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1.2 Common and Preferred Shares
SEC Certification Examination Phase 1 General
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1 Chapter 1: Corporate Structure & Capital Stock
1.1 Philippine Corporate Formation and Capital Structure 1.2 Common and Preferred Shares 1.3 Stockholder Rights and Corporate Actions 1.4 Corporate Debt and Fixed Income Instruments
2 Chapter 2: Financial Markets and Securities Products
2.1 Money Market and Capital Market Instruments 2.2 Collective Investment Schemes and Funds 2.3 Philippine Stock Exchange (PSE) Structure and Trading 2.4 Real Estate Investment Trusts (REITs) and Asset-Backed Securities
3 Chapter 3: Macroeconomic Principles and Monetary Policy
3.1 Gross Domestic Product, Inflation, and Business Cycles 3.2 Monetary Policy and the Bangko Sentral ng Pilipinas (BSP) 3.3 Fiscal Policy, National Debt, and Foreign Exchange 3.4 Philippine Financial Regulatory Architecture
4 Chapter 4: Financial Mathematics and Valuation Concepts
4.1 Time Value of Money and Interest Calculations 4.2 Bond Valuation and Yield Concepts 4.3 Equity Valuation Metrics and Financial Ratios 4.4 Investment Return, Risk Metrics, and Portfolio Principles
5 Chapter 5: The Securities Regulation Code (SRC) & Securities Registration
5.1 Legislative Framework and SEC Regulatory Powers 5.2 Definition and Scope of Securities 5.3 Mandatory Registration of Securities 5.4 Exempt Securities and Exempt Transactions
6 Chapter 6: Market Intermediaries & Trading Conduct
6.1 Registration of Brokers, Dealers, Associated Persons, and Salesmen 6.2 Duties and Ethical Standards of Market Professionals 6.3 Supervision and Compliance Organization 6.4 Books, Records, and Customer Account Handling
7 Chapter 7: Market Manipulation, Insider Trading & Public Disclosures
7.1 Prohibited Acts and Market Manipulation 7.2 Insider Trading and Unlawful Disclosures 7.3 Tender Offer Rules, Proxy Solicitation, and Periodic Reports
8 Chapter 8: Principles of Corporate Governance & Board Oversight
8.1 Evolution and Governance Framework in the Philippines 8.2 Board Composition, Roles, and Fiduciary Duties 8.3 Independent Directors and Term Limits 8.4 Board Committees and Special Responsibilities
9 Chapter 9: Internal Controls, Disclosure & Shareholder Rights
9.1 Internal Control System and Internal Audit Function 9.2 Related Party Transactions (RPT) Policy and Governance 9.3 Corporate Transparency and Timely Disclosure 9.4 Rights of Shareholders and Stakeholder Engagement
10 Chapter 10: Risk Concepts and Categories
10.1 Risk, Uncertainty, and Objectives 10.2 Financial Risks: Market, Credit, and Liquidity 10.3 Non-Financial Risks: Operational, Strategic, and Reputational
11 Chapter 11: Risk Management Process
11.1 Risk Management: Coordinated Direction and Control 11.2 Risk Identification 11.3 Risk Analysis and Evaluation
12 Chapter 12: Risk Treatment and Hedging
12.1 Risk Treatment, Mitigation, Monitoring, and Review 12.2 Hedging: Purpose and Exposure Identification 12.3 Hedging Strategies and Instruments 12.4 Integrated Risk Scenarios and Review
13 Chapter 13: AML Legal Framework & Institutional Governance
13.1 Anti-Money Laundering Act of 2001 (AMLA) and Amendments 13.2 Anti-Money Laundering Council (AMLC) Powers and Structure 13.3 Money Laundering Offenses and the Three Stages 13.4 Compliance Framework and Money Laundering Prevention Program (MLPP)
14 Chapter 14: Customer Due Diligence, Reporting & Record Keeping
14.1 Customer Due Diligence (CDD) and Know-Your-Customer (KYC) 14.2 Politically Exposed Persons (PEPs) and High-Risk Relationships 14.3 Covered and Suspicious Transaction Reporting 14.4 Record Keeping, Freezing of Assets, and Penalties
1.2 Common and Preferred Shares
Key Takeaways Explain This Topic AI
Every Philippine stock corporation must maintain at least one class of shares with complete voting rights, typically designated as common shares.
Preferred shares can only be issued with a stated par value and may offer dividend preferences (cumulative vs. non-cumulative, participating vs. non-participating) and asset distribution priority upon liquidation.
Under Section 6 of the RCCP, holders of non-voting shares retain statutory voting rights on eight fundamental corporate acts, including charter amendments, mergers, corporate dissolution, and incurring bonded indebtedness.
Redeemable shares under Section 8 may be repurchased by the corporation regardless of the presence of unrestricted retained earnings, provided the corporation possesses sufficient assets to satisfy outstanding liabilities.
Founder's shares under Section 7 can carry exclusive voting rights to elect board directors, but this exclusivity is strictly capped by statute at a maximum of five years from SEC approval.
Last updated: October 2026
1.2 Common and Preferred Shares
Under Section 6 of Republic Act No. 11232 (The Revised Corporation Code of the Philippines) , corporate issuers are granted broad statutory authority to classify their capital stock into distinct share classes. These classes may carry varying rights, voting privileges, dividend preferences, and statutory restrictions, provided each classification is explicitly set forth in the Articles of Incorporation (AOI).
A fundamental mandate of Section 6 is that there must always be a class of shares with complete voting rights . No corporation can disenfranchise all its equity; common shares typically serve as this voting foundation.
Common Shares: The Core Equity Interest
Common shares represent the basic residual ownership interest in a Philippine corporation. Common stockholders assume the ultimate business risk: they have no guaranteed dividend payout and stand last in line during corporate liquidation.
Essential Rights of Common Stockholders
Voting Power : Common stockholders possess full voting rights on all corporate matters submitted to a shareholder vote. In director elections, Philippine law guarantees cumulative voting (Section 23), allowing a stockholder to multiply their shares by the number of director seats to be elected and concentrate all votes on a single candidate or distribute them among multiple candidates.
Residual Dividend Claim : Common shareholders participate in corporate profits only after debt service, operating expenses, and preferred dividend preferences have been satisfied.
Preemptive Right : Common stockholders hold an inherent statutory right under Section 38 to subscribe to new share issuances to protect against dilution.
Liquidation Claim : Upon corporate dissolution, common stockholders receive the remaining assets only after all creditors, bondholders, and preferred shareholders have been paid in full.
Preferred Shares: Preferences and Mechanics
Preferred shares are equity securities designed to provide investors with debt-like income priority while maintaining equity status. Under Section 6, preferred shares may be given preference in the distribution of dividends, the distribution of corporate assets upon liquidation, or any other preference not contrary to law.
Important
The Stated Par Value Requirement : Section 6 explicitly mandates that preferred shares may only be issued with a stated par value . Philippine corporations are legally prohibited from issuing no-par preferred shares.
Preferred Dividend Classifications
Preferred shares typically carry a fixed dividend rate stated either as a percentage of par value (e.g., 6% preferred on ₱100 par = ₱6.00 annual dividend) or as a fixed peso amount per share. Preferred dividends are divided into several operational structures: Preferred Dividend Classifications
├── Arrears Accumulation:
- │ ├── Cumulative Preferred (Passed dividends accumulate as arrears)
- │ └── Non-Cumulative Preferred (Passed dividends are forfeited)
└── Excess Sharing:
- ├── Participating Preferred (Shares in surplus profits beyond fixed coupon)
- └── Non-Participating Preferred (Receives only the stated fixed dividend)
- 1. Cumulative vs. Non-Cumulative
Cumulative Preferred : If the board does not declare dividends in a given year (e.g., due to insufficient earnings or capital reinvestment), the unpaid dividend accumulates as a dividend in arrears . The corporation must fully settle all accumulated arrears to cumulative preferred shareholders before declaring or paying any dividend to common stockholders. Note: Dividends in arrears are not corporate debts until formally declared by the board.
Non-Cumulative Preferred : If dividends are passed in any fiscal year, the preferred stockholder permanently forfeits the right to receive that year's payout. The corporation only needs to pay the current year's dividend to preferred holders before paying common dividends.
2. Participating vs. Non-Participating
Participating Preferred : After the preferred shareholder receives their fixed dividend and the common shareholder receives an equivalent dividend percentage, participating preferred shares share pro-rata with common stock in any remaining distributable profits.
Non-Participating Preferred : The preferred stockholder receives strictly their stated fixed dividend rate and nothing more, regardless of how extraordinarily profitable the corporation becomes. In the Philippines, preferred shares are presumed non-participating unless participation is explicitly granted in the AOI.
The Eight Fundamental Acts Where "Non-Voting" Shares Vote
While Section 6 allows a corporation to classify preferred or redeemable shares as "non-voting," Philippine corporate law does not permit complete disenfranchisement.
Under Section 6, Paragraph 6 of the RCCP , holders of non-voting shares shall nevertheless be entitled to vote on the following eight (8) fundamental corporate actions :
Amendment of the Articles of Incorporation (including any extension or shortening of the corporate term).
Adoption and amendment of bylaws .
Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property and assets .
Incurring, creating, or increasing bonded indebtedness .
Increase or decrease of authorized capital stock .
Merger or consolidation of the corporation with another corporation or corporations .
Investment of corporate funds in another corporation or business outside the primary purpose .
- Dissolution of the corporation . Non-Voting Shares Statutory Voting Rights (Sec 6)
- ├── Charter Governance: AOI Amendments | Bylaw Changes | Dissolution
- ├── Major Asset Moves: Sale of Substantially All Assets | Mergers & Consolidations
- └── Capital Structure: Increasing Bonded Debt | Increasing/Decreasing ACS | Outside Investments
Note
The Routine Governance Exclusion : In annual elections of the board of directors and the approval of management compensation, non-voting shares have no vote . The eight statutory items represent fundamental structural changes to the corporate enterprise.
Redeemable Shares (Section 8)
Under Section 8 of the RCCP , redeemable shares are shares issued by a corporation that may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the corporate books.
Key Legal Properties
The URE Exemption : Regular share buybacks under Section 40 strictly require unrestricted retained earnings. In stark contrast, redeemable shares can be repurchased even if the corporation has zero or negative retained earnings , provided the corporation has sufficient assets in its books to cover all debts and liabilities inclusive of capital stock (the solvency rule).
Mandatory vs. Optional : Redemption may be at the option of the corporation (callable), at the option of the holder (puttable), or mandatory upon a specified maturity date.
Retirement of Shares : Once redeemed, redeemable shares are considered retired and cannot be reissued unless the AOI expressly permits their reissuance.
Convertible Shares
Convertible shares (most commonly convertible preferred stock) give the holder the option to exchange their shares for a predetermined number of common shares.
Conversion Ratio : Number of common shares received for each preferred share (e.g., a 1:4 ratio grants 4 common shares per preferred share).
Conversion Price : The effective cost of common stock acquired through conversion (Par Value of Preferred / Conversion Ratio).
Anti-Dilution Covenants : Charters typically include anti-dilution clauses that adjust the conversion ratio automatically if the corporation executes a stock split or stock dividend on its common shares.
Founder's Shares (Section 7)
Under Section 7 of the RCCP , founder's shares are shares classified in the AOI that grant the original founders or promoters specific rights and privileges not enjoyed by other stockholders.
The Strict 5-Year Rule
Founder's shares may be granted the exclusive right to vote and be voted for in the election of directors . However, Section 7 imposes an absolute statutory cap:
Maximum Period of Exclusive Voting Rights = 5 Years from SEC Approval \text{Maximum Period of Exclusive Voting Rights} = 5 \text{ Years from SEC Approval} Maximum Period of Exclusive Voting Rights = 5 Years from SEC Approval
The 5-year clock begins on the exact date the SEC approves the corporation's Articles of Incorporation.
Once the 5-year period expires, the exclusive voting privilege terminates automatically by operation of law, and the shares revert to standard voting rights.
Foreign Equity Restrictions : Founder's shares cannot be structured to circumvent foreign equity ceilings under the Philippine Constitution, the Anti-Dummy Law (Commonwealth Act No. 108), or the Foreign Investments Act (RA 7042).
Treasury Shares (Section 9)
Under Section 9 of the RCCP , treasury shares are shares that have been lawfully issued and fully paid for, but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or forfeiture.
Essential Legal Constraints on Treasury Shares
No Voting Power : Treasury shares cannot be voted at shareholder meetings and cannot be counted toward establishing a quorum or a voting majority.
No Dividend Entitlement : A corporation cannot pay dividends to itself; treasury shares receive neither cash nor stock dividends.
Not Outstanding Equity : Treasury shares are issued shares, but they are not outstanding shares .
Source of Acquisition (Section 40) : A corporation can only repurchase its own shares to hold in treasury if it possesses sufficient unrestricted retained earnings (URE) to cover the purchase price.
Reissuance Below Par : When reissuing treasury shares, the board of directors may sell them for any fair market price, even below original par value . Because the par value was already fully paid upon original issuance, selling treasury shares below par does not create watered stock (Section 64).
Comparative Matrix: Share Classes and Key Legal Attributes
Share Class Primary Legal Purpose Voting Rights Requires Stated Par Value? Buyback Requires URE?
- Common Core equity; residual claim Complete voting rights No (Can be par or no-par) Yes (Sec 40)
- Preferred Dividend and liquidation priority Non-voting (except 8 acts) Yes (Mandatory par) Yes (Sec 40)
Redeemable Capital retrieval on fixed terms Non-voting (except 8 acts) Yes or No (as per charter) No (Solvency test only)
Founder's Founder governance retention Exclusive election (max 5 yrs) Yes or No Yes (Sec 40)
Treasury Reacquired corporate shares Zero voting rights Retains original par status N/A (Acquisition requires URE)
Practical Exam Traps and Regulatory Pitfalls
Trap 1: Assuming Non-Voting Preferred Shares Can Never Vote. Exam candidates frequently pick options stating that non-voting preferred shares have zero voice in corporate governance. Always remember the eight fundamental statutory matters where they must vote.
Trap 2: Paying Dividends on Treasury Shares. If a scenario involves a corporation distributing a 10% stock dividend, the candidate must calculate the distribution based on outstanding shares only , excluding any treasury shares.
Trap 3: The Redeemable Shares Retained Earnings Trap. Questions frequently ask if an insolvent corporation can redeem its redeemable shares if it has retained earnings, or if a solvent corporation without retained earnings can redeem them. The rule is simple: Retained earnings are not required, but corporate solvency (sufficient assets to cover debts) is mandatory.
Trap 4: Founder's Exclusivity Renewal. The 5-year exclusivity limit for electing directors cannot be extended or renewed by charter amendment after incorporation. Once 5 years elapse, the exclusivity dies.