Subscription Requirements

A subscription is a contract by which a person agrees to take and pay for unissued shares of a stock corporation, whether the corporation is already existing or still to be formed. It is the juridical link between authorized capital and subscribed capital: authorized capital is the ceiling fixed in the articles, while subscribed capital is the portion of that ceiling already taken by subscribers under binding contracts.

The Revised Corporation Code treats subscription as part of capital formation, not merely as a private purchase of property. A subscriber undertakes to contribute capital to the corporation, the corporation obtains an enforceable claim for the unpaid balance, and corporate creditors may rely on that unpaid subscription as part of the fund available for corporate debts.

Place of Subscription in the Capital Structure

A stock corporation has capital stock divided into shares, and those shares may be issued only within the limits and classes stated in the articles of incorporation. Subscription requirements therefore depend on the authorized capital stock, the number of shares, the par or no-par character of the shares, and the restrictions attached to each class.

The subscription requirement is tied to unissued shares. A person who takes unissued shares becomes a subscriber; a person who buys treasury shares or outstanding shares from an existing stockholder is ordinarily a purchaser or transferee, not a subscriber to corporate capital.

Minimum Capital and Incorporation Subscriptions

The general rule under the Revised Corporation Code is that a stock corporation is not required to have a minimum capital stock, except when a special law provides otherwise. This rule removed the former general incorporation formula that required a fixed percentage of authorized capital to be subscribed and a fixed percentage of the subscription to be paid before registration.

The absence of a general minimum does not mean the absence of subscriptions. The articles of a stock corporation must still state the amount of authorized capital stock, the number of shares, the par value of par-value shares, the fact that shares are without par value when applicable, the names and details of the original subscribers, and the amount subscribed and paid by each.

Each incorporator of a stock corporation must own or subscribe to at least one share. This requirement identifies each incorporator as a person with an actual proprietary stake or binding capital undertaking, although the Revised Corporation Code now allows incorporation by a single person, by juridical persons, or by combinations of persons subject to the statutory limit on the number of incorporators.

Where the incorporator is a corporation, partnership, or association, the subscription belongs to that juridical entity, not to the natural person who signs on its behalf. The representative must be authorized, and the investment must be within the capacity and authority of the subscribing entity.

A one person corporation satisfies the subscription requirement through its single stockholder, who owns or subscribes to the shares stated in its articles. The nominee and alternate nominee required for succession in a one person corporation do not become subscribers merely because they are named as nominees.

Special laws remain controlling. Banks, insurance companies, financing companies, lending companies, investment houses, public utilities, educational institutions, and corporations engaged in partly nationalized activities may be subject to minimum capital, paid-up capital, foreign equity, public ownership, or regulatory approval requirements. In those cases, the Revised Corporation Code supplies the general corporate framework, but the special law supplies the controlling capital threshold.

Pre-Incorporation Subscriptions

A pre-incorporation subscription is a subscription for shares of a corporation that is still to be formed. It is binding even before the corporation comes into legal existence because the law treats the subscription as a continuing offer and undertaking in favor of the proposed corporation once it is registered.

A pre-incorporation subscription cannot be revoked for at least six months from its date, unless all other subscribers consent to the revocation or the corporation fails to materialize within that period or within a longer period stipulated in the subscription agreement. Once the articles of incorporation are submitted to the Securities and Exchange Commission, the subscription can no longer be revoked on the subscriber's unilateral will.

The statutory irrevocability rule protects the integrity of the proposed capital structure. Without it, incorporators could present subscribed capital for registration while retaining the practical ability to withdraw that capital before the corporation acquires personality.

When the corporation is registered, the pre-incorporation subscriber becomes bound to pay the subscription according to its terms and according to lawful calls made by the board. The corporation may enforce payment, and the subscriber may exercise stockholder rights attached to the subscribed shares unless the shares become delinquent or the governing instruments lawfully provide otherwise.

Post-Incorporation Subscriptions

A post-incorporation subscription is a contract to take unissued shares of an existing corporation. It requires corporate authority, available unissued shares within the authorized capital stock, agreement on the number and class of shares, lawful consideration, and compliance with preemptive rights when applicable.

The board of directors generally acts for the corporation in accepting subscriptions to unissued shares, subject to the articles, bylaws, stockholder approvals required for particular transactions, and regulatory approvals required by special law. A subscription cannot validly create shares beyond the authorized capital stock; an agreement to take shares from a proposed capital increase is ordinarily conditional upon approval of the increase.

When the capital stock is increased, the certificate and supporting documents must disclose the subscriptions and payments made for the increase. The newly authorized shares cannot become validly issued shares until the increase is approved by the Securities and Exchange Commission, because corporate power to issue those additional shares arises only upon approval.

Existing stockholders generally have a preemptive right to subscribe to new issues or dispositions of shares of any class in proportion to their existing shareholdings, unless the articles of incorporation deny or limit the right. The right is designed to protect proportionate voting power and proprietary participation from dilution.

The preemptive right does not apply when shares are issued in compliance with laws requiring stock offerings or minimum public ownership, or when shares are issued in good faith with the required stockholder approval in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Outside these exceptions and valid article restrictions, a subscription accepted in disregard of preemptive rights may be vulnerable to corporate and stockholder remedies.

Form and Substance of the Subscription

No special label is necessary to create a subscription. Any contract for the acquisition of unissued shares is deemed a subscription, even if the parties call it a purchase, option, participation, investment, or other arrangement, when its legal effect is to bind the person to take shares from the corporation's unissued capital.

A sound subscription identifies the corporation or proposed corporation, the number of shares, the class or series of shares, the par value or issue value when relevant, the consideration, the amount paid, the unpaid balance, the payment schedule or basis for calls, and any lawful conditions. The subscription cannot contradict the articles of incorporation or create rights greater than those attached to the shares subscribed.

Subscription to a class of shares carries the legal incidents of that class. Common shares ordinarily carry residual voting and dividend rights; preferred shares carry the preferences, limitations, and relative rights stated in the articles; redeemable shares may be bought back under their terms; and non-voting shares remain entitled to vote on fundamental matters when the law preserves voting rights despite their non-voting character.

Preferred shares must have par value, because their preferences normally require a fixed capital measure for dividends, liquidation preference, redemption, or conversion. No-par shares may be issued only for the consideration fixed in the articles or by proper corporate action, and no-par shares may not be issued for less than the statutory minimum issue value.

Lawful Consideration for Shares

Shares may be issued for consideration that represents real value received by the corporation. Acceptable consideration includes cash, property actually received and useful or convenient for corporate purposes, labor or services actually rendered, previously incurred corporate indebtedness, amounts transferred from unrestricted retained earnings to stated capital, and outstanding shares exchanged in a lawful reclassification or conversion.

Shares cannot be issued for promissory notes or future services. A promise to pay in the future may support a subscriber's contractual liability, but it is not the kind of consideration that justifies treating shares as fully paid upon issuance.

When consideration is property, intangible rights, services already rendered, debt conversion, or another noncash contribution, the valuation must be made in good faith and must reflect actual value to the corporation. Overvaluation impairs capital because the corporation appears to have received capital that it did not actually receive.

Par-value shares cannot be issued for less than par value, and no-par shares cannot be issued for less than the lawful issue value. Shares issued as fully paid despite insufficient consideration are watered shares, and persons who knowingly consent to or receive such shares may be liable to the corporation and its creditors for the deficiency.

The entire consideration received for no-par shares forms part of capital and is not available for distribution as dividends. This rule prevents no-par shares from being used to disguise distributable surplus as capital contribution.

Payment of Subscriptions

A subscription may be fully paid at once or partly paid, unless full payment is required by the subscription agreement, the articles, a special law, or the terms of the issuance. The unpaid balance remains a corporate asset in the form of a receivable from the subscriber.

If the subscription contract fixes a payment date, payment is due on that date. If no date is fixed, the board may make a call requiring payment of all or part of the unpaid subscription, subject to the terms of the subscription and the requirements of law.

Interest on unpaid subscriptions is due only when stipulated, required by the subscription agreement, or validly imposed under the governing terms. The subscriber's basic obligation, however, is to pay the full agreed consideration for the shares subscribed.

No stock certificate may be issued for shares until the full amount of the subscription, together with interest and expenses when due, has been paid. This rule preserves the distinction between being a subscriber or stockholder and being entitled to a certificate representing fully paid shares.

Unpaid subscriptions are enforceable by the corporation through calls, delinquency sale, judicial collection, or other lawful remedies. Because unpaid subscriptions form part of the capital relied upon by creditors, corporate management cannot release or condone them to the prejudice of creditors without lawful basis.

Delinquency and Stockholder Rights

Subscribed shares that are unpaid but not delinquent are generally treated as outstanding shares. They may be counted for quorum and voting, and the subscriber may exercise stockholder rights attached to them, subject to the articles, bylaws, and lawful restrictions.

When payment becomes due and remains unpaid after the statutory period and proper proceedings, the shares may be declared delinquent. Delinquent shares lose voting rights and representation at stockholders' meetings, although dividend rules continue to operate in a manner that protects the corporation's claim for the unpaid balance.

Cash dividends due on delinquent shares are applied to the unpaid balance, while stock dividends are withheld until the delinquency is fully settled. This treatment prevents a defaulting subscriber from extracting corporate value while leaving the capital undertaking unpaid.

A delinquency sale transfers the delinquent shares to the bidder who offers to pay the full balance, interest, costs, and expenses for the smallest number of shares, leaving any remaining shares to the original subscriber. If no bidder appears, the corporation may bid for the shares, subject to the rules on treasury shares and capital protection.

Capital Protection Effects

Subscription requirements are part of the doctrine that corporate capital is a fund for the payment of corporate debts. Once a person subscribes to shares, the unpaid balance is not merely an internal account; it is an enforceable contribution that may be reached when necessary to satisfy legitimate corporate obligations.

A corporation may not issue shares without real consideration, treat unpaid shares as fully paid, return capital to subscribers under the guise of dividends, or manipulate subscriptions in a way that leaves creditors with an inflated picture of capital. The legality of the subscription is measured not only by agreement but by the effect on statutory capital.

Directors and officers who approve the issuance of watered shares, fictitious subscriptions, or releases of subscription obligations may incur liability when they knowingly participate in the impairment of capital. A subscriber who knowingly receives shares as fully paid without giving full lawful consideration may also be liable for the unpaid value.

For nationalized or regulated corporations, subscriptions also determine compliance with ownership and control requirements. A subscription that would cause foreign equity to exceed a constitutional or statutory limit, or that would evade a required Filipino ownership threshold, cannot be treated as an ordinary private arrangement insulated from regulatory scrutiny.

Practical Classification of Subscription Issues

The central inquiry in subscription requirements is whether the corporation has a lawful and enforceable capital undertaking for shares that it is authorized to issue. Once that undertaking exists, the subscriber's rights, the corporation's remedies, and the creditors' protection all flow from the same premise: subscribed capital is a binding contribution to the corporate enterprise, not a revocable expression of investment interest.