Introduction

In the Philippine corporate landscape, the increase of a corporation's authorized capital stock is a fundamental mechanism for business expansion, allowing companies to raise additional funds through the issuance of new shares. This process is governed primarily by the Revised Corporation Code of the Philippines (Republic Act No. 11232, or RCC), which amended the old Corporation Code (Batas Pambansa Blg. 68) in 2019 to streamline corporate procedures and enhance ease of doing business. The Securities and Exchange Commission (SEC) serves as the primary regulatory body overseeing these increases, ensuring compliance with legal standards to protect investors and maintain market integrity.

This article provides an exhaustive examination of the topic, drawing from the RCC, SEC rules, and related jurisprudence. It covers the legal framework, prerequisites, procedural steps, documentation requirements, potential challenges, and post-increase obligations. Understanding this process is crucial for corporate officers, legal practitioners, and investors navigating the Philippine business environment.

Legal Framework and Basis

The authority to increase authorized capital stock stems from Section 37 of the RCC, which empowers corporations to amend their Articles of Incorporation (AOI) to raise their capital. Authorized capital stock refers to the maximum amount of capital that a corporation is permitted to raise through share issuances, as stated in its AOI. An increase typically involves amending the AOI to reflect a higher authorized amount, which may or may not involve issuing new shares immediately.

Key legal principles include:

Corporate Autonomy: Corporations have the inherent power to manage their capital structure, subject to stockholder approval and regulatory oversight.
Pre-emptive Rights: Under Section 38 of the RCC, existing stockholders have pre-emptive rights to subscribe to new shares in proportion to their holdings, unless denied in the AOI or bylaw provisions.
Minimum Capital Requirements: While the RCC eliminated the minimum paid-up capital requirement for most corporations (except for those in regulated industries like banking or insurance), increases must still comply with sectoral regulations.
Tax Implications: Increases may trigger documentary stamp taxes (DST) under the Tax Code (Republic Act No. 8424, as amended), particularly on share issuances.
SEC Oversight: The SEC's Memorandum Circular No. 28, Series of 2020, and subsequent issuances provide guidelines on electronic filing and processing, reflecting the shift to digital submissions post-COVID-19.

Jurisprudence, such as in Majority Stockholders of Ruby Industrial Corporation v. Lim (G.R. No. 165887, 2011), underscores the need for fairness in capital increases to prevent dilution of minority interests.

Types of Capital Stock Increases

Capital stock increases can be categorized based on method and purpose:

Increase in Authorized Capital Without Issuance: This amends the AOI to raise the authorized amount but does not immediately issue new shares. It provides flexibility for future fundraising.
Increase with Immediate Issuance: New shares are issued simultaneously with the increase, often subscribed by existing or new investors.
Stock Dividends: Under Section 42 of the RCC, corporations may increase paid-up capital by declaring stock dividends from unrestricted retained earnings, effectively capitalizing profits without cash outflow.
Reclassification or Conversion: Shares may be reclassified (e.g., from preferred to common) or converted, indirectly increasing certain classes of stock.
Merger or Consolidation: As per Sections 75-79 of the RCC, mergers can result in increased capital for the surviving entity.

Special considerations apply to:

One Person Corporations (OPCs): Under Section 115, OPCs can increase capital unilaterally by the single stockholder, with simplified SEC filing.
Foreign Corporations: Branch offices or subsidiaries must comply with the Foreign Investments Act (Republic Act No. 7042, as amended), ensuring foreign ownership limits (e.g., 40% in certain sectors).
Publicly Listed Companies: Subject to Philippine Stock Exchange (PSE) rules and SEC's additional disclosure requirements under the Securities Regulation Code (Republic Act No. 8799).

Prerequisites and Requirements

Before initiating an increase, corporations must satisfy several conditions:

Board Approval: A majority vote of the board of directors is required to propose the increase, as per Section 37.
Stockholder Approval: At least two-thirds (2/3) of the outstanding capital stock must approve the amendment at a meeting with proper notice and quorum (Section 37). For non-voting shares, approval is needed if the increase affects their rights.
Subscription and Payment: At least 25% of the increase must be subscribed, and 25% of the subscribed amount paid up (Section 37). Payment can be in cash, property, or previously incurred indebtedness.
Valuation of Non-Cash Contributions: Property contributions require SEC approval if valued over PHP 500,000, with appraisal by an independent appraiser.
No Prejudice to Creditors: The increase must not impair creditors' rights, and the corporation must be solvent.
Compliance with Par Value: If shares have par value, the increase must maintain it; no-par value shares are allowed under Section 6, except for certain types.
Environmental and Social Considerations: For corporations in extractive industries, compliance with the Philippine Mining Act or similar laws may be required.

Failure to meet these can lead to SEC denial or post-approval revocation.

Procedural Steps

The process is streamlined under the SEC's OneSEC platform for electronic submissions. Steps include:

Preparation: Draft the amended AOI reflecting the new authorized capital, including share classes, par value, and subscriptions.
Board and Stockholder Meetings: Hold meetings to approve the increase. Minutes must detail votes and resolutions.
Treasurer's Affidavit: The corporate treasurer must execute an affidavit certifying the subscription and payment levels (at least 25% subscribed and paid).
Filing with SEC: Submit via OneSEC:
- Amended AOI.
- Board resolution.
- Stockholders' resolution.
- Treasurer's affidavit.
- Subscription contracts or deeds of assignment for non-cash payments.
- Audited financial statements (if required).
- Payment of filing fees.
SEC Review and Approval: The SEC processes applications within 5-10 working days for standard cases. Expedited processing is available for a fee.
Issuance of Certificate: Upon approval, the SEC issues a Certificate of Amendment.
Post-Approval Actions: Update corporate books, issue new stock certificates, and file with the Bureau of Internal Revenue (BIR) for DST (PHP 2 per PHP 200 par value).

For e-filing, corporations must have a verified SEC account. Manual filing is discouraged but allowed in exceptional cases.

Documentation Requirements

Comprehensive documentation ensures smooth approval:

Core Documents:
- Amended AOI (7th Article for capital stock).
- Directors' Certificate on board resolution.
- Secretary's Certificate on stockholders' resolution.
- Treasurer's Affidavit.
Supporting Documents:
- List of subscribers and payments.
- Bank certificates for cash deposits.
- Appraisal reports for property.
- GIS (General Information Sheet) updates.
For Special Cases:
- OPCs: Single stockholder's consent.
- Banks: Bangko Sentral ng Pilipinas (BSP) approval.
- Insurance: Insurance Commission nod.

All documents must be notarized where required.

Fees and Timelines

SEC fees are based on the increase amount:

Basic filing fee: PHP 2,020 plus 1/5 of 1% of the increase (max PHP 2 million).
Legal research fee: 1% of filing fee.
Expedited: Additional 50-100%.

Timelines: 5-15 days for approval, extendable for complex cases. Delays may occur due to incomplete submissions.

Potential Challenges and Remedies

Common issues include:

Minority Opposition: Address via buy-out options or court mediation.
Valuation Disputes: Use SEC-accredited appraisers.
Tax Audits: Ensure BIR compliance to avoid penalties.
Regulatory Overlaps: Coordinate with other agencies (e.g., DTI for sole proprietorship conversions).
Fraudulent Increases: Penalized under Section 143 of the RCC with fines up to PHP 2 million or imprisonment.

Remedies: Appeal SEC denials to the SEC En Banc, then Court of Appeals.

Post-Increase Obligations

After approval:

Update Records: Amend bylaws if needed, update stock and transfer books.
Reporting: File amended GIS within 30 days.
Disclosure: For public companies, disclose via PSE and SEC Form 17-C.
Monitoring: Ensure no unauthorized issuances, risking SEC sanctions.
Annual Compliance: Reflect changes in audited financials and annual reports.

Conclusion

Increasing authorized capital stock is a strategic tool for Philippine corporations to fuel growth, but it demands meticulous adherence to the RCC and SEC protocols. By ensuring robust governance and transparency, companies can leverage this process effectively while safeguarding stakeholder interests. Legal counsel is advisable to navigate nuances, particularly in regulated sectors. This mechanism not only supports economic development but also aligns with the Philippines' push towards a more investor-friendly environment under the RCC's reforms.