Capitalization of Corporations in Philippine Law

The capitalization of corporations under Philippine law is a foundational aspect of corporate formation and structure, directly influencing the company's financial capacity, regulatory obligations, and shareholder relationships. In the Philippines, the framework governing corporate capitalization is primarily outlined in the Revised Corporation Code of the Philippines (Republic Act No. 11232) and related issuances from the Securities and Exchange Commission (SEC). Below is a detailed and meticulous breakdown of all aspects related to corporate capitalization under Philippine mercantile and taxation laws, particularly focusing on the requirements, regulatory frameworks, and practical considerations.

1. Authorized Capital Stock

Authorized capital stock is the maximum amount of capital that a corporation is legally allowed to raise by issuing shares. This amount is specified in the Articles of Incorporation and may be adjusted later with SEC approval. The authorized capital stock is divided into shares with specified par values, or, if the shares are no-par, they are issued at a value decided by the board within legal limits.

Minimum Authorized Capital: Under the Revised Corporation Code, a corporation is no longer mandated to have a minimum authorized capital stock unless otherwise required by special laws (e.g., for banks and other financial institutions).
Non-Stock Corporations: Non-stock corporations, by their nature, do not have capital stock and therefore do not require authorized capital stock.

Important Note: The authorized capital stock represents the ceiling on the amount of capital a corporation can raise without having to amend its Articles of Incorporation.

2. Subscribed Capital Stock

Subscribed capital stock refers to the portion of the authorized capital stock that has been subscribed to by investors, meaning that shareholders have committed to buy shares even if they have not yet paid the full amount. This subscription provides an obligation to the corporation and is a metric of shareholder interest in the company.

Subscription Requirements: For incorporation, at least 25% of the authorized capital stock must be subscribed, with a minimum of 25% of the subscribed capital paid at the time of incorporation.
Minimum Paid-Up Capital: While the minimum paid-up capital required to form a corporation was previously set by law, the Revised Corporation Code has removed this restriction for most corporations. Paid-up capital is only required if specified by other regulatory bodies or special laws, such as for foreign-owned corporations or companies in specific industries.

3. Paid-Up Capital Stock

Paid-up capital stock is the actual amount of money received by the corporation from the initial subscription of shares. This reflects the corporation’s real cash or asset inflow and represents the shareholders’ actual contribution to the company’s finances.

Paid-Up Capital in Practice: It must be in the form of cash or tangible assets. Other forms of payment, such as labor or future services, are not accepted for incorporation under Philippine law.
Foreign Equity Restrictions: For corporations with foreign ownership, paid-up capital requirements may vary according to industry. For example, certain industries require a minimum paid-up capital of USD 200,000 for foreign entities, subject to adjustments based on the nature of the business.

4. Classes of Shares

Corporations may issue various classes of shares, which allows for flexibility in rights and privileges conferred upon shareholders. Each class of shares has different capitalization impacts, as some may not contribute to certain forms of capitalization.

Common Shares: Represent ordinary ownership in a corporation and grant voting rights.
Preferred Shares: May have specific privileges, such as fixed dividends or preference in asset distribution, and typically lack voting rights unless otherwise provided by the corporation.
Redeemable Shares: A type of preferred share that can be bought back by the corporation under terms specified at issuance.
Par and No-Par Value Shares: Shares may either have a par value, which is the minimum price per share, or be issued as no-par shares.

5. Issuance and Sale of Shares

The issuance of shares directly impacts corporate capitalization and is regulated by the Revised Corporation Code and the SEC. A corporation cannot sell shares beyond the number authorized in its Articles.

Subscription Agreements: Typically documented through subscription agreements, wherein shareholders commit to buying shares. Subscriptions are legally binding, and any unpaid subscriptions may be subjected to specific collection procedures.
Payment of Subscriptions: Payment for subscriptions can be made in cash or assets valued at fair market value, and directors are responsible for approving the valuation of non-cash contributions.
Pre-emptive Rights: Shareholders generally have the right to purchase new shares to maintain their proportional ownership unless this right is waived in the Articles of Incorporation or by agreement.

6. Capitalization for Foreign-Owned Corporations

Foreign-owned corporations are subject to additional capitalization regulations in the Philippines to comply with national equity requirements.

Foreign Investment Act (FIA): Under the FIA, foreign-owned corporations operating in industries where foreign equity is permitted are subject to minimum paid-up capital of USD 200,000 or its peso equivalent, with reductions available for certain technology-oriented or labor-intensive enterprises.
Anti-Dummy Law Compliance: To maintain compliance with the Anti-Dummy Law, foreign investors must avoid any arrangement that results in circumvention of foreign equity restrictions, which may include strict adherence to capitalization requirements.

7. Amendments to Capital Structure

Corporations may amend their capital structure through SEC-approved amendments to the Articles of Incorporation, subject to shareholder approval.

Increase in Capital Stock: Requires at least two-thirds (2/3) affirmative vote from shareholders and notification to the SEC.
Reduction in Capital Stock: Requires approval from shareholders and notification to creditors, who may oppose if the reduction adversely affects corporate solvency.

8. Tax Implications on Capitalization

Corporations are also subject to taxation on certain aspects of capitalization. The Documentary Stamp Tax (DST) is levied on original issues and transfers of shares at a rate provided in the National Internal Revenue Code. Additional tax considerations include:

Capital Gains Tax: A 15% tax on net capital gains from the sale of shares not traded on the Philippine Stock Exchange.
Dividend Distribution: Dividends issued to shareholders are taxed at different rates depending on the residency and type of shareholder.

9. Legal Implications and Liabilities Related to Capitalization

The corporate veil protects shareholders from liabilities exceeding their investment, provided the corporation follows proper capitalization requirements. Failure to properly capitalize may lead to:

Piercing the Corporate Veil: Courts may hold shareholders personally liable if undercapitalization is shown to have been a factor in fraud, evasion of the law, or abuse of the corporate entity.
Credit Implications: Lenders and creditors assess a corporation’s capital structure to evaluate solvency, affecting access to funding.
Regulatory Compliance: The SEC and Bureau of Internal Revenue (BIR) regularly assess corporations' compliance with capitalization requirements. Non-compliance may lead to fines, penalties, or corporate dissolution.

10. Best Practices and Corporate Governance in Capitalization

To ensure smooth capitalization processes, corporations are encouraged to adopt the following practices:

Adequate Capitalization: Maintaining sufficient capital levels to support operations, growth, and regulatory compliance.
Regular Disclosures: Ensuring transparency in share issuance and paid-up capital declarations to both shareholders and regulatory bodies.
Equity Planning: Strategically planning future stock issuances or adjustments to balance investor interests and corporate financial health.

Conclusion

Capitalization plays a pivotal role in the successful incorporation and sustainable growth of a corporation in the Philippines. Adhering to the Revised Corporation Code and SEC regulations ensures legal compliance, shareholder protection, and operational stability. By carefully managing capital stock structures, subscription agreements, and paid-up capital, corporations can mitigate legal and financial risks while fostering investor confidence.