In June 2018, DEF Corp. sent notices to its stockholders informing them of the corporation’s issuance of new shares of stock. The notice included a reminder that, pursuant to DEF Corp.’ s Articles of Incorporation, any stockholder who fails to exercise his or her pre-emptive right within three (3) weeks from receipt of notice would be considered to have waived the same.
Ms. Z, a stockholder of DEF Corp., failed to exercise her pre-emptive right within the said period. However, she claimed that she did not validly waive her right to do so because a waiver must be expressed in writing.
(a) Explain the concept of pre-emptive right under the Corporation Code. (2 %)
(b) Is Ms. Z’s contention correct? Explain. (3%)
Suggested answer only. Not an official answer and not legal advice.
(a) Pre-emptive right is a stockholder's preferential right to subscribe to share issuances in proportion to shareholdings. (b) No, Ms. Z's contention is incorrect.
Under Section 38 of the Revised Corporation Code (RA 11232), pre-emptive rights protect stockholders against equity dilution. The right is not absolute and may be waived expressly or impliedly. Upon receiving reasonable notice, failure to exercise the right within the specified period constitutes a waiver.
Here, DEF Corp. gave notice of the new issuance with a three-week period to exercise pre-emptive rights pursuant to its Articles of Incorporation. By failing to exercise her right within three weeks, Ms. Z impliedly waived it. A written waiver is not legally required.
Therefore, Ms. Z's contention is incorrect, as her pre-emptive right was validly waived.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
Under Section 38 of the Revised Corporation Code, what is the primary purpose of a stockholder's pre-emptive right?
Pre-emptive right protects existing stockholders against equity dilution by preserving their proportionate voting power and financial interest.
Is a formal written waiver required for a stockholder to validly waive a pre-emptive right?
Pre-emptive rights may be waived impliedly, such as by failing to exercise them within the prescribed notice period.
Under what condition may pre-emptive rights be completely denied to stockholders of a corporation?
Section 38 provides that pre-emptive rights exist unless denied or restricted by the Articles of Incorporation.
Why is Ms. Z's claim that her waiver of pre-emptive rights had to be expressed in writing legally incorrect?
Ms. Z impliedly waived her pre-emptive right by failing to exercise it within the three-week period set in the Articles of Incorporation.
Which statute governs pre-emptive rights and corporate share dispositions in Philippine stock corporations?
Republic Act Number 11232, the Revised Corporation Code, governs pre-emptive rights of stockholders.
Learn more about these topics
1. Pre-Emptive Right Concept
Under Section 38 of the Revised Corporation Code of the Philippines (Republic Act Number 11232), all stockholders of a stock corporation enjoy a pre-emptive right to subscribe to all issues or dispositions of shares of any class, in proportion to their respective shareholdings. The legal purpose of pre-emptive right is to protect existing stockholders against equity dilution, preserving both their proportionate voting power and financial interest in the corporation. Unless restricted or denied by the articles of incorporation, pre-emptive rights apply to capital increases and unissued stock disposition.
2. Waiver of Rights
Under Section 38 of Republic Act Number 11232 and civil law principles governing rights, pre-emptive rights are personal to the stockholder and may be validly waived either expressly or impliedly. While an express waiver is stated explicitly, an implied waiver occurs when a stockholder, after receiving due notice, fails or neglects to exercise the pre-emptive right within the reasonable period prescribed by the corporate bylaws or articles of incorporation. A formal written instrument is not statutorily mandated to effectuate a valid waiver of pre-emptive rights.
3. Articles of Incorporation
The articles of incorporation constitute the fundamental charter defining corporate powers and shareholder privileges. Provisions in the articles of incorporation denying or regulating pre-emptive rights bind all stockholders. When the articles specify that a failure to exercise pre-emptive rights within a designated timeframe constitutes a waiver, shareholders who fail to act within that period impliedly surrender their preferential subscription privilege. Corporate officers are entitled to rely on such charter provisions to issue unissued or increased shares to other subscribers without incurring corporate liability.