Increase and Decrease of Authorized Capital Stock (ACS)

“A corporation has the power to increase or decrease its capital stock…”
-Section 37 of the Revised Corporation Code

An Authorized Capital Stock refers to the maximum number of stocks which a corporation can issue pursuant to its Articles of Incorporation. An issued capital is a part of authorized capital stock which represents the complete capital issued by a corporation out of its authorized capital stock.

Section 37 of the Revised Corporation Code of the Philippines provides that a corporation has the power to increase or decrease its capital stock. A corporation may increase or decrease its authorized capital stock in order to raise more capital and eliminate accumulated losses by returning excess capital to stockholders, respectively.

Increasing Authorized Capital Stock

Since corporations grow, they may need additional capital to support their expansion and finance more projects. The most conventional way of raising capital is to attract potential investors and allow the company to issue more shares after it increases its authorized capital stock.

The Authorized Capital Stock may be increased by increasing the:

1. Number of shares and retaining the par value;
2. Par value of existing shares without changing the number of shares; or
3. Number of shares and increasing the par value.

Increasing the authorized capital stock of a corporation raises additional capital. It is very beneficial for attracting investors, facilitating mergers and acquisitions, and offering stock-based employee compensation. However, it leads to potential dilution of existing stockholders’ ownership which results in reduced control and earnings.

As to taxation, the corporation will need to pay the Documentary Stamp Tax on Shares of Stock with the Bureau of Internal Revenue. The corporation must also inform or furnish other government agencies on the said increase, if applicable.

Decreasing Authorized Capital Stock

Decrease of authorized capital stock is reducing the amount of capital that a corporation has that is either reducing the number of shares outstanding or by lowering the par value of each share. It is done to return excess capital to existing stockholders, improving the capital structure, or eliminate accumulated losses.

The Authorized Capital Stock may be decreased by reducing the:

1. Number of shares and retaining the par value;
2. Par value of existing shares without changing the number of shares; or
3. Number of shares and decreasing the par value.

As to taxation, the corporation does not need to pay an additional Documentary Stamp Tax on Shares but the corporation must inform or furnish other government agencies on the said decrease, if applicable.

The basic requirements for Increase or Decrease of Authorized Capital Stock are as follows:

1. Amended Articles of Incorporation;
2. Directors’ Certificate;
3. Secretary’s Certificate;
4. Treasurer’s Affidavit
5. List of Current Stockholders;
6. Certificate of Decrease or Increase of Authorized Capital Stock;
7. Latest Audited Financial Statements;
8. Monitoring Clearance from the SEC Compliance and Monitoring Division; and
9. Endorsement or Clearance from other government agencies, if applicable.

Step-by-Step Process for Increase or Decrease of Authorized Capital Stock

1. Prepare all the information and documentary requirements needed by the SEC and other government bodies
2. Secure Monitoring Clearance from the SEC.
3. Submit the complete application documents to the SEC.
4. Wait for the evaluation of the application.
5. Secure the payment assessment form and pay the filing fees.
6. Obtain the Amended Articles of Incorporation and the Certificate of Approval of
   the Increased or Decrease of the Authorized Capital Stock

Lastly, the increase or decrease of the authorized capital stock needs to be approved by the Securities & Exchange Commission.

In the case of Central Textile Mills v. National Wages, the Supreme Court clarified that there is no increase in the authorized capital stock even if the stockholders have already paid the additional subscription if there is no approval of the SEC. Any payment by the shareholder of the subscription price before the filing of the application with the SEC shall be considered as deposits only on future subscriptions and the corporation will hold the same in trust until it files a petition to increase its capitalization and a certificate of filing of the increase of capital stock is approved and issued by SEC.