After reading “What is the power of the corporation to deny pre-emptive right?”, read also “What is the power of the corporation to increase or decrease capital stock or incur, create, increase bonded indebtedness?”
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Pre-emptive right is the right of shareholders to subscribe to all issue or disposition of shares of any class in proportion to their shareholdings.
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The corporation can deny pre-emptive right if the articles of incorporation or amendment thereto deny such right.
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As a preferential right, a stockholder has the option to waive such right.
Pre-emptive right is the right of shareholders to subscribe to all issue or disposition of shares of any class in proportion to their shareholdings. It is the right granted to the stockholders to have the first option to subscribe to any issuance or disposition of share from the capital stock in proportion to the stockholdings of the shareholders. (SEC-OGC Opinion No. 19-15 dated March 13, 2019)
As stated in the Revised Corporation Code of the Philippines, pre-emptive right is the preferential right granted to all stockholders of a corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. (Sec. 38, Revised Corporation Code of the Philippines) The purpose of pre-emptive right is to enable the shareholder to retain his proportionate control in the corporation and retain his equity in the surplus.
When is the pre-emptive right not available? The law says:
All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such preemptive right shall not extend to shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares issued in good faith with the approval of the stockholders representing two the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt (Emphasis supplied). (Sec. 38, RCCP)
Thus, the pre-emptive right is not available when:
- Right is denied in the Articles of Incorporation;
- Shares are issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; and
- Shares are issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
Another instance when the pre-emptive right of a stockholder cannot be exercised is when he or she waives such right.
Jurisprudence says:
The stockholder must be given a reasonable time within which to exercise their preemptive rights. Upon the expiration of said period, any stockholder who has not exercised such right is deemed to have waived it. (Majority Stockholders of Ruby Industrial Corp. vs. Lim and the Minority Stockholders of Ruby Industrial Corp., G.R. Nos. 165887 & 165929, June 6, 2011)
As a preferential right, a stockholder has the option to waive such right. A stockholder who neither desires nor intends to buy any of the stocks being offered may waive such rights. In such event, the shares may be offered to any interested person acceptable to the corporation. (SEC Opinion dated January 25, 1990)
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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