Your Rights as the Founder of a Corporation 2 years ago

As is written in Section 6. Classification of Shares within the Republic No. 11232 (Revised Corporation Code of the Philipines), shareholders are entitled to rights, privileges, restrictions, and value in correspondence with their shares. 

This is why, even when you are a minor shareholder with nonvoting shares, you are still provided with some voting rights regarding specific matters (i.e., amendment of the articles of incorporation, merger or consolidation of the corporation, dissolution of the corporation). Given the scope given to them, you can only imagine those afforded by the founder.

Since founders are generally one of, if not its major shareholder, a handful of rights are afforded to them asides from their daily responsibilities for the business. 

Interested in knowing these rights?

1. Voting Rights

2. Right to Dividends

3. Preemptive Rights

4. Power of Inspection

5. Right to Information

6. Appraisal Right

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Voting Rights

In accordance with the Revised Corporation Code, major shareholders have the right to elect, remove, and replace directors and vote on certain corporate acts.

Positions in the company that is decided through votes include the following:

• Member of the Board of Directors

• Trustee

• Corporate Officers (i.e., president, treasurer, secretary)

• Other officers as provided in the bylaws

On the other hand, corporate actions that require votes from shareholders include amendments to the company’s articles of incorporation. Any provision that will be stated in the articles is subject to a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds of the outstanding capital stock.

Adopting bylaws by the corporation is another corporate action requiring votes from the stockholders representing at least a majority of the outstanding capital stock or at least a majority of the members in the case of nonstock corporations.

Right to Dividends

Dividends, as explained in this article regarding taxes paid in one-time transactions, represent the corporation's owners' share. They are the embodiment of the distribution of corporate earnings to eligible shareholders. Since you are not only a major shareholder, but the founder of the company, you, among others are entitled to dividends.

Pre-emptive Rights

Depending on the details laid out in your company’s Articles of Incorporation, a founder with major controlling shares has the right to subscribe to the capital stock of the company. Known, too, as the  “right of first refusal,” this specific privilege is one that can prove to be advantageous in terms of shares being made available for purchase in the future.

Before it is publicized to the general public, these newly available shares are first introduced to shareholders. Since they are not public yet, there is less competition for the shares. 

You can buy them or refuse purchase firsthand — hence, the alternate title.  

Unfortunately, if the shares made available are issued in compliance with laws requiring stock offerings or minimum stock ownership by the public, then your preemptive rights do not apply. 

They are also inapplicable to shares issued in good faith with the approval of stockholders representing two-thirds of the outstanding capital stock, in exchange for corporate property, or in payment of a previously contracted debt.

Power of Inspection

Part of your responsibilities as a major shareholder of your company includes the task of tracking the records of the company. This is done as a way to gauge the enterprise’s performance and keep an eye open for any irregularities in terms of finances (i.e., the value of the shares of stock for sale or investment).

To do this, you are awarded the “Power of Inspection,” allowing you to inspect the corporate books and records of the company. Some examples of legal documents accessible for inspections include stock and transfer books, business correspondences, memoranda, and contracts. 

It is your legal right as the founder to have access to the aforementioned documents along with other similar files. In cases where a member of the corporation refuses or prevents you from exercising this right, you can report noncompliance to the Securities and Exchange Commission (SEC), which will conduct a summary investigation and issue an order directing the inspection or reproduction of the requested records.

SEC (2020) has detailed the following scenarios where your right to inspect and/or reproduce corporate records is violated:

• Outright refusal to allow the director, trustee, stockholder, or member of the corporation, to peruse any of the corporate records in person or by a representative

• Failure to take, within a reasonable amount of time, the necessary steps that would allow the director, trustee, stockholder, or member of the corporation, to peruse any of the corporate records in person or by a representative

• Failure to give the director, trustee, stockholder, or member a reasonable amount of time to peruse any of the corporate records in person or by a representative

• Outright refusal to allow the director, trustee, stockholder, or member of the corporation, to reproduce any of the corporate records in person, or by a representative, at his/her own expense

• Failure to take, within a reasonable amount of time, the necessary steps that would allow the director, trustee, stockholder, or member of the corporation, to reproduce any of the corporate records in person, or by a representative, at his/her own expense

• Failure to give the director, trustee, stockholder, or member a reasonable amount of time to reproduce any of the corporate records in person, or by a representative, at his/her own expense. 

Upon violation of this right, you are encouraged to report to the Commission, who will investigate the matter and issue an order directing the inspection or reproduction of the requested records. Furthermore, the violators will be fined an amount of money ranging from PHP 10,000 to PHP 200,000, depending on the severity of the action. An act detrimental to the public, for example, can go as high as PHP 200,000 to PHP 400,000.

Right to Information

Freedom of Information is a fundamental right provided to Filipino citizens in accordance with Section 7, Article 3 of the 1987 Constitution. However, within the context of a business, this right pertains to the privileges provided to all shareholders. 

In relation to the “Power of Inspection,” a founder is provided with the right to information. As both a founder and major shareholder, you can request periodic reports filled with personal and professional information about the directors and officers of the company.

Examples of information available to you are the directors’ and officers’ holdings of the company’s shares, dealings, and the aggregate compensation of the directors and officers.

Appraisal Right

First among the rights given to a founder is the right to dissent and demand payment of the fair value of their shares in the manner provided for under Section 82 of the Corporation Code of the Philippines. This is called the “Appraisal Right.”

As a founder with major shares, you can exercise this right under these four circumstances:

• There is an amendment to the Articles of Incorporation of the company that changes or restricts the rights of any stockholders or class of shares, authorizes preferences in any respects superior to those of outstanding shares of any class, and extends/shortens the term of corporate existence.

• Any occurrences of sale, lease, exchange, transfer, mortgage, pledge, or other disposition of all or substantially all of the corporate property and assets as provided in the Corporation Code.

• In case of a merger 

• Corporate funds are invested for any purpose outside the company’s primary purpose.

You can exercise your appraisal rights by voicing dissent against these and other similar corporate actions by making a written demand on the corporation. The demand itself is dedicated to acquiring the payment of the fair market value of shares held within thirty (30) days beginning from the date when votes were collected regarding the disputed corporate action.

Failing to submit a written demand within thirty days will be regarded as a renunciation of your appraisal rights.

If the proposed corporate action is carried out, the corporation shall pay the stockholder the fair value thereof as of the day before the vote upon surrender of the certificate/s of stock representing your shares, minus the appreciation or depreciation of expenses in anticipation of such corporate action.

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Understanding your legal standing as a founder is a crucial element that can aid you in your efforts to maintain and guide the development of your company. It is also important that stay up-to-date with laws that help ease business transactions within the company. 

Read this briefer about the 2019 Revised Corporation Code of the Philippines, which details the in’s and out’s of establishing and maintaining businesses within the country. It also introduces new concepts that promote good corporate governance and afford protection to corporations, investors, and consumers alike. 

You can also check out Digest.ph for upfront pricing, scopes of work, and other legal services.

References:

[1] Rights of Shareholders by Magsaysay and Houlder

[2] Revised Corporation Code: Title X – Appraisal Right by Tax and Accounting Center, Inc.

[3] SEC Advances Right to Inspect Corporate Records by Securities and Exchange Commission (SEC) 

[4] Stockholder’s right of inspection by Divina Law

[5] Preemptive Rights: Some Shareholders Get First Dibs on New Stock from Investopedia

[6] PREEMPTIVE RIGHTS UNDER THE REVISED CORPORATION CODE by P&L Law
[7] Briefer on Revised Corporation Code by SEC

[8] THE 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES – ARTICLE III

[9] 2019 Revised Corporation Code of the Philippines