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Before I
begin my discussion on part two of this matter regarding
amendment, it is worth mentioning that there are certain
provisions in the original articles of incorporation
which cannot be a subject of amendment. Examples of
these are the names of the initial or original
incorporators, directors and subscribers of the
corporation. Their names and subscriptions remain as
imprinted, even if there are changes in the composition
through the years because they are considered among the
established facts. I bring this up now because of a
recent discussion in the Securities and Exchange
Commission (SEC) en banc that involved the use of
fraudulent names in the incorporation papers.
Another
item in the articles of incorporation that can be a
subject of amendment is the provision on increase or
decrease in the capital stock. Business expansion is the
main reason why a corporation increases its
capitalization. Before it can increase its worth,
however, it has to undergo the process of changing its
financial structure through the infusion of fresh
capital as attested to by the filing of an amendment of
the Articles of incorporation, usually article seven
thereof. As correctly ruled by the Supreme Court and as
a jurisprudential guideline, when capital stock is
issued in the course of and in compliance with the
requirements of increasing its authorized capital stock
under Section 38 of the Corporation Code, the SEC as a
matter of course examines the financial condition of the
corporation. One of the multiple documentation
requirements under the current regulations of the SEC in
respect to the filing of a certificate of increase of
authorized capital stock, is the submission of a
financial statement duly certified by an independent
Certified Public Accountant (CPA) covering the latest
date possible or as of the date of the meeting when
stockholders approved the increase/decrease in capital
stock. When all or part of the newly authorized capital
stock is proposed to be issued as stock dividend, the
SEC requirements are even more exacting; it requires, in
addition to the regular audited financial statements,
the submission by the corporation of a “detailed or Long
Form Report of the certifying Auditor.” Moreover, since
approval of an increase in authorized capital stock by
the stockholders holding two-thirds (2/3) of the
outstanding capital stock is required by Section 38 of
the Corporation Code, at a stockholders meeting held for
that purpose, the directors and officers of the
corporation may be expected to take pains to inform the
shareholders of the financial condition and prospects of
the corporation and of the proposed utilization of the
fresh capital sought to be raised (Nestlé Philippines
Inc. vs. Court of Appeals, G.R. 86738, November 13,
1991).
Still
another amendment is the matter affecting the denial of
pre-emptive rights of shareholders so as to protect
other stockholders regarding their investment in the
corporation. Section 39 of the Corporation Code states
that all stockholders of a stock corporation shall enjoy
a preemptive right to subscribe to any and all issues,
or dispositions of shares of any class, in proportion to
their respective stockholdings, unless such right is
denied by the articles of incorporation or an amendment
thereto. Except that such preemptive right shall not
extend to shares to be issued in compliance with laws
mandating stock offerings or minimum stock ownership by
the public; or to shares to be issued in good faith with
the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of
a previously contracted debt.
Thus,
unless denied in the articles of incorporation or the
issuance falls under any of the exceptions
above-mentioned, all existing stockholders of record are
entitled to exercise their preemptive right to subscribe
to all additional issuances of shares of stock of the
corporation in proportion to their present
stockholdings. The foundation or underlying basis of
this right is to maintain the relative and proportionate
voting strength and control of existing stockholders,
that is, the existing ratio of their interest and voting
power in the corporation (SEC Opinion dated 7-10-1991).
However, this can all be changed in an amendment
stipulating the contrary.
In the
next column, (Part III) I will discuss the matter of
restricting or broadening the rights of members of a
nonstock corporation to vote; the number of trustees who
may be more than fifteen and their respective terms;
matters included in the articles of incorporation of a
close corporation; classification of trustees of
educational institutions; terms of office and
designation of the governing board of a nonstock
corporation other than boards of trustees. |
