Subscription Agreements in the Philippines: A Complete Overview

What is the Nature of a Subscription Agreement?

A subscription agreement is the contract by which a corporation sells its shares to one or more prospective stockholders. It is the written agreement whereby an investor or stockholder, marks his/her subscription and principal officers, on behalf of the corporation, formally accepts it. While often accompanying corporate bylaws or articles of incorporation, a subscription agreement need not be attached to the charter documents of a company. A subscription agreement may be incorporated in another instrument, such as stock purchase agreement, joint venture agreement, incorporator’s agreement or escrow agreement. Often, subscriptions are not attached to articles of incorporation because they contain significant provisions relating to the terms and conditions of the sale of shares, requiring extensive requirements under Philippine law to comply with and public filing with the Securities and Exchange Commission.
However , a subscription agreement shall invariably be executed by or for each shareholder of the corporation at the time the subscription to shares is made or offered. This shall include shareholders added to the corporation’s register of shareholders by the subsequent issuance of shares representing additional capital contribution. Further, a subscription agreement shall be executed by all of the stockholders in adoption of the bylaws upon ratification of bylaws from time to time. The agreement, which contains a valid offer and acceptance, creates a bilateral executory contract between a prospective subscription and a corporation. Such agreement is not yet fully-binding until the conditions precedent to the acceptance of the prospective subscriber is effected. Such conditions precedent may include the payment of subscription price, delivery of proper stock subscriptions and a written consent from the directors of the corporation issuing the shares.

Key Elements of a Subscription Agreement

A subscription agreement typically contains the following key elements:
Details of the subscriber and the issuer – A subscription agreement will generally require the full legal name and residence of the issuer and the name and residence of each subscriber. If the subscriber is a corporation or association, the full name of its officers and directors, the place of incorporation, and the business address of such corporation or association are usually required.
Subscription price – subscription agreements will usually provide details of the schedule of payments for the subscription price, if any, and the method of payment.
Rights and Obligation of Parties – subscription agreements will also typically set out the respective rights and obligations of the parties. The nature of the subscription will often determine the provisions relating to the rights of the subscriber. If the shares offered under the rights of the existing shareholders, the subscription agreement should provide restrictions on transfer of the shares. If the investment sought involves unsecured promissory notes, the terms of such notes will often be incorporated in the subscription agreement and an additional trust indenture could also be executed.
Payment terms – the subscription agreement may also specify that all amounts paid by a subscriber (including the subscription of an installment) shall, unless otherwise specified, be payable to a depositary designated by the issuer or its agents and shall be held by it as security for the performance by the subscriber of its obligations and to be applied and disbursed by it (or at its direction) for the account of the issuer.
The subscription agreement may also call for the payment of interest on any amounts owing to the issuer from time to time or provide that the interest on a note is due and payable the first day of each month or other payment schedules.
If it is a purchase or sale, the agreement will provide that the subscriber irrevocably offers to purchase from the issuer and the issuer irrevocably offers to sell to the subscriber the number of shares specified in the agreement at the price specified in such agreement or as otherwise may be determined in accordance with the terms of the subscription agreement and state that the issuer or the subscriber will not be obligated to effect the sale if the conditions precedent set forth in the subscription agreement have not been satisfied at the time required.

Legal Basis for a Subscription Agreement in the Philippines

The legal framework governing subscription agreements in the Philippines is primarily contained in the Securities Regulation Code ("SRC") and the Corporation Code. The SRC and the implementing rules and regulations ("IRR") are the primary laws that govern the sale of shares ("securities") in the Philippines. It provides for the requirements pertaining to issuances of securities pursuant to a subscription agreement.
Section 8.1.1 of the IRR of the SRC states that:
"Section 8.1.1. Requirement of registration. No person shall sell or offer for sale any security in the Philippines unless such security is covered by a registration statement, or exempt from registration pursuant to Section 9 of this Code, including any other exemption under the rules or regulations of the Commission."
A subscription contract, although it is an agreement between a company and a subscriber, is a sale of securities, and must comply with Section 8.1.1 of the Securities Regulation Code. The Securities Regulation Code has been mentioned previously as the prime charter in regulating all transactions concerning securities in the Philippines. The sale of securities through subscription agreements in the Philippines is considered public sale, as there is no discernable limit as to who can apply and there must be full disclosure of all information regarding the security. There is no quota as to the number of shares a subscriber may subscribe, nor is there a restriction on who can be a "subscriber".

Common Terms for a Subscription Agreement in the Philippines

Subscription agreements, like other contracts, contain numerous clauses that are either found in other contracts or are unique to the parties’ business needs. Some of the more common clauses in subscription agreements in the Philippines include:
(a) Payment of Subscription Price – the subscription price may be payable in a number of installments, such as upon execution of the agreement or upon delivery of the interest. The subscription agreement may also require the client to make an advance payment of commissions for the service to be rendered. This provision shall state the mode of payment.
(b) Period of Subscription – Subscription agreements usually provide the number of days to pay the subscription price. There may also be penalties for late payment of the subscription price.
(c) Interests Earned – this clause states the interest earned from the subscription and the applicable tax liabilities. The subscription agreement usually states that any taxes due on the interest (10% final withholding tax for individual subscribers; 20% final withholding tax for corporate subscribers) shall be for and should be paid by the subscriber.
(d) Pre-termination of Subscription Agreement – this clause provides grounds for the termination or pre-termination of the subscription agreement. The subscription agreement may provide that any other violation of the provisions of the subscription agreement (aside from those mentioned in the grounds for termination) shall give rise to the right of any of the parties to terminate the agreement.
(e) Confidentiality – the confidentiality clause protects any confidential information, trade secrets or proprietary information of any of the parties. It shall also provide the remedies if any of the parties violates the confidentiality obligation.
(f) Limitation of Liability – this clause limits the liability of one party to another under the subscription agreement. The subscription agreement may even provide exclusions to exempt the parties from liability altogether.

How to Prepare a Subscription Agreement

When it comes to subscription agreements, compliance with Philippine law is of utmost importance. For instance, in order to issue shares at a discount, corporations must first secure prior approval from the Securities and Exchange Commission (SEC), otherwise the corporation employees would have no recourse or protection in the event of any deficiency in the amount paid for the shares. With that said, there are some factors to keep in mind when drafting a subscription agreement:

• Consider the different methods in which a subscription may be made. A subscription may be made as payment in cash, property, by way of a promissory note (subject to the rules on loans or guarantees by the corporation) or even intellectual property (subject to the provisions of the Intellectual Property Code). In fact, subscription agreements frequently provide that the subscriber’s contribution will be settled in cash or by personal check, but this type of situation may jeopardize the validity of shares issued .
• Subscription form is usually in two steps, namely a subscription offer and notice of acceptance, which obligates the company to issue the shares, such acceptance becoming a binding contract take effect upon signing. Acceptance however is competent only if automatic vesting of rights upon said acceptance is stated, otherwise mere acceptance will not vest the rights of ownership of the shares. However after the offer of subscription is accepted, the offer may be revoked by the subscriber before notice of such acceptance is given to him or her if it has been published with general circulation as in the case of a prospectus.
• Subscription agreements with respect to shares must generally be in writing, in conformity with the relevant provisions of the Corporation Code; provided however that subscription agreements to insurance corp is exempted from said requirements.
• Every subscriber to a corporation must be a stockholder.
• Subscription agreements must not contravene the provisions of the tax code.

Difficulties and Considerations

When establishing a business in the Philippines, foreign investors looking to accept Philippine subscribers’ shares through our local corporation must bear in mind that even after acceptance of their subscription, there are instances when the subscription will remain uncompleted. A subscription becomes an obligation of the subscribing shareholders to complete or fulfill their obligation with respect to the shares they subscribe for in the amount they have agreed upon, at their subscription price. When this obligation does not manifest itself, the subscribing shareholder may refuse to pay, or effectively disregard his subscribed shares and treat them as unissued shares. In this scenario, the subscribing shareholder abandons or refuses to accept the shares he has subscribed for such that they continue to belong to the corporation.
A case in point in a particular instance is where the payment on subscription became non-optionable due to a change of ownership over shares of stock. What happened was that a shareholder acquired the shares of stock from the original shareholder who refused to complete his subscription, such that the new shareholder is now the one refusing to pay on a new subscription. Section 62 of the Corporation Code provides that shares of stock can no longer be amended in the event the subscription relates to a non-due, optional right to convert a non-equity security into a class of equity security. In this case, may the subscribing shareholders recover from the issuing corporation the subscription money paid on the subscription of shares? Another challenge concerns circumstances when a corporation is restricted from issuing more shares when it enters into a subscription agreement. This scenario may arise when the authorized capital stock of the corporation is fully subscribed. In that case, the corporation, as a rule, cannot issue additional shares. It is only through an amendment to the Articles of Incorporation that the corporation can increase its authorized capital stock and issue additional shares. In general, under a subscription agreement, in case capital contribution is made pursuant to the provision of a fiscal agent, the circulating notes of the fiscal agent themselves may be delivered as evidence of the same, so that there would be the appearance of regularity. But if the payment is not made, how will the corporation protect the collecting officers, who are left without recourse to any other paraphrenas? What recourse or courses of action are available to the corporation when the preemptive rights of the other subscribers at the time of the original subscription will no longer exist when the subscription is issued? An investor, especially the foreign investor, should also note that subscription agreement may be characterized as a type of financing arrangement because many subscription agreements are figuratively described as falling within the ambit of an equity financing package that characterized features of such a hybrid financing document. In that case, the subscription agreement is characterized as a hybrid between a debt security and common stock which pays interest and common stock dividends. Although various issues surrounding a subscription agreement cannot be readily addressed in this blog entry, nevertheless a discussion on the material provisions of a subscription agreement provides adequate insight into the challenges that both the investor and the corporate entity may find themselves in.

Recap

In conclusion, subscription agreements are crucial tools for businesses in the Philippines looking to issue or purchase securities. These agreements outline the terms and conditions under which an investor agrees to subscribe for or purchase shares or other equity or debt securities. They provide clarity on the nature of the securities being offered, the rights and obligations of both the issuer and the investor, and the applicable legal and regulatory requirements.
From the type of securities being subscribed to the potential risks and returns associated with the investment, each subscription agreement contains important details for all parties involved. In the Philippines, these documents must comply with the requirements set forth in the Corporation Code, the Securities Regulation Code, and other applicable laws and regulations .
When it comes to drafting a subscription agreement in the Philippines, it is essential for both parties to carefully consider their respective needs and requirements. More importantly, both the issuer and the investor should have a solid understanding of the transaction and its implications. It is highly recommended to seek the guidance of experienced commercial lawyers to navigate through the process of creating and executing a subscription agreement to ensure that it meets legal requirements, as well as the expectations of both parties.
Armed with a solid understanding of the purpose and elements of subscription agreements, as well as complexities that arise when structuring and drafting them, businesses and investors in the Philippines can enter into a subscription agreement with confidence.