A white hat hacker, a software engineer, a gamer, an ophthalmologist, and a computer engineer got together sometime in 2019 to develop a software that can identify a person using a photo of their eyes taken by a 10-megapixel camera. By early January 2020, they decided that they needed more equipment and capital, and that they had to protect their intellectual property rights. A wealthy entrepreneur offered to give them the funds they needed. They negotiated that the funds would be treated as an investment rather than a debt liability. Thus, the entrepreneur would recover through dividends rather than through amortized payments. At the same time, they did not want the wealthy entrepreneur to be involved with creative decisions in their business projects. To accommodate their desired arrangements, a new corporation was registered with the Securities and Exchange Commission. In this corporation, the wealthy entrepreneur held preferred, non-voting shares, while the other held common, voting shares. By the middle of 2020, it became clear that the software was going to be highly profitable. Unlike other financial recognition software, theirs would be able to identify a person even with lowresolution cameras found in most smartphones. It could also identify persons even if they wore face masks. Mindful of its profitability, a Chinese corporation offered to buy all the assets of the corporation for YSD10,000,000,000.00. Everyone wanted to close the deal except the wealthy entrepreneur, who insisted that they should not sell all corporate assets, but instead enter into software licensing arrangements, as these would be more profitable. Under the Revised Corporation Code, are the white hat hacker, software engineer, gamer ophthalmologist, and computer engineer required to allow the wealthy entrepreneur, who holds preferred shares, to vote on whether they can sell all the corporate assets? Explain briefly.
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Yes, the founders are required to allow the wealthy entrepreneur to vote on whether to sell all corporate assets. Under Section 6 of the Revised Corporation Code (RA 11232), holders of non-voting preferred shares are entitled
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Quick check
Under Section 6 of the Revised Corporation Code, on which corporate matter are holders of non-voting preferred shares entitled to vote?
Section 6 of the Revised Corporation Code explicitly entitles holders of non-voting preferred shares to vote on the sale or disposition of all or substantially all corporate assets.
What vote is required from stockholders under Section 39 to approve the sale of all corporate assets?
Section 39 of the Revised Corporation Code requires the vote of stockholders representing at least two-thirds of the outstanding capital stock.
Do preferred non-voting shares count toward the outstanding capital stock required to approve the sale of all corporate assets?
Holders of non-voting preferred shares possess statutory voting rights on asset sales and count toward the required capital stock vote.
Why are founders required to allow a preferred non-voting shareholder to vote on selling all corporate property?
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Which statute governs the statutory voting rights of preferred non-voting shareholders in Philippine corporations?
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Learn more about these topics
1. Non-Voting Share Limitations
Under Section 6 of the Revised Corporation Code of the Philippines (Republic Act Number 11232), non-voting shares, including preferred shares, are generally denied the right to vote on ordinary corporate matters. However, holders of non-voting shares retain statutory voting rights on fundamental corporate actions. These fundamental acts include amendments to articles of incorporation, adoption or amendment of bylaws, corporate sale or disposition of all assets, incurring bonded indebtedness, increasing capital stock, merger, consolidation, and voluntary corporate dissolution.
2. Corporate Asset Sale
Under Section 39 of Republic Act Number 11232, a corporation may sell, lease, exchange, mortgage, pledge, or otherwise dispose of all or substantially all of its property and assets. To execute such a fundamental disposition, the transaction requires approval by a majority vote of the board of directors and authorization by stockholders representing at least two-thirds of the outstanding capital stock. Non-voting preferred shareholders are legally entitled to vote on this transaction alongside voting common shareholders.
3. Preferred Shareholder Protection
Statutory voting rights granted to preferred non-voting shareholders serve as an essential legislative protection for equity investors. Although investors holding preferred shares agree to forgo management participation regarding routine business decisions, fundamental corporate changes directly impact their investment security and equity value. Granting voting rights on major transactions, such as selling all corporate assets, prevents majority common shareholders from unilaterally liquidating corporate operations or altering core enterprise assets without preferred shareholder approval.