Doctrine of Equality of Shares

Doctrine of Equality of Shares | Stockholders and Members | Corporations | BUSINESS ORGANIZATIONS

Doctrine of Equality of Shares

The Doctrine of Equality of Shares is a fundamental principle under Philippine corporate law that operates as a baseline in the governance of corporations and the rights attached to shareholding. It generally states that all shares within the same class are treated equally in terms of rights, obligations, and privileges. This doctrine underscores that each share, unless otherwise specified, holds the same value and the same rights in proportion to all other shares within its class.

Under the Philippine Revised Corporation Code (Republic Act No. 11232), the Doctrine of Equality of Shares emphasizes a fair and uniform approach to the treatment of shareholders. Here are the key aspects of the doctrine and how it applies to corporations in the Philippines:


1. Equal Rights to Dividends

  • Shareholders with the same class of shares have equal rights to receive dividends. This means that if a corporation declares dividends, each share within the class receives the same proportionate amount. The dividend distribution does not vary among shares of the same class, ensuring parity.
  • However, the right to dividends depends on the availability of surplus profits and the discretion of the board of directors, as specified in the Revised Corporation Code.

2. Equal Rights to Voting

  • One of the core applications of the Doctrine of Equality of Shares is the equal right to vote. Unless specifically stated otherwise in the corporation’s Articles of Incorporation or other governing documents, each share carries one vote.
  • This principle ensures that each share represents an equal vote, and thus each stockholder, based on their number of shares, has an equal opportunity to influence corporate decisions proportional to their shareholding. This applies to voting in general stockholders' meetings and elections of the board of directors.
  • Exceptions apply, such as non-voting shares (preferred shares, for example), which may be issued by corporations under certain conditions.

3. Right to Equal Treatment in Liquidation

  • Upon liquidation, shareholders are entitled to receive their proportionate share of any remaining assets after the settlement of debts and obligations. The Doctrine of Equality of Shares mandates that shareholders within the same class receive an equal share in the liquidation assets, ensuring fairness in the distribution based on their shareholding.
  • Preferred shareholders may have liquidation preferences that could allow them to receive assets before common shareholders, if stipulated in the corporation’s Articles of Incorporation.

4. Proportional Distribution of Rights and Liabilities

  • The doctrine ensures that shareholders within a particular class carry equal responsibilities in terms of liabilities and obligations. Any assessments, calls, or additional contributions required of shareholders are applied uniformly to shares within the same class.
  • This principle safeguards stockholders by ensuring that any liability imposed by the corporation is proportionally distributed, maintaining equal treatment within share classes.

5. Application to Preferred and Common Shares

  • While the doctrine holds universally, its application may differ slightly between common and preferred shares. Common shares, by default, enjoy the basic corporate rights: voting, dividends, and liquidation rights. Preferred shares, on the other hand, may have limited or preferential rights as stated in the Articles of Incorporation.
  • Preferred shareholders might enjoy privileges such as priority in dividend distribution but may not have voting rights. Nonetheless, within the same class of preferred shares, the Doctrine of Equality applies—each preferred share within the same series or class is treated equally.

6. Limitations and Exceptions

  • Classified Shares: Corporations can issue multiple classes of shares, each with different rights and privileges. This classification must be detailed in the Articles of Incorporation and approved by the Securities and Exchange Commission (SEC). For instance, one class may be non-voting but entitled to higher dividends, while another has voting rights but lower dividends. Within each class, however, the doctrine remains applicable.
  • Special Provisions in the Articles of Incorporation: Corporations may create unique rights or restrictions on shares as long as they are clearly specified in the Articles of Incorporation. These provisions, when filed and registered with the SEC, can override certain general principles of equality of shares.
  • Treasury Shares: Treasury shares are shares that a corporation has bought back and are held in the corporation's treasury. They do not carry voting rights or the right to dividends while in the treasury, thus exempting them from the Doctrine of Equality of Shares as they are not part of the active share pool held by stockholders.

7. Enforcement of the Doctrine of Equality of Shares

  • The Revised Corporation Code, through provisions such as the Appraisal Right (Section 80) and Right of Inspection (Section 73), ensures that shareholders have mechanisms to enforce their rights.
  • The SEC acts as the primary regulatory body for disputes involving violations of shareholder equality. Stockholders can file a complaint with the SEC if they believe that their rights have been prejudiced or if they are subject to unequal treatment in violation of the Doctrine of Equality of Shares.
  • In addition, stockholders may resort to court action under the doctrine of piercing the corporate veil if a corporation has engaged in fraudulent or prejudicial practices that undermine the Doctrine of Equality of Shares.

Practical Implications for Corporations

For corporate governance, the Doctrine of Equality of Shares is essential to ensuring an equitable and just corporate environment. It provides shareholders confidence that they will be treated fairly in terms of financial benefits, voting rights, and liquidation preferences. The doctrine serves as a foundational principle, helping corporations establish and maintain transparent, consistent, and fair practices in their dealings with shareholders.

The Doctrine of Equality of Shares also places significant emphasis on the fiduciary duties of the board of directors. Directors must ensure that all shareholders within the same class receive equal treatment, and any failure to uphold this principle may expose them to liability for breaches of fiduciary duty or even to actions under corporate law for damages and remedial measures.

Conclusion

The Doctrine of Equality of Shares remains a cornerstone of shareholder rights within Philippine corporate law, enshrining principles of fairness and uniformity in treatment among shareholders within the same class. It acts as a check on corporate power, reinforcing shareholder confidence, and promoting transparency in corporate governance practices.