CHAPTER VI: RIGHTS OF STOCKHOLDERS AND MEMBERS

A shareholder is any person, company or other institution that owns at

leas one share in a company. A member is any person, company or
other institution who is part of a non-stock corporation.
So can
1. Right to Attend Stockholders Meetings
A registered stockholder has a right to participate in any meeting, until
challenged successfully in proper proceedings, and in the absence of
fraud the action of the stockholders meeting cannot be collaterally
attacked.
Types of Meetings:
a. Regular meetings held annually on a date fixed in the by-laws,
or if not so fixed, on any date in April of every year as
determined by the BOD/BOT. Provided: Written notice must be
sent 2 weeks prior to the meeting, unless a different period is
required by the by-laws.
b. Special meeting held at any time deemed necessary or as
provided in the by-laws. Provided: Written notice must be sent 1
week prior to the meeting, unless a different period is required
by the by-laws.
Place and Time of Meeting must be held in the city or municipality
where the principal office of the corporation is located. Any provision in
the by-laws changing such place shall be illegal. (Sec. 51, Corporation
Code)
Who may call meetings if there is no person authorized to call a
meeting, SEC upon petition of a stockholder/member, and on the
showing of good cause, may issue an order to petitioner to call a
meeting by giving proper notice, with the petitioner presiding thereat
Quorum Majority of the OCS/members
Except: in cases where greater vote for an act or business
is required
2. Right to Vote
The right to vote is a right inherent in and incidental to the
ownership of corporate stock, and such is a property right.
By their very nature, shares of common stock, do not guarantee
that the vote of the stockholder will prevail.

Note: Upon the death of a shareholder, the heirs do not automatically

become stockholders and acquire voting rights. The stock must be: 1.
Distributed first to the heirs in estate proceedings, and 2. The transfer
of the stocks must be recorded in the books of the corporation.
Note: Unlike in non-stock corporation, membership are personal and
non-transferable, unless the AOI or by-laws provide shares are sti.
Limitations that may be placed on the right to vote:
a. No share may be deprived of voting rights except preferred or
redeemable shares;
b. There shall always be a class or series of shares which must have
complete voting rights;
c. Non-voting shares are still entitled to vote in:
i. Amendment of AOI
ii. Adoption/Amendment of by-laws
iii. Sale, lease, encumbrance of all or substantially all of
the corporate property
iv. Increasing bonded indebtedness
v. Increase/decrease of capital stock
vi. Merger or consolidation
vii. Investment of corporate funds in another corporation
viii. Dissolution of the corporation
Right to Vote of Mortgagors and Pledgors:
GR: The stockholder, even if he has pledged or mortgaged his shares,
can still vote on those shares
Exception: such right is granted to the pledgee or mortgagee but
must be recorded in the corporate books
Voting in case of joint ownership of stock
Rule: consent of all co-owners shall be necessary, unless there is a
written proxy, signed by all the co-owners, authorizing one or some of
them or any other person to vote
Proxies
a. Form Proxies shall be in writing, signed by the stockholder or
member, and filed with corporate secretary before scheduled
meeting. If not complied, it cannot be enforced nor exercised.
b. Period of validity it shall be valid only for the meeting for which
it is intended. No proxy shall be valid and effective for a period
longer than 5 years at any one time.
Voting Trust Agreement (VTA)

Purpose: confer upon a trustee or trustees the right to vote and other
rights pertaining to the shares for a period not exceeding 5 years at
any one time.
Form: it must be: 1. In writing and notarized, 2. Filed with corporation
and SEC (otherwise it shall be ineffective an unenforceable), 3.
Notation in corporate books
Prohibited VTA No VTA shall be entered for the purpose of
circumventing the law against monopolies and illegal combination in
restraint of trade or used for purposes of fraud.
3. Pre-emptive Right
It is the shareholders right to subscribe to all issues or
disposition of shares of any class in proportion to his present
stockholdings
Purpose: to enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the retained
earnings
4. Right of First Refusal
It is a contractual right that gives its holder the option to enter a
business transaction with the owner of something, according to
specified terms, before the owner is entitled to enter into that
transaction with a third party.
Except in case of close corporations where the right of first
refusal must be provided in the AOI, the right of first refusal can
only arise in Corporate law by means of a contractual stipulation,
or when it is provided for in the AOI.
5. Right to Receive Dividends
GR: Stock corporations are prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock
Exceptions:
a. when justified by definite corporate expansion projects or
programs approved by BOD
b. when corporation is prohibited under any loan agreement
from declaring dividends without its consentn
c. when such retention is necessary under special circumstances
Form of Dividends:
1. Cash Dividends can be declared by mere Board resolution from
URE; revocable before announcement; can be payable to holders
of delinquent stock but to be applied to the unpaid balance on
the subscription
2. Property Dividends

3. Stock Dividends can be declared by the board with approval of

2/3 OCS
Note:
No dividends can be declared out of capital, except liquidating
dividends distributed at dissolution.
Dividends can be declared only out of URE
1 Stock dividends cannot be issued to non-stockholders even for
services rendered Right to Receive Dividends
DIVIDENDS is part of the earnings of a corporation that is
distributed to its shareholders, usually paid quarterly. Or in other term
right to profit.
Example Elijah has 1 share in Marnessa Corporation, is he a owner of
the corporation? Yes.
That means Elijah has the right to the profitability earnings of the
corporation regardless of the number of shares he owns.
GR: Stock corporations are prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock
If the corporation performs well and the profitability of corporation is in
headway that cause surplus profits in excess of 100% of their paid in
capital stock they can retain the surplus.
Exceptions:
a when justified by definite corporate expansion projects or
programs approved by BOD
the usage of the surplus is possible provided its allocation is
with justifiable allocation like expansion of projects or
programs. The usage shall be approved by the BOD.
b when corporation is prohibited under any loan agreement
from declaring dividends without its consent
c when such retention is necessary under special circumstances
such as when there is need for special reserve for probable
contingencies( possible event).
Fund to use for the preparation of possible occurrence of
events.
Form of Dividends:
1 Cash Dividends can be declared by mere Board resolution from
URE; revocable before announcement; can be payable to holders
of delinquent stock but to be applied to the unpaid balance on
the subscription

Alvin Corporation pays a 100 pesos dividend to shareholders. An

investor who owns 1,000 shares of JPF will receive Php 100,000
1,000 shares x Php 100 = Php. 100, 000
Cash Dividends shall be first applied to the unpaid balance
2 Property Dividends
3 Stock Dividends can be declared by the board with approval of
2/3 OCS
With a stock dividend, each investor will receive an additional number
of shares based on the number of shares that they own. The market
price of the stock will decline after the stock dividend has been
distributed to reflect that there are now more shares outstanding, but
the total market value of the company will remain the same.
Example:
If HRT pays a 5% stock dividend to its shareholders, an investor with
500 shares will receive an additional 25 shares. This is determined by
multiplying the number of shares owned by the amount of the dividend
to be paid.
500 x 5% = 25
Note:
No dividends can be declared out of capital, except liquidating
dividends distributed at dissolution.
Dividends can be declared only out of URE
Stock dividends cannot be issued to non-stockholders even for
services rendered

6. Right to Inspect and Copy Corporate Records

Books required to be kept all business transactions of the
corporation, minute book for meetings of stockholders/ members and
meetings of the board, stock and transfer book
Right of inspection, examination and copying
Conditions:
1. it is done during business hours
2. for good purpose such as investigate acts of management,
financial conditions, fix value of shares, mailing list for proxies.
note: the burden of proof lies with the corporation who refuses to grant
the right to inspect corporate records

Liability for refusal to allow inspection If the director or officer

unjustly refuses to allow stockholder to inspect the corporate books, he
can be held liable for damages and criminal offense under Sec. 144 of
Corporation Code.
Valid defenses: improper use of information, bad faith, use the
information for an illegitimate purpose.
Right to financial statement within 10 days from receipt of a
written request of any stockholder or member, corporation shall furnish
him most recent financial statement, which shall include the balance
sheet and profit or loss statement.
7. Right to File Derivative Suit
Where the corporate directors are guilty of breach of trust and
intracorporate remedy is futile or useless, a stockholder may institute a
suit in behalf of himself and other stockholders and for the benefit of
the corporation.
A derivative suit is a suit by a stockholder to enforce a corporate cause
of action an individual stockholder may file a derivative suit on behalf
of the corporation to protect or vindicate corporate rights whenever
the officials of the corporation:
a. refuse to sue,
b. are the ones to be sued, or
c. hold control of the corporation
note: there is no conflict between Derivative suit and Business
Judgment Rule reason: the suit is only available only in instances
when the Board is incapable of exercising business judgment on behalf
of the corporation or when there is violation of the duty of diligence
Requisites for filing derivative suit:
1. he was a stockholder or member
2. he exerted all reasonable efforts to exhaust all remedies to
obtain desired relief
3. no appraisal rights are available
4. suit is not a nuisance or harassment suit
Venue: RTC where the principal office of the corporation is located
8. Appraisal Right
The right to withdraw from the corporation and demand payment
of the fair value of his shares after dissenting (disapproval, be of
different opinions) from certain corporate acts involving
fundamental changes in corporate structure.
When it may be exercised:
a. Extend or shorten corporate term;

For example the corporation extends its corporate term from

50 to another 50 years then if it dissents to a stockholders
demand, he may exercise his/her appraisal right
b. Restriction of rights or privileges through amendment of AOI
For instance theres an amendment of AOI of the corporation
and in the amendment it denies the Pre-emptive right ( power

to privilege that may be extended to certain shareholders of a corporation

that grants them the right to purchase additional shares in the company
prior to shares being made available for purchase by the general public)

which the allowed to but it dissenting your demand you may

exercise your appraisal right
c. Bulk Sales
d. Equity investment in non-primary purpose
In case of investment of corporate funds in another
corporation or business or for any other purpose
e. Merger or consolidation
Outline on Exercise of Appraisal Right:
1. Dissenting stockholder must submit a written demand for the
fair value of the shares within 30 days from the date the vote
was taken.
2. 10 days from demand, dissenting stockholder must submit his
certificate of stocks for notation
3. Within 60 days, the corporation and dissenting stockholder
shall agree to the FMV of the shares. If there is no agreement,
it shall be determined and appraised by 3 disinterested
persons.
4. After findings of the FMV, the corporation must pay within 30
days
5. The dissenting stockholder shall only be paid only if there is
URE
Note: if dissenting stockholder is not paid within 30 days from
the award, he shall be automatically restored to all his rights as
stockholder