When you start your business, you mostly focus on building a foundation and gaining market traction. You also rely on modest investments, usually with limited capitalization, to get off the ground and sustain initial operations.
As your business grows and demand increases, you may need additional capital infusion to support expansion, improve infrastructure, and fund new projects. One common way of doing so is by increasing your company’s authorized capital stock (ACS)— which allows the company to issue more shares and enables it to attract potential investors.
This article provides a comprehensive guide for amending the Articles of Incorporation (AOI) to increase your company’s authorized capital stock. Read on and tell us in the comments how we can assist you with your business compliance needs.
Understanding Articles of Incorporation (AOI) and Amendments
The Articles of Incorporation (AOI) are public legal documents filed with the Securities and Exchange Commission (SEC), the registrar and overseer of the corporate sector in the Philippines, to document the establishment of a corporation. They outline fundamental information, such as the corporate name, business purpose, principal address, names of the incorporators and directors, authorized capital stock, and the shares subscribed and paid by shareholders, among others.
If you need to amend your company’s AOI, e.g., changing your corporate name, amending your primary purpose, or changing other contents of the AOI which cannot be done through the filing of a General Information Sheet, you may do so without substantially altering or reversing it. Suppose you want to change your corporate name. The amendment will only be applied to the section where the corporate name is provided in the AOI. The Amended AOI will simply indicate in bold and underline the changes made, along with the date of amendment. If substantial changes or additions are necessary, however, the document can also be drawn up rather than amended.
According to Section 15 of the Revised Corporation Code (RCC) of the Philippines (R.A. 11232), there are three basic requirements for amending a company’s AOI. For stock corporations these are: (1) majority vote of the board of directors; (2) written assent of the stockholders representing at least ⅔ of the outstanding capital stock; and (3) approval by the Securities and Exchange Commission (SEC). For non-stock corporations: (1) vote or written assent of the majority of the trustees; (2) written assent of at least ⅔ of the members; (3) approval by the SEC.
Understanding Authorized Capital Stock (ACS)
An Authorized Capital Stock (ACS)—also known as authorized stock, authorized share capital, or authorized shares—is the maximum number of stock units or shares that a corporation can legally issue or offer based on its Articles of Incorporation (AOI).
When you incorporate your company, you and other incorporators decide on the ACS (e.g., PHP 10M) by considering important factors, such as the initial capital needs for the first round of financing, the flexibility to raise capital in the future without amending the corporation’s AOI, and other future plans for expansion. Here are additional things that you need to know about authorized capital stock:
1. The subscribed capital is different from paid up capital. An authorized capital stock is the maximum amount that a company can raise from issuing shares. It is different from and does not represent the actual number of shares issued to the shareholders.
Subscribed capital is the total amount of stock that investors have agreed to purchase, whether or not payment has been made yet. Paid-up capital, on the other hand, is the portion of the subscribed capital that shareholders have actually paid for.
2. It can affect investor confidence. If a company has a very high authorized capital stock compared to its issued shares, it might cause concern that it could dilute the stock by issuing more shares in the future. This explains why companies need to be transparent about the plans for stock issuance.
3. It is not mandatory for a corporation to issue all its authorized capital stock. In most cases, ACS is not fully used up by the management to leave room for future issuance of additional stocks to raise capital quickly. Equally, keeping stocks in the treasury often retains a controlling interest in the company.
4. High authorized capital stock allows corporate flexibility. A corporation can issue new shares in order to raise funds. This can be an advantage if it wants to raise capital quickly or engage in stock-based acquisitions.
5. A corporation may increase its authorized capital stock. If a corporation decides to issue more shares in excess of the amount of the ACS declared in its AOI, it must amend the said document, seek the approval of the majority of the board of directors, meet the required vote by the shareholders in accordance with Section 15 of the RCC as discussed above, and file the necessary documentation with the SEC.
6. A corporation may also decrease its authorized capital stock. There are several reasons for the decrease, such as eliminating excess authorized shares, restructuring its capital, reducing debt, avoiding future dilution, aligning with a changing business strategy, improving shareholder value, or complying with legal requirements. Under Section 37 of the RCC, no corporation shall decrease its capital stock unless approved by a majority vote of the board of directors and by two thirds (⅔) of the outstanding capital stock at a stockholders’ meeting duly called for the purpose.
Advantages and Disadvantages of Increasing Authorized Capital Stock
Increasing your corporation’s authorized capital stock can have both advantages and disadvantages that you should be aware of:
Advantages
By increasing the authorized capital stock, your corporation can have the flexibility to raise additional capital. This can be beneficial for attracting investors, facilitating mergers and acquisitions, and offering stock-based employee compensation. It can also be instrumental in converting debt into equity, reducing leverage, and improving the balance sheet. Equally, a larger authorized capital base can also provide a buffer against stock dilution when new shares are issued in the future, ensuring smoother capital-raising efforts.
Disadvantages
Despite the advantages, increasing authorized capital stock can lead to potential dilution of existing shareholders’ ownership, resulting in reduced control and earnings. This may also negatively affect investor perception and confidence, as it can be associated with over-expansion or financial instability. Additionally, the increase may also involve significant legal and administrative costs.
SEC Requirements for AOI Amendment (Increase Authorized Capital Stock)
To amend your corporation’s AOI for the increase of the authorized capital stock, you need to draft, gather, and file the following documentary requirements:
Basic Requirements
- Cover Sheet;
- Certificate of Increase of Capital Stock signed by majority of the directors and certified by the Chairman and Secretary of the stockholders meeting;
- Treasurer’s Affidavit certifying the increase of capital stock, the amount subscribed, and the amount received as payment thereto;
- Director’s Certificate, notarized and signed by the majority of the directors and the corporate secretary certifying (i) the amendment of the Articles of Incorporation increasing the authorized capital stock, (ii) the votes of the directors and stockholders thereto, (iii) the date and place of the stockholder’s meeting, and (iv) the tax identification number of the signatories which shall be placed below their names;
- Amended Articles of Incorporation
Additional Requirements
- List of stockholders of record as of date of meeting approving the increase, indicating their nationalities, and their respective subscribed and paid-up capital on the present authorized capital stock certified under oath by the corporate secretary;
- Audited Financial Statements (AFS) as of the latest fiscal year stamped received by BIR and SEC (if payment on subscription is already reflected therein);
- Deed of Assignment;
- Special Audit Report as per SEC Memo Circular No. 6 Series of 2008;
- Notarized Secretary’s Certificate certifying that all of the non-subscribing stockholders waived their respective preemptive rights/Joint Waiver;
- Notarized Secretary’s Certificate on no pending case of intra-corporate dispute;
- Registration under Foreign Investment Act (FIA), if the foreign equity increased to more than 40%;
- Clearance from other departments or other government agencies;
- CRMD Monitoring Clearance
How to Amend Articles of Incorporation (AOI) to Increase Authorized Capital Stock (Step-by-Step Process)
Your application for amendment of your corporation’s Articles of Incorporation (AOI) for the increase in authorized capital stock must be filed with the SEC. This is done through submission of the documentary requirements to the Financial Analysis and Audit Division (FAAD) via email.
1. Prepare All Documentary Requirements.
You must ensure you have collated all documentary requirements for submission with the SEC. Files must be signed and notarized, as may be applicable.
2. Submit the Application to FAAD.
Send the application for AOI amendment to FAAD through their email address (faad_application06@sec.gov.ph) and attach the necessary documentary requirements.
3. Expect a Confirmation Email.
Wait for an email from FAAD acknowledging receipt of your application. FAAD will inform you that they have assigned an examiner to review your application for amendment.
4. Wait for the Evaluation of Your Application.
Wait for the assigned examiner to send an evaluation after nineteen (19) working days from the date of assignment of the application to him/ her.
5. Generate the Payment Assessment Form (PAF) and Pay the Fees.
After the SEC assigned examiner has reviewed and approved your application, you will receive an email notification with a “For Payment” status. Click the link provided and proceed to downloading the Payment Assessment Form (PAF).
Based on the schedule of fees published by the SEC, the amendment fee for corporations with par value is ⅕ of 1% of the increase in capital stock but not less than PHP 3,000 or the subscription price of the subscribed capital stock, whichever is higher. For corporations without par value, it is ⅕ of 1% of the increase in capital stock computed at PHP 100 per share but not less than PHP 3,000 or the issue value of the subscribed capital stock, whichever is higher.
6. Submit the Hard Copies of Documents.
After payment, prepare four (4) sets of the signed and notarized hard copies, along with the payment receipt, and submit them to the SEC Processing Office. One set should include the original and notarized, while the others can be photocopied to reduce costs.
7. Receive the Amendment Certificate.
The submitted hard copy documents will undergo further review which may take several weeks or even months depending on the assigned reviewer. Once reviewed, the SEC will send an email notification with the status “For Releasing of Certificate.” You may then visit the SEC Processing Office on the scheduled date to receive the original Certificate of Approval of Increase of Capital Stock.
In conclusion, amending the Articles of Incorporation (AOI) to increase authorized capital stock is a crucial step for businesses looking to expand their operations and raise additional funds. By following the outlined steps and submitting the necessary documents to the SEC, corporations can ensure a smooth and compliant process. It also pays to consult legal and financial experts throughout the process to ensure compliance.
… and you might just need our assistance.
At FilePino, we ensure our team stays updated with the latest rules and regulations governing business compliance across various government agencies. We also leverage our extensive experience and expertise in navigating the intricacies of transactions.
Ready to increase your company’s authorized capital stock by amending your Articles of Incorporation (AOI)? Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.
