Mr. Nicanor J. Gumagay

October 9, 1989 Mr. Nicanor J. Gumagay Abalayan Subdivision San Jose, Digos, Davao del Sur Sir : This refers to your letter dated August 18, 1989, requesting clarification relative to issuance of both common and preferred shares without authority from the Commission and the legal consequences for such unauthorized issuance. The pertinent provision of the Corporation Code provides: "SECTION 6. Classification of shares . The shares of stock corporations may be divided into classes or series of shares of stock, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation . xxx xxx xxx Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code. xxx xxx xxx Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share ." (emphasis supplied). Thus, where the articles of incorporation are silent on the question of classification of shares, all shares issued by the corporation are presumed to be equal. Accordingly, a corporation cannot without express authority in the articles of incorporation issue preferred shares with superior rights than other shares. The corporation, however, if it desires to issue preferred shares, should amend its articles of incorporation in accordance with Section 16 of the Corporation Code quoted hereunder: "SECTION 16. Amendment of Articles of Incorporation . Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. LibLex The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation ." (emphasis supplied). Regarding the effects of subscription contracts executed pursuant to unauthorized issuance of preferred shares, the pertinent provision of the Civil Code of the Philippines, provides: "ARTICLE 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, good customs, public order or public policy; xxx xxx xxx (3) Those whose cause or object did not exist at the time of the transaction ;...(emphasis supplied). Likewise, Section 144 of the Corporation Code provides: "SECTION 144. Violations of the Code . Violations of any or the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand pesos (P10,000.00) or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code". Please be advised accordingly. Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner