A corporation can increase or decrease its authorized capital stock, but only through the process the Revised Corporation Code requires. It needs approval by a majority of the board of directors and by the stockholders representing at least two-thirds of the outstanding capital stock at a meeting called for the purpose, then the filing of the amended articles with the SEC, with the SEC's approval required for the change to take effect. An increase requires a treasurer's affidavit that a portion is subscribed and paid, while a decrease must not prejudice creditors.
A growing company may need to raise its authorized capital to issue more shares to investors; a shrinking one may want to reduce capital. Neither can be done by a simple management decision — the Revised Corporation Code sets a specific process.
Authorized vs. Subscribed vs. Paid-Up Capital
First, the concepts:
- Authorized capital stock — the maximum amount of shares the corporation may issue, as stated in its articles;
- Subscribed capital — the portion of the authorized capital that stockholders have agreed to take (subscribe); and
- Paid-up capital — the portion of the subscribed capital that has actually been paid.
To issue shares beyond the authorized capital, the corporation must first increase the authorized capital stock — which is an amendment of the articles of incorporation.
The Approval Process
To increase or decrease the capital stock, the corporation must:
- Obtain approval by a majority vote of the board of directors;
- Obtain the ratification of stockholders representing at least two-thirds (2/3) of the outstanding capital stock, at a meeting called for the purpose with proper notice; and
- File the amended articles and the required documents with the SEC, whose approval is necessary for the increase or decrease to take effect.
The 2/3 stockholder vote is a higher threshold than ordinary matters, reflecting the significance of changing the capital structure.
Additional Requirements for an Increase
For an increase, the corporation must file a treasurer’s affidavit showing that at least 25% of the increase in authorized capital has been subscribed, and at least 25% of that subscription has been paid (in cash or property), as the law requires. This ensures an increase is real and not merely on paper. Existing stockholders also generally have a pre-emptive right to subscribe to the new shares in proportion to their holdings, unless the right is denied by the articles or the shares are issued for specific exempt purposes.
Creditor Protection on a Decrease
A decrease in capital stock is scrutinized because it can prejudice creditors — capital is a fund that creditors rely on. The SEC will not approve a decrease that impairs the rights of creditors or is used to defraud them. The corporation typically must show that the decrease will not prejudice creditors (and may need to notify or settle with them). This safeguards those who extended credit on the strength of the corporation’s capital.
Practical Advice
- To bring in new investment beyond your authorized capital, you must increase the authorized capital stock — a board approval, a 2/3 stockholder vote, a treasurer’s affidavit, and SEC approval.
- Respect pre-emptive rights of existing stockholders when issuing new shares.
- A decrease must not prejudice creditors, and the SEC will examine it closely.
Frequently Asked Questions
How does a corporation increase its capital stock? By a majority board approval and ratification by stockholders holding at least two-thirds of the outstanding capital stock at a meeting called for the purpose, then filing the amended articles with the SEC, whose approval is required for the increase to take effect.
What extra requirement applies to an increase? A treasurer's affidavit showing that at least 25% of the increase is subscribed and at least 25% of that subscription is paid, to ensure the increase is real. Existing stockholders also generally have a pre-emptive right to the new shares.
Can a corporation reduce its capital stock? Yes, through the same board and two-thirds stockholder approval and SEC filing, but the SEC will not approve a decrease that prejudices or defrauds creditors, since capital is a fund creditors rely on.
Why is a two-thirds vote required? Because changing the capital structure is a significant corporate act. The higher two-thirds threshold ensures broad stockholder support for increasing or decreasing the authorized capital stock.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If your corporation needs to raise or reduce its capital, our firm can handle the approvals and SEC filing. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.