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1. What is capital? What are the classifications of capital 2. What are the main classes of shares of stocks?

Describe
stocks? Describe each. each. (More than 10)

Capital - Capital refers to financial assets or the financial 1) Par value shares - Shares with a value fixed in the articles of
value of assets, such as funds held in deposit accounts, as incorporation and the certificates of stock. The par value fixes
well as the tangible machinery and production equipment the minimum issue price of the shares.
used in environments such as factories and other
manufacturing facilities. Additionally, capital includes Note: A corporation cannot sell less than the par value but a
facilities, such as the buildings used for the production and shareholder may sell the same less than the par value because
storage of the manufactured goods. Materials used and it is his.
consumed as part of the manufacturing process do not
qualify.
Shares sold below its par value is called watered stocks.

Capital Stocks – there is no minimum authorized capital


2) No par value shares - These are shares having no stated value in
stock as long as the paid-up capital is not less than P5000.
the article of incorporation.
3) Common shares - These are ordinarily and usually issued stocks
Capital stock is the common and preferred stock a without extraordinary rights and privileges, and entitle the
company is authorized to issue according to the corporate shareholder to a pro rata division of profits. It represents the
charter. Accountants define capital stock as one residual ownership interest in the corporation. The holders of
component of the equity section in a company's balance this kind of share have complete voting rights and they cannot
sheet. Firms can issue more capital stock over time or buy be deprived of the said rights except as provided by law.
back shares that are currently owned by shareholders. 4) Preferred shares - These entitle the shareholder to some
priority on distribution of dividends and assets over those
Paid up capital stocks - Paid-up capital is the amount of holders of common shares.
money a company has received from shareholders in 5) Redeemable shares - These entitle the shareholder to some
exchange for shares of stock. Paid-up capital is created priority on distribution of dividends and assets over those
when a company sells its shares on the primary market, holders of common shares.
directly to investors. When shares are bought and sold 6) Treasury shares - Shares that have been earlier issued as fully
among investors on the secondary market, no additional paid and have thereafter been acquired by the corporation by
paid-up capital is created as proceeds in those transactions purchase, donation, and redemption or through some lawful
go to the selling shareholders, not the issuing company. means. (Sec. 9)

Issued capital stocks - The total amount of a company's To put simply, these are shares reacquired by the corporation.
stock, both common and preferred, that has been issued They are called treasury shares because they remain in the
and represents the total capitalized value of the company. corporate treasury until reissued. More importantly, they have
Includes non-retired shares being held as Treasury stock. no:

Circulating capital stocks - The portion of an organization's 1. Voting Rights


investment that is continually used and replenished in 2. Right to dividends.
ongoing operations. Circulating capital can consist of
operating expenses, raw material stock, inventories of Note: Treasury shares are not retired shares. They do not
finished goods or physical capital on hand. Circulating revert to the unissued shares of the corporation but are
capital is the opposite of constant (fixed) capital. regarded as property acquired by the corporation which may
be reissued or resold at a price to be fixed by the Board of
Working capital stocks - Working capital is a measure of Directors (SEC Rules Governing Redeemable and Treasury
both a company's efficiency and its short-term financial Shares, CCP No. 1‐1982).
health. Working capital is calculated as:
7) Founder’s share - Shares classified as such in the articles of
Working Capital = Current Assets - Current Liabilities incorporation which may be given special preference in voting
rights and dividend payments. But if an exclusive right to vote
The working capital ratio (Current Assets/Current and be voted for as director is granted, this privilege is subject
Liabilities) indicates whether a company has enough short to approval by the SEC, and cannot exceed 5 years from the
term assets to cover its short term debt. Anything below 1 date of approval. (Sec. 7)
indicates negative W/C (working capital). While anything 8) Voting shares -Shares with a right to vote. If the stock is
over 2 means that the company is not investing excess originally issued as voting stock, it may not thereafter be
assets. Most believe that a ratio between 1.2 and 2.0 is deprived of the right to vote without the consent of the holder.
sufficient. Also known as "net working capital". 9) 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.
10) Convertible shares - A share that is changeable by the
stockholder from one class to another at a certain price and
within a certain period. corporation to transact the legitimate business or
GR: Stockholder may demand conversion at his pleasure. accomplish the purpose for which it was created.
XPN: Otherwise restricted by the articles of incorporation.
11) Watered stock – A stock issued in exchange for cash, property, Section 22 of the Corporation Code states that if a
share, stock dividends, or services lesser than its par value. corporation does not formally organize and commence the
transaction of its business within two (2) years from the
Watered Stocks include stocks: date of its incorporation, its corporate powers shall cease
and the corporation shall be deemed dissolved.
 Issued without consideration (bonus share)
 Issued for a consideration other than cash, the fair -if a corporation has commenced business but
valuation of which is less than its par or issued value subsequently becomes continuously inoperative for a
(discount share) period of at least five (5) years, the same shall be a ground
 Issued as stock dividend when there are no sufficient for the suspension or revocation of its certificate of
retained earnings to justify it incorporation.
 Issued as fully paid when the corporation has
received a lesser sum of money than its par or issued 4. What are the qualifications of incorporators?
value
Section 10. Number and qualifications of incorporators. –
12) Fractional share - A share with a value of less than one full Any number of natural persons not less than five (5) but
share. not more than fifteen (15), all of legal age and a majority
13) Shares in escrow - Subject to an agreement by virtue of which of whom are residents of the Philippines, may form a
the share is deposited by the grantor or his agent with a third private corporation for any lawful purpose or purposes.
person to be kept by the depositary until the performance of Each of the incorporators of s stock corporation must own
certain condition or the happening of a certain event contained or be a subscriber to at least one (1) share of the capital
in the agreement. stock of the corporation. (6a)
14) Over‐issued stock - It is a stock issued in excess of the
authorized capital stock; it is null and void. 5. Amendments to Articles of Incorporation-What are the
15) Street certificate - It is a stock certificate endorsed by the requirements? Meetings,quorum etc
registered holder in blank and the transferee can command its
transfer to his name from issuing corporation.
16) Promotion share - This is a share issued by promoters or those Section 16. Amendment of Articles of Incorporation. –
in some way interested in the company, for incorporating the Unless otherwise prescribed by this Code or by special law,
company, or for services rendered in launching or promoting and for legitimate purposes, any provision or matter
the welfare of the company. stated in the articles of incorporation may be amended by
a majority vote of the board of directors or trustees and
the vote or written assent of the stockholders
3. What are the steps in the creation of corporations? representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of
1. Promotion - It is the process of bringing together the dissenting stockholders in accordance with the provisions
incorporators or the persons interested in the business, of of this Code, or the vote or written assent of at least two-
procuring subscriptions or capital for the corporation and thirds (2/3) of the members if it be a non-stock
of setting in motion the machinery that leads to the corporation.
incorporation of the corporation itself.
6. De facto corporation-describe
2. Incorporation
Section 20. De facto corporations. – The due incorporation
a. Verification from the records of the Securities and of any corporation claiming in good faith to be a
Exchange Commission (SEC) that the proposed corporate corporation under this Code, and its right to exercise
name is not the same or similar to an existing corporation. corporate powers, shall not be inquired into collaterally in
any private suit to which such corporation may be a party.
b. Drafting and execution of the articles of incorporation Such inquiry may be made by the Solicitor General in a quo
by the incorporators. The person elected as temporary warranto proceeding. (n)
treasurer should execute an affidavit regarding the share
capital subscribed and paid up. The treasurer should also 7. What are the rights of preemption/preemptive rights?
submit a sworn statement of assets and liabilities of the
corporation. Section 39. Power to deny pre-emptive right. – All
stockholders of a stock corporation shall enjoy pre-
3. Formal organization and commencement of business emptive right to subscribe to all issues or disposition of
operations. Formal organization requires the adoption of shares of any class, in proportion to their respective
by-laws and the election of the board of directors and of shareholdings, unless such right is denied by the articles
the administrative officers. It also includes the taking of of incorporation or an amendment thereto: Provided,
such other steps as are necessary to enable the That such pre-emptive right shall not extend to shares to
be issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or to shares to  Must be consistent with the charter or articles of
be issued in good faith with the approval of the incorporation
stockholders representing two-thirds (2/3) of the  Must be reasonable
outstanding capital stock, in exchange for property needed  Must be of general application and not directed
for corporate purposes or in payment of a previously against a particular individual.
contracted debt.

Section 102. Pre-emptive right in close corporations. – The


pre-emptive right of stockholders in close corporations
shall extend to all stock to be issued, including reissuance
of treasury shares, whether for money, property or
personal services, or in payment of corporate debts, unless
the articles of incorporation provide otherwise.

8. Dividends-describe

A dividend is a distribution of a portion of a company's


earnings, decided by the board of directors, paid to a class
of its shareholders. Dividends can be issued as cash
payments, as shares of stock, or other property.

9. Profits-describe

Profit is a financial benefit that is realized when the


amount of revenue gained from a business activity
exceeds the expenses, costs and taxes needed to sustain
the activity. Any profit that is gained goes to the business's
owners, who may or may not decide to spend it on the
business.

What are the distinctions between the two?

PROFIT DIVIDENDS
Profit is earned by the The dividend payment is a total
company during the year and management decision. in
dividend is distribution a simple words dividend
percentage of such profit. It is payment is not an obligatory
important to remember that requirement and management
company may have profitable may decided to reinvest the
operation but he still not profit instead of paying out.
paying dividend Dividend payment is normally
described as percentage of
nominal value.

10. Bylaws-requisites of valid bylaws

Q: What are by‐laws?

A: Rules and regulations or private laws enacted by the


corporation to regulate, govern and control its own
actions, affairs and concerns and of its stockholders or
members and directors and officers in relation thereto and
among themselves in their relation to it.

Q: What are the requisites for the validity of by‐laws?

 Must be consistent with the Corporation Code, other


pertinent laws and regulations
 Must not be contrary to morals and public policy
 Must not impair obligations and contracts or property
rights of stockholders

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