Introduction

In the Philippine corporate landscape, the authorized capital stock (ACS) represents the maximum amount of capital that a corporation may raise through the issuance of shares, as stipulated in its Articles of Incorporation (AOI). Under the Revised Corporation Code of the Philippines (Republic Act No. 11232, or RCC), corporations have the flexibility to adjust their ACS to align with business needs, such as expansion, restructuring, or financial optimization. Increasing or decreasing the ACS involves amending the AOI, which requires compliance with specific legal requirements and procedural steps overseen by the Securities and Exchange Commission (SEC). This article provides a comprehensive overview of the requirements and procedures for both increasing and decreasing ACS, grounded in Philippine law and regulatory practices.

The process ensures protection for shareholders, creditors, and the public interest, emphasizing transparency, fairness, and solvency. While the procedures share similarities, they differ in rationale, documentation, and potential implications. Failure to adhere to these can result in denial of approval, penalties, or legal challenges.

Legal Basis

The authority to increase or decrease ACS stems from Sections 37 and 38 of the RCC. Section 37 allows corporations to increase ACS to accommodate growth, while Section 38 permits decreases for reasons such as eliminating accumulated losses, reducing par value, or canceling unissued shares. These amendments must not impair creditors' rights or violate pre-emptive rights of shareholders unless waived.

Additionally, SEC Memorandum Circulars (e.g., MC No. 28-2020 on digital submissions) and the SEC's Guidelines on Corporate Registration provide administrative details. For stock corporations, compliance with the Philippine Stock Exchange (PSE) rules may apply if listed, though this article focuses on general SEC procedures.

General Requirements Applicable to Both Increase and Decrease

Before delving into specific procedures, certain foundational requirements apply universally:

Corporate Capacity: The corporation must be duly registered with the SEC and in good standing, with no pending dissolution or revocation proceedings.
Board and Shareholder Approval: Amendments require a majority vote of the board of directors (or trustees for non-stock corporations) and approval by shareholders representing at least two-thirds (2/3) of the outstanding capital stock (OCS) at a meeting called for that purpose.
No Prejudice to Creditors: The adjustment must not reduce the corporation's ability to pay debts. For decreases, a certificate from the treasurer affirming solvency is mandatory.
Payment of Fees: SEC filing fees are based on the amount of change in ACS, computed at 1/10 of 1% of the increase or decrease, with a minimum of PHP 2,000. Additional fees apply for expedited processing.
Documentation Integrity: All documents must be notarized where required, and submissions are now primarily electronic via the SEC's eSPARC (Electronic Simplified Processing of Application for Registration of Corporations) system.
Compliance with Other Laws: If the corporation is in a regulated industry (e.g., banking under the Bangko Sentral ng Pilipinas), additional approvals may be needed.

Procedure and Requirements for Increasing Authorized Capital Stock

Increasing ACS is typically pursued to fund expansion, acquire assets, or issue new shares. It does not automatically increase paid-up capital unless accompanied by subscriptions.

Step-by-Step Procedure

Board Resolution: The board convenes and adopts a resolution recommending the increase, specifying the new ACS amount, share classes, par value (if applicable), and purpose. This must be approved by a majority of the directors.
Shareholders' Meeting: Notice is sent to shareholders at least two weeks in advance (or as per bylaws). At the meeting, shareholders vote to approve the amendment by at least 2/3 of the OCS. Pre-emptive rights must be considered; shareholders have the right to subscribe to new shares pro-rata unless denied in the AOI or waived.
Amendment of Articles of Incorporation: The AOI is amended to reflect the new ACS. The amended AOI must include the original text with changes highlighted.
Preparation of Supporting Documents:
- Treasurer's Affidavit: Certifying the amount of increase, that at least 25% of the increased ACS has been subscribed (if applicable), and at least 25% of subscriptions paid (the "25-25 Rule" under Section 37, unless exempted for certain corporations like those with no-par shares).
- Auditor's Certificate: If the increase involves non-cash considerations (e.g., property), an independent auditor's valuation is required.
- Bank Certificate: For cash subscriptions, proof of deposit in a bank.
- Directors' Certificate: Attesting to the board and shareholder approvals.
- Cover Sheet and General Information Sheet (GIS): Updated versions.
- If applicable, Waiver of Pre-emptive Rights.
Filing with the SEC: Submit the application via eSPARC or in person at the SEC head office or extension offices. The SEC reviews for completeness and compliance, typically within 3-5 working days for standard processing or faster for priority lanes.
SEC Approval and Issuance: Upon approval, the SEC issues a Certificate of Amendment. The corporation must then update its books and, if necessary, issue new stock certificates.

Special Considerations

Minimum Capital Requirements: Certain corporations (e.g., insurance companies) have statutory minimums that must be maintained post-increase.
Tax Implications: Increases may trigger documentary stamp taxes (DST) on new shares at PHP 2 per PHP 200 par value.
Exemptions: One-person corporations (OPCs) and corporations with no-par value shares may bypass the 25-25 Rule.
Timeline: The entire process can take 1-2 months, depending on SEC backlog.

Procedure and Requirements for Decreasing Authorized Capital Stock

Decreasing ACS is often done to streamline capital structure, eliminate treasury shares, reduce par value, or apply capital to offset losses. It cannot be used to distribute assets unless in dissolution.

Step-by-Step Procedure

Board Resolution: The board approves a resolution detailing the decrease, method (e.g., reducing par value, canceling shares), and rationale. Majority board approval is needed.
Shareholders' Meeting: Similar to increases, notice is given, and 2/3 OCS approval is required. Shareholders must be informed of potential impacts on their holdings.
Amendment of Articles of Incorporation: Update the AOI to show the reduced ACS.
Preparation of Supporting Documents:
- Treasurer's Affidavit: Certifying solvency, that the decrease will not prejudice creditors, and detailing the method of decrease.
- Auditors' Report: If the decrease involves offsetting losses or valuation adjustments.
- Creditors' Consent: If the decrease could affect creditors (e.g., reducing stated capital), notarized consents from all creditors may be required under Section 38.
- Directors' Certificate: Confirming approvals.
- Updated GIS and Financial Statements: To demonstrate financial health.
- If applicable, Appraisal Report for any asset revaluations.
Publication Requirement: For decreases that reduce stated capital, notice must be published once a week for three consecutive weeks in a newspaper of general circulation, inviting creditor objections (Section 38). Any objections must be resolved before SEC filing.
Filing with the SEC: Submit via eSPARC, including proof of publication if required. The SEC scrutinizes for creditor protection and legitimacy.
SEC Approval: Approval leads to a Certificate of Amendment. The corporation adjusts its stock ledger accordingly.

Special Considerations

Methods of Decrease: Can include reducing par value, canceling unissued or treasury shares, or redeeming shares. Each method has distinct implications (e.g., redemption may require surplus funds).
Prohibitions: Cannot decrease below minimum capital requirements or if it renders the corporation insolvent.
Tax Implications: May involve capital gains tax if shares are canceled, or DST adjustments.
Creditor Protection: The publication step is crucial; unresolved creditor claims can halt approval.
Timeline: Longer than increases due to publication, often 2-3 months.

Common Challenges and Best Practices

Rejections: Common reasons include incomplete documents, insufficient subscriptions for increases, or creditor objections for decreases. Engage legal counsel early.
Digital Compliance: Use SEC's online portals to avoid delays; physical submissions are discouraged post-pandemic.
Post-Amendment Obligations: Update BIR registrations, stock certificates, and report to the PSE if listed.
Penalties for Non-Compliance: Fines up to PHP 1,000,000 or revocation of registration under SEC rules.
Case Law Insights: Philippine jurisprudence (e.g., SEC v. Various Corporations) emphasizes that ACS adjustments must serve legitimate business purposes, not fraud.

Conclusion

Adjusting authorized capital stock is a strategic tool for Philippine corporations, enabling adaptability while safeguarding stakeholders. By meticulously following the RCC and SEC guidelines, corporations can execute these changes efficiently. Consultation with legal and financial experts is advisable to navigate nuances, ensuring compliance and minimizing risks. This framework not only supports corporate growth but also upholds the integrity of the Philippine securities market.