Philippines Corporation Code

(17) Deferred shares, are those which are entitled to dividends after payment of holders of common shares.s (18) Watered shares, are those issued for no consideration or inadequate consideration. (19) Bonus shares, are those issued gratuitously; they are watered shares. (20) Overissued shares, are those issued beyond the authorized capital stock and are considered void. (21) Vetoing shares, are those issued with the right to vote only on specific questions or proposals. (22) Promotion shares, are those issued by mining corporations to owners of mines who transferred their rights over the latter to the former, or those shares issued to promoters who brought about the formation of the corporation. (23) Street certificate, the certificate covering shares which is indorsed in blank and therefore transferable by mere delivery until the reaches the hands of a transferee who, deciding to effect registration in the books of the corporation can just place his name as transferee in the proper space provided for in the certificate .

Interest on preferred shares

Preferred shares cannot be issued with a fixed annual interest on the face thereof inasmuch as this will change the contract of subscription between the corporation and the shareholders to one of an and will destroy the well-established corporate theory that are of stock are not credits or debts due from the corporation the stockholders. (SEC Opinion, Feb. 10, 1969.)

Corporation possesses no inherent power redeem its preferred shares-

It was opined that the corporation has no inherent power to redeem its preferred shares because such shares are deemed irredeemable in the absence of any provisions to the contrary in the articles to incorporation and in the certificates of stock of said preferred shares. (SEC Opinion, 1968) But redeemable shares may be issued by the corporation when expressly provided for in the articles of incorporation (Refer to Section 8, infra).

Preferred stocks; where redemption of preferred stocks is guaranteed in a purchase agreement, the latter becomes a debt instrument and the absolute obligation of the issuer-corporation to redeem at specified dates the preferred shares shall not depend upon the financial ability of the issuing entity; so also, a stipulation to pay 8% cumulative annual dividends on preferred stock would convert said dividends into payable interests.

In the case of Lirag Textile Mills, Inc., et al. vs. Social Security System, et al. (L-33205, Aug. 31, 1987), in a written purchase agreement, the Social Security System agreed to purchase from Lirag Textile Mills preferred shares of stock worth P1 million subject to certain conditions. On Jan. 31, 1962, SSS paid Lirag Textiles P500,000 for which the former was issued Stock Certificate No. 128 covering 5,000 preferred shares and later the balance of P500,000 was paid by SSS to Lirag Textiles for which the latter issued Stock Certificate No. 139 in favor of SSS.

Lirag Textile Mills agreed to repurchase all the above shares of stock at stipulated dates and to guarantee the redemption of the stocks purchased by the SSS, the payment of dividends (8% cumulative dividends) as well as other obligations of the Lirag Textile Mills, Inc. Basilio L. Lirag signed the purchase agreement of Sept. 4, 1961, not only as president of the Lirag Textile Mills but also as surety so that should the Lirag Textile Mills fail to perform any of its obligations in the said purchase agreement, the surety shall immediately pay to the vendee the amounts then outstanding.

Lirag Textile Mills failed to redeem Certificates of Stock Nos. 128 and 139 by payment of the amounts stipulated upon in the purchase agreement.

The lower court ruled that the purchase agreement was a debt instrument and decided in favor of SSS.

The Supreme Court agreed with the trial court, saying:

"We uphold the lower court's finding that the purchase agreement is, indeed, a debt instrument. Its terms and conditions unmistakably show that the parties intended the repurchase of the preferred shares on the respective scheduled dates of be an absolute obligation which does not depend upon the financial ability of petitioner corporation. This absolute obligation on the part of petitioner corporation is made manifest by he fact that a surety was required to see to it that the obligation is fulfilled in the event of the principal debtor's inability o do so. The unconditional undertaking of petitioner corporation to redeem the preferred shares at the specified dates constitutes a debt which is defined as an obligation to pay money at some future time, or at a time which becomes definite and fixed by acts of either party and which they expressly or impliedly, agree to perform in the contract."

"A stockholder sinks or swims with the corporation and here is no obligation to return the value of his shares by means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a surety."

"As private respondent contends, if the parties intended it SSS) to be merely a stockholder of petitioner corporation, it would have been sufficient that Preferred Certificates Nos. 128 nd 139 were issued in its name as the preferred certificate contained all the rights of a stockholder as well as certain obligations on the part of petitioner corporation. However, the parties did in fact execute the Purchase Agreement, at the same time that the petitioner corporation issued its preferred stock o the respondent SSS. The Purchase Agreement serves to de. me the rights and obligations of the parties and to establish firmly the liability of petitioners in case of breach of contract. The Certificates of Preferred Stock serve as additional evidence C the agreement between the parties, though the precise terms nd conditions thereof must be read together with, and regarded qualified by, the terms and conditions of the Purchase Agreement."

"Moreover, the Purchase Agreement provided that failure in the part of petitioner to repurchase the preferred shares on the scheduled due dates renders the entire obligation due and mandible, with petitioner in such eventuality liable to pay % of the then outstanding obligation as liquidated damages. These features of the Purchase Agreement, taken collectively, any show the intent of the parties to be bound therein as debtor and creditor, and not as corporation and stockholder."

"Petitioners" contention that it is beyond the power and competence of petitioner corporation to redeem the preferred shares or pay the accrued dividends due to financial reverses can not serve as legal justification for their failure to perform under the Purchase Agreement. The Purchase Agreement constitutes the law between the parties and obligations arising ex contractu must be fulfilled in accordance with the stipulations. Besides, it was precisely this eventuality that was sought to be avoided when respondent SSS required a surety for the obligation."

"Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner corporation's default. As surety, Basilio L. Lirag is bound immediately to pay respondent SSS the amount then outstanding. The obligation of a surety differs from that of a guarantor in that the surety insures the debt, whereas the guarantor merely insures solvency of the debtor; and the surety undertakes to pay if the principal does not pay, whereas a guarantor merely binds itself to pay if the principal is "On the liability of petitioners to pay 8% cumulative dividend, we agree with the observation of the lower court that the dividends stipulated by the parties served evidently as interests. The amount thereof was fixed at 8% per annum and was not made to depend upon or to fluctuate with the amount of profits or surplus realized, a clear indication that the parties intended to give a sure and fixed earnings on the principal loan. The fact that the dividends were supposed to be paid out of net profits and earned surplus, of which there were none, does not excuse petitioners from the payment thereof, again for the reason that the undertaking of petitioner Basilio L. Lirag as surety, included the payment of dividends and other obligations then outstanding."

"The award of the sum of P146,000 in liquidated damages representing 12% of the amount then outstanding is correct, considering that petitioners in the stipulation of facts admitted having failed to fulfill their obligations under the Purchase Agreement. The grant of liquidated damages in the amount stated is expressly provided for in the Purchase Agreement in case of contractual breach."

"The pronouncement of the lower court for the payment of interests on both the unredeemed shares and unpaid dividends is also in order. Per stipulation of facts, petitioners did not deny the fact of non-payment of dividends nor their failure to purchase the preferred shares. Since these involve sums of money which are overdue, they are bound to earn legal interest from the time of demand, in this case, judicial i.e., the time of filing the action."

"Petitioner Basilio L. Lirag is precluded from denying his liability under the Purchase Agreement. After his firm representation to "pay immediately to the vendee the amounts then outstanding" evidencing his commitment as surety, he is stopped from denying the same. His signature in the agreement carries with it the official imprimatur as petitioner corporation's president, in his personal capacity as majority stockholder, as surety and as solidary obligor. The essence of his obligation as surety is to pay immediately without qualification whatsoever if petitioner corporation does not pay. To have another interpretation of petitioner Lirag's liability as surety would violate the integrity of the Purchase Agreement as well as the clear and unmistakable intent of the parties to the same."