Shares of stock must be issued for a valid consideration and generally not for less than their par or issued value. Valid consideration for the issuance of shares includes actual cash paid, property (tangible or intangible) actually received and necessary or convenient for the corporation's use, at a fair valuation; labor or services actually rendered to the corporation; previously incurred indebtedness of the corporation; amounts transferred from unrestricted retained earnings to stated capital; and outstanding shares exchanged for shares in a reclassification or conversion. Shares cannot be issued in exchange for promissory notes or future services. 'Watered stock' refers to shares issued as fully paid when in fact the corporation received less than their full value (for example, overvalued property, or shares issued below par). The consequences: the stockholder and the consenting directors/officers may be liable to the corporation and its creditors for the difference (the 'water'), because the trust fund doctrine protects creditors who rely on the paid-in capital. So issuing shares for inadequate consideration does not escape liability; the shortfall remains collectible.
Shares Need Valid Consideration
Shares must be issued for valid consideration, generally not less than par or issued value.
Valid Consideration Includes
- Cash actually paid;
- Property received at a fair valuation;
- Labor or services already rendered;
- Previously incurred indebtedness of the corporation; and
- Transfers from retained earnings to capital.
Watered Stock
Not valid: promissory notes or future services. Watered stock is issued as fully paid when the corporation received less than full value. The stockholder and consenting directors/officers may be liable for the “water” to the corporation and creditors.
Practical Takeaways
- Shares need valid consideration at full value — no notes or future services;
- Watered stock (issued below value) creates liability for the shortfall;
- This protects creditors under the trust fund doctrine.
Frequently Asked Questions
What is valid consideration for shares? Cash actually paid, property received at fair valuation, labor or services already rendered, previously incurred corporate indebtedness, and transfers from retained earnings to capital. Not promissory notes or future services.
What is watered stock? Shares issued as fully paid when the corporation in fact received less than their full value, such as through overvalued property or issuance below par.
Who is liable for watered stock? The stockholder and the consenting directors or officers may be liable to the corporation and its creditors for the difference between the full value and what was actually received.
Can shares be issued for future services? No. Shares cannot be validly issued in exchange for promissory notes or future services. The consideration must be actual and presently received.
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 you have questions about your rights or options under Philippine law, our firm is available to assist. 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.