I. Business Organizations: Corporations

A. Stockholders and Members

In Philippine law, corporations are governed by the Revised Corporation Code of the Philippines (Republic Act No. 11232) enacted in 2019. Stockholders and members in a corporation possess various rights, duties, and responsibilities critical to the governance and financial operations of the corporation. Their powers are balanced with the regulatory framework established to protect corporate interests, ensure transparency, and provide a structure for equitable governance. Below is an extensive breakdown of stockholders' and members' roles, rights, and obligations.

1. Definition and Classification of Stockholders and Members

Stockholders (or shareholders) refer to individuals or entities that own shares of stock in a stock corporation. Stockholders own a proportionate part of the corporation relative to the number of shares they hold and possess specific rights, such as the right to dividends, voting rights, and other privileges associated with corporate ownership.

Members, on the other hand, are those who hold membership in a non-stock corporation. Unlike stockholders, members do not own shares but may possess voting rights and other privileges similar to stockholders, depending on the nature and classification of the corporation.

2. Rights of Stockholders and Members

The Revised Corporation Code of the Philippines outlines specific rights for stockholders and members. These rights can be categorized as basic rights, voting rights, proprietary rights, and management rights:

a. Basic Rights

Right to Participate in Meetings
- Stockholders and members have the right to attend and participate in meetings, including the annual stockholders’ or members’ meeting, where significant corporate matters are discussed.
- The law mandates that notices of meetings be sent in advance, specifying the date, time, place, and agenda.
Right to Inspect Corporate Books and Records
- Stockholders and members may inspect the corporate books and records, including minutes of board meetings, stock and transfer books, and financial statements.
- This right is essential for transparency and accountability in corporate governance. However, inspection is subject to reasonable limitations and must not prejudice the corporation's business interests.
Right to Financial Information
- Stockholders and members are entitled to financial information, particularly the audited financial statements of the corporation. Corporations must make financial records available within a prescribed period before the annual meeting.

b. Voting Rights

Right to Vote in Meetings
- Stockholders exercise their voting rights in proportion to the shares they hold, whereas members in non-stock corporations vote based on their membership interest.
- Voting rights empower stockholders and members to influence corporate decisions, including the election of directors, adoption of by-laws, mergers, acquisitions, and other major corporate actions.
Cumulative Voting in the Election of Directors
- Cumulative voting is a mechanism that allows stockholders to concentrate their votes in favor of one or more candidates, enhancing the minority’s influence in electing directors. It applies unless expressly prohibited by the corporation’s by-laws.
Proxy Voting
- Stockholders and members may exercise their right to vote via proxy. Proxies must be in writing, signed by the stockholder/member, and filed before the scheduled meeting.

c. Proprietary Rights

Right to Dividends
- Stockholders are entitled to receive dividends when declared by the board of directors. Dividends may be in the form of cash, property, or stock dividends.
- Non-stock corporations do not declare dividends since they do not have stockholders. However, they may allocate surplus funds for member benefits, consistent with their purpose.
Pre-emptive Rights
- Stockholders have the right to purchase new shares in proportion to their existing shareholding, preventing dilution of their ownership percentage. Pre-emptive rights apply unless restricted by the articles of incorporation or by-laws.
Appraisal Rights
- Appraisal rights allow dissenting stockholders to demand payment for their shares at fair value when they disagree with specific corporate actions, such as mergers, amendments to the articles of incorporation, or the sale of substantial assets. This right ensures protection for minority stockholders in major corporate decisions.

d. Management Rights

Right to Elect Directors
- Stockholders elect the board of directors, who oversee corporate management. The board acts as the governing body, making strategic decisions and overseeing corporate operations on behalf of stockholders.
Right to Propose Corporate Actions and Resolutions
- Stockholders holding at least 20% of the shares may propose corporate actions and resolutions. This mechanism enables stockholders to influence corporate governance beyond simply voting on board proposals.
Right to Information and Redress
- Stockholders may exercise their right to be informed about corporate affairs and may seek legal redress if directors or officers engage in fraudulent or oppressive conduct detrimental to stockholders' interests.

3. Duties and Liabilities of Stockholders and Members

While stockholders and members enjoy several rights, they also have obligations to the corporation:

a. Compliance with Corporate By-laws and Policies

Stockholders and members must adhere to corporate by-laws, resolutions, and policies, which govern the corporation’s internal operations and procedures.

b. Duty of Loyalty and Non-Compete

Stockholders are bound by fiduciary responsibilities if they hold significant influence over corporate decisions or are involved in corporate management. They must act in good faith and refrain from engaging in competing businesses unless otherwise permitted by the corporation.

c. Liabilities on Unpaid Subscriptions

Stockholders are liable for the payment of unpaid subscriptions on shares they hold. Failure to fulfill this obligation may result in penalties, interest charges, and forfeiture of shares.

d. Secondary Liability in Closely Held Corporations

In closely held corporations, stockholders may bear greater liability if corporate formalities are disregarded, particularly if the corporation is found to be an alter ego or instrumentality for fraudulent acts.

4. Remedies Available to Stockholders and Members

Stockholders and members are entitled to specific legal remedies under the Revised Corporation Code to protect their interests and ensure fair treatment within the corporate structure:

a. Derivative Suit

A derivative suit allows a stockholder or member to file a lawsuit on behalf of the corporation against directors or officers for breach of duty or misconduct. It is utilized when directors or officers fail to act in the corporation’s best interests.

b. Injunction

Stockholders and members may seek injunctive relief to prevent imminent harm or abuse by corporate officers or directors, particularly in cases of fraudulent transactions, illegal acts, or oppressive behavior.

c. Corporate Rehabilitation or Liquidation

If the corporation is insolvent or unable to continue operations, stockholders may participate in corporate rehabilitation or liquidation proceedings. They have a residual interest in the corporation’s assets after settling debts and liabilities.

d. Dissenters’ Rights and Appraisal Remedies

In events of significant corporate restructuring, dissenting stockholders can invoke appraisal rights to exit the corporation, receiving fair compensation for their shares. This right applies to major corporate changes like mergers, consolidations, and asset sales.

5. Tax Implications for Stockholders and Members

Stockholders in the Philippines are subject to various tax liabilities based on the nature of income received from their investments in the corporation:

Dividends Tax
- Dividends received by stockholders are subject to a final withholding tax of 10% for domestic shareholders and up to 25% for foreign shareholders, depending on any tax treaty relief applicable.
Capital Gains Tax
- Gains from the sale or exchange of shares not listed on the Philippine Stock Exchange (PSE) are subject to a capital gains tax of 15%.
- For shares listed on the PSE, the seller incurs a stock transaction tax of 0.6% of the transaction value.
Documentary Stamp Tax (DST)
- Transfers of shares are subject to documentary stamp tax at a rate of PHP 1.50 for every PHP 200 of the par value of the shares, applicable to stockholders involved in the transaction.
Estate and Donor’s Tax on Shares
- Shares are included in the decedent’s estate subject to estate tax or, if donated, donor’s tax. The rates vary depending on the transaction type, and certain deductions or exemptions may apply.

Conclusion

Stockholders and members play vital roles within Philippine corporations, and their rights and obligations are fundamental to corporate governance. The Revised Corporation Code provides robust protections and mechanisms to ensure that stockholders' interests are safeguarded, while mandating their adherence to corporate rules and procedures. Additionally, the tax implications on dividends, capital gains, and other transactions are designed to streamline tax revenue collection and maintain the integrity of the corporate structure within the regulatory framework.