Classification of Shares in Corporations

Shares are the fundamental units of ownership in a corporation, representing a bundle of rights in the corporation. Under Philippine law, particularly the Revised Corporation Code of the Philippines (Republic Act No. 11232), shares may be classified into different types depending on their distinct features, rights, preferences, and limitations. The classification is essential for structuring the equity and control dynamics within a corporation and must be set forth in the corporation’s Articles of Incorporation.

The following are the classifications and characteristics of shares recognized in the Philippines:

1. Common Shares

Common shares are the most basic type of shares in a corporation. They confer voting rights to shareholders, typically giving them control over corporate affairs, such as electing directors and approving major corporate actions.

Rights:
- Right to Vote: Common shareholders have the right to vote in the annual shareholders’ meeting or on corporate matters subject to shareholder approval.
- Right to Dividends: Common shareholders receive dividends only after preferred shareholders have been paid, if dividends are declared.
- Right to Liquidation: In the event of liquidation, common shareholders are the last to receive proceeds, after creditors and preferred shareholders.
Characteristics: Common shares do not have any special privileges over other shares and are inherently risky, as dividends and liquidation benefits are subordinate to those of preferred shares.

2. Preferred Shares

Preferred shares are a class of shares that have a priority over common shares in receiving dividends and/or in liquidation proceeds. These shares are commonly issued to attract investors who want a stable dividend without assuming the same level of risk as common shareholders.

Rights:
- Preference in Dividends: Preferred shareholders are entitled to dividends before common shareholders, often at a fixed rate. Dividends can be cumulative (accumulate if not paid) or non-cumulative.
- Preference in Liquidation: In liquidation, preferred shareholders receive payment from the assets before common shareholders but after creditors.
- Voting Rights: Typically, preferred shares are non-voting, but they may acquire voting rights upon specific conditions (e.g., non-payment of dividends for a specified period).
Characteristics: Preferred shares are a form of hybrid security, blending characteristics of both equity and fixed income. They are attractive to investors seeking a regular income from dividends.

3. Redeemable Shares

Redeemable shares are issued by a corporation with the stipulation that they can be bought back or redeemed by the corporation at a predetermined price or upon reaching a specific date.

Characteristics:
- No Voting Rights: Redeemable shares typically do not have voting rights.
- Redeemable Period: These shares can be redeemed at a fixed date or period, or based on a specified condition.
- Non-Cumulative: Dividends on redeemable shares are generally not cumulative, which limits the corporation’s obligation to pay dividends.
Purpose: Redeemable shares are often used to raise capital temporarily without diluting control over the corporation, as they are later removed from the outstanding shares once redeemed.

4. Treasury Shares

Treasury shares are shares that have been previously issued and subsequently repurchased by the corporation from shareholders but have not been retired.

Characteristics:
- Non-Voting: Treasury shares do not have voting rights, nor do they earn dividends or participate in corporate profit-sharing.
- No Dividends: Since they belong to the corporation, treasury shares do not earn dividends.
Purpose: Treasury shares can be reissued or resold by the corporation as a mechanism to raise capital or as part of employee stock option plans.

5. Founders’ Shares

Founders' shares are a special class of shares that grant the founders or organizers of a corporation exclusive rights or privileges.

Characteristics:
- Special Voting Rights: Founders’ shares may carry special voting privileges, often allowing them to maintain control of the board or certain corporate decisions.
- Restrictions on Transferability: The Revised Corporation Code limits the existence of such shares to a maximum of five years from incorporation, as a means of preventing prolonged control by founders without additional capital infusion.

6. Par Value and No Par Value Shares

Shares may also be categorized based on par value or the absence thereof.

Par Value Shares: These shares have a nominal value set at issuance, representing the minimum amount shareholders must pay. Par value serves as a basis for accounting purposes and regulatory compliance.
No Par Value Shares: These shares do not have a set nominal value and are issued based on the corporation’s perceived value. This allows greater flexibility in setting share prices during issuance.

7. Convertible Shares

Convertible shares are shares that may be converted into another class of shares, typically common shares, upon the option of the holder or upon the occurrence of a specific event.

Characteristics:
- Conversion Rights: Convertible shares come with terms that outline the conversion rate and conditions.
- Potential for Appreciation: Conversion allows preferred shareholders to participate in the corporation’s growth, especially if common share value increases.

8. Cumulative and Non-Cumulative Shares

This classification applies primarily to preferred shares and pertains to the payment of dividends:

Cumulative Shares: If dividends are unpaid in any year, the unpaid dividends accumulate and must be paid out before common shareholders can receive any dividends.
Non-Cumulative Shares: Dividends do not accumulate. If dividends are not declared for a year, shareholders do not have the right to claim unpaid dividends in future years.

9. Participating and Non-Participating Shares

Participating shares are a class of shares that grant additional rights to dividends and surplus assets beyond the fixed dividends typically given to preferred shareholders.

Participating Shares: After receiving fixed dividends, participating shareholders may be entitled to further dividends once common shareholders receive dividends. They may also have rights to residual assets upon liquidation, after all other claims are satisfied.
Non-Participating Shares: These are entitled only to their fixed dividends and do not share in any additional profits or residual assets.

Legal Requirements and Compliance in Classification

Under the Revised Corporation Code, the following requirements apply:

Articles of Incorporation: The corporation’s Articles must explicitly specify the classification, rights, privileges, and restrictions of each class of shares issued.
Approval of Securities and Exchange Commission (SEC): For corporations seeking to issue multiple classes of shares, especially preferred or redeemable shares, the terms must be compliant with SEC regulations.
Equal Treatment within Classes: Shareholders within the same class must be treated equally in terms of rights and dividends, ensuring no preferential treatment within a class.

Conclusion

The classification of shares serves as a fundamental tool in corporate finance and governance, allowing corporations to attract diverse investors and structure control within the company. Each share classification has unique features tailored to meet the needs of different stakeholders, from founders seeking control to investors seeking steady returns. Compliance with the Revised Corporation Code and SEC regulations ensures that these classifications are fairly structured and transparent, protecting both the corporation and its shareholders.