Photo from Unsplash | Jud Mackrill
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
All stockholders of a corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings in the corporation. (Section 38, Revised Corporation Code)
Preemptive right
Preemptive right refers to the right, option or privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before the same can be disposed of in favor of others.
Section 38 of the Revised Corporation Code provides:
“Section 38. Power to Deny Preemptive Right. – 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-thirds (2/3) of the outstanding capital stock in exchange for property needed for corporate purposes or in payment of previously contracted debt.” (Section 38, Revised Corporation Code)
This right is exercised in order to preserve the existing proportionate rights of the stockholders, and to enable a shareholder to retain his proportionate control and equity in the corporation. The underlying basis of this right is to maintain the proportionate interest and voting strength of existing stockholders in the corporation.
According to SEC-OGC Opinion No. 19-15 (Re: Preemptive Right), preemptive right is based on the principle that a stockholder, in subscribing to shares of stock, do so under the understanding that his equity is fixed by the relation which the number of shares he subscribes bears to the total authorized capital stock, issued or unissued, subscribed or unsubscribed, at the time of his subscription, as shown in the company’s articles of incorporation, and should not, therefore, be diluted by the issuance of additional shares as to affect his rights to vote, to dividends, and to the distribution of assets upon liquidation, without first giving him the opportunity to subscribe to such shares in proportion to his shareholdings.
Scope of the preemptive right of shareholders
The Revised Corporation Code states that 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. (Section 38, Revised Corporation Code)
The phrase “all issues of disposition of shares of any class” shall mean:
(1) new shares issued in pursuance of increase in capital stock or from the unissued shares which form part of the authorized capital stock; and
(2) treasury shares.
Following the legal principle “Ubi lex non distinguish nec nos distinguere debemos.” (Where the law does not distinguish, courts should not distinguish.), since Section 38 of the Revised Corporation Code uses the phrase “all issues or dispositions of shares of any class,” preemptive right extends not only to issuances of new shares resulting from an increase in capital stock, but also to issuance of previously unsubscribed shares which form part of the existing authorized capital stock, as well as to disposition of treasury shares. (SEC-OGC Opinion No. 11-41 on the Availability of Preemptive Rights)
Preemptive right shall not extend to (1) shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public, (2) shares issued in good faith with the approval of the shareholders representing two-thirds of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously-contracted debt.
It should be noted that preemptive right shall not take effect if denied in the corporation’s Articles of Incorporation or an amendment thereto.
Read also: SHAREHOLDERS’ APPROVAL ON SALE OF CORPORATE ASSETS
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding taxation and taxpayer’s remedies, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
All rights reserved.