any form during the lifetime of the corporation.

Authorized capital stock

Amount

fixed in the Articles of Incorporation to be subscribed and paid by the stockholders of the corporation.

Subscribed capital stock

The

portion of the authorized capital stock that has been subscribed but not yet fully paid and therefore still unissued.

Outstanding capital stock

Refers

to the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is a binding subscription agreement.

Additional paid in capital

Is

the portion in capital representing excess over the par or stated value.

Retained earnings
Represents

the cumulative balance of periodic earnings, dividend distributions, fundamental errors and other capital adjustments.

Market value
The

price at which shares of capital stock are bought and sold by investors in the market.

Book value
The

amount per share that each shareholder would receive if the corporation were liquidated without incurring any further expenses and if assets were sold and liabilities liquidated at their recorded amounts.

Kinds or classifications of share

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Par value shares. No par value shares. Common shares. Preferred shares. Redeemable shares. Treasury shares. Founders shares. Voting shares. Non-voting shares. Convertible shares. Watered stock. Fractional share. Shares in escrow.

Par value shares

Shares

with a value fixed in the articles of incorporation and the certificates of stock. The par value fixes the minimum issue price of the shares.

Note:

A corporation cannot sell less than the par value but a shareholder may sell the same less than the par value because it is his.

No par value shares

Shares

with having no par value but have issued value stated in the certificate of stock or Articles of Incorporation.

Limitations on no par value shares

No par value shares cannot have an issued price less than P5.00. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends. They cannot be issued as preferred stocks. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares. Once issued, they are deemed fully paid and non-assessable.

Common shares
These

are ordinary and usually issued stocks without extraordinary rights and privileges and entitle the shareholder to a pro rata division of profits.

Preferred shares
These

entitle the shareholder to some priority on dividends when declared and asset distribution. Holders thereof cannot compel the corporation to give them dividends. The preference only applies once dividends are declared.

Kinds of preferred shares

Preferred shares as to assets: Shares which gives the holder preference in the distribution of the assets of the corporation in case of liquidation. Participating preferred shares entitled to participate with the common shares in excess distribution. Non-participating preferred shares not entitled to participate with the common shares in excess distribution.

Preferred shares as to dividends: Shares which are entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. Cumulative preferred shares if a dividend is omitted in any year, it must be made up in a later year before any dividend may be paid on the common shares in the later year. Non- cumulative preferred shares there is no need to make up for undeclared

Redeemable shares
These

are shares of stocks issued by a corporation which said corporation can purchase or take up from their holders as expressly provided for in the articles of incorporation and certificates of stock representing said shares.

Purchase by a corporation of its own shares

General Rule Corporation cannot purchase its own shares except out of current retained earnings. Exception: Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings provided that the corporation has after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of

 Note:

Corporations issuing redeemable shares with mandatory redemption features are required to set-up and maintain a sinking fund.

Unrestricted retained earnings

These

are surplus profits not subject to encumbrance.

Limitations on redeemable shares

Issuance of redeemable shares must be expressly provided in the articles of incorporation. The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Corporation Code.

Treasury shares
Shares

that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, and redemption or through some lawful means.

Other means for a corporation to reacquire treasury shares

1. 2. 3.

4.
5.

To collect or compromise unpaid indebtedness to the corporation. To eliminate fractional shares. To pay dissenting or withdrawing stockholders entitled to payment for their shares. Redemption Close corporation

Limitations on treasury shares

They may be re-issued or sold again as long as they are held by the corporation as treasury shares. 2. Cannot participate in dividends because dividends cannot be declared by the corporation itself.
1.

3.
4.

It cannot be represented during stockholders meetings. The amount if unrestricted retained earnings equivalent to the cost of treasury shares being held shall be restricted from being declared and issued as dividends.

Founders shares

Shares classified as such in the articles of incorporation which may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the Securities and Exchange Commission (SEC), and cannot exceed 5 years from the date of approval.

Voting shares
Shares

with a right to vote.

Non-voting shares
Shares

without right to vote. The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights.

Convertible shares
A share that is changeable by the stockholder from one class to another at a certain price and within a certain period. General rule: Stockholder may demand conversion at his pleasure. Exception: Otherwise restricted by the articles of incorporation.

Watered stock
This

refers to stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services.

Includes stocks:
1.

2.

3.

4.

Issued without consideration. Issued for a consideration other than cash, the fair valuation of which is less than its par or issued value. Issued as stock dividend when there are no sufficient retained earnings to justify it. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value.

Fractional share
A

share with a value of less than one full share.

Shares in escrow
Subject

to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be kept by the depositary until the performance of certain condition or the happening of a certain event contained in the agreement.

Classes of shares infinite

There

can be other classifications as long as they are indicated in the Articles of Incorporation, stock certificate and not contrary to law.

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.

Requisites of a de facto corporation

A valid law under which the corporation is organized. 2. An attempt in good faith to incorporate under such law. Issuance of a certificate of incorporation by the Securities and Exchange Commission. 3. Assumption of corporate powers.
1.

Nature and status of de facto corporation

The

existence of a de facto corporation shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
long as it exists, a de facto corporation enjoys all the attributes of a corporation until the State questions its

As