The corporate legal framework in the Philippines recently underwent substantial changes as part of the efforts of the government to ease doing business in the country. In particular, the Revised Corporation Code of the Philippines(the “RCC”) was enacted earlier this year on February 20, 2019 to repeal in its entirety the old Corporation Code (the “OCC”), which dates back to 1980. It can be seen as a move to modernize corporate practices while strengthening corporate governance.
Key changes introduced by the RCC include the following.
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Simpler Incorporation Requirements
Section 10 of the RCC now permits any person, partnership, association or corporation, singly or jointly with others (but not more than fifteen (15) in number), to organize a corporation for any lawful purpose. This provision removed the incorporation requirement to have at least five (5) individual incorporators, a majority of whom should be residents of the Philippines.However, please note that the Securities and Exchange Commission (“SEC”) has recently interpreted Section 10 to mean that (a) there should still be at least two but not more than fifteen (15) incorporators to set up a domestic corporation, and (b) as further discussed later, only a one-person corporation may have a single shareholder and a sole director.
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Corporate Incorporators Now Allowed
Section 10 of the RCC also now allows entities, including foreign corporations, to be incorporators. Previously, only natural persons of legal age may incorporate a company In this regard, the SEC has clarified that incorporators may now consist of any combination of (a) natural persons, (b) SEC-registered partnerships, (c) SEC-registered domestic corporations or associations in good standing, and/or (d) foreign corporations.
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Simpler Governance
A minimum of five (5) directors is no longer required to govern a corporation. The requirement that a majority of such directors be residents of the Philippines has also been dispensed with.Thus, subject to the application of special governance rules that require the election of independent directors,
an ordinary corporation may now just have one (1) director, or several directors up to fifteen (15) directors.
4-.New Residence Requirement for Treasurers
The treasurer of a corporation, who may or may not also be a director, must now be a resident of the Philippines. With respect to other key officers of a company, the RCC kept the requirement that the president be a director, and that the secretary be a resident and citizen of the Philippines. The RCC also still permits a person to hold two (2) or more positions concurrently, and retains the exception that the president cannot also act as the secretary or the treasurer at the same time.
5.Special Rules for Corporations Vested with Public Interest
Corporations vested with public interest include the following:
(a) Corporations subject to reportorial requirements under Section 17.2 of the Securities Regulation Code, namely those whose securities are registered with the SEC, corporations listed for trading with an exchange, or those with assets of at least Fifty Million Pesos (Php 50,000,000) with two hundred (200) or more shareholders, each holding at least one hundred (100) shares;
(b) Banks, quasi-banks, nonstock savings and loan associations, pawnshops, corporations engaged in money services, preneed, trust and insurance companies, and other financial intermediaries; and
(c) Other corporations engaged in businesses vested with public interest similar to the above, as may be determined by the SEC, taking into account factors that are consistent with the purpose of requiring the election of an independent director, such as the extent of minority ownership, type of financial products or securities issued or offered to investors, public interest involved in the nature of business operations, and other similar factors.
Special governance rules have been provided for the foregoing corporations. First, at least 20% of its board must be independent directors. Second, it must have a compliance officer. Lastly, they are required to submit additional annual reports to the SEC such as a directors’ compensation report, and a directors’ appraisal or performance report, including the criteria used to assess each director.Although encouraged, these reports are not mandatory for regular corporations.
6.One Person Corporation (“OPC”)
The RCC introduced a new type of corporate vehicle designed for a solo stockholder. An OPC may be formed by a single stockholder, which must be a natural person (including a foreign national), trust or an estate. As mentioned earlier, the SEC stressed that only an OPC may have a single shareholder and a sole director.
A regular corporation can opt to be converted into an OPC if a single stockholder acquires all the shares thereof. The opposite is also possible, whereby an OPC is converted into an ordinary stock corporation.
OPCs are subject to lesser governance requirements, e.g., no requirement to submit and file corporate bylaws.Also, although the single stockholder may not act as the president and the corporate secretary at the same time, he/she may act as the treasurer of the corporation subject to a bond requirement. Please note, however, a sole shareholder claiming limited liability has the burden of affirmatively showing that the corporation was adequately financed, and if he/she cannot prove that the property of the OPC is independent of his/her personal property, he/she can be held jointly and severally liable for the debts and other liabilities of the OPC. Moreover, the principles of piercing the corporate veil (e.g., the separate corporate legal entity is disregarded if it is used to shield against liability for any wrongdoing) applies with equal force to OPCs.
7.No More Minimum Subscription and Paid-Up Capital Requirements
The RCC retained the rule that there is generally no minimum capital stock requirement for stock corporations, except as otherwise specifically provided by special law. Significantly, however, it boldly removed the minimum subscription and paid-up capital requirements under Section 13 of the OCC, namely, that at least 25% of the authorized capital stock must be subscribed at the time of incorporation, and at least 25% of the total subscription must be paid upon subscription. It should be noted though that, in relation to an increase of the authorized capital stock, these minimum subscription and paid-up capital requirements still apply with respect to the increase in capital.
8.Arbitration Alternative for Intracorporate Disputes
In recognition of the benefits of alternative forms of dispute resolution in the context of corporate affairs, the RCC now provides a statutory basis for inserting an arbitration agreement in the articles of incorporation or bylaws of a corporation to resolve intracorporate disputes between the corporation
and its stockholders that arise from the implementation of the articles of incorporation or bylaws, or from intracorporate relations. Moreover, when an intracorporate dispute is filed with a Regional Trial Court, the court is obliged to dismiss the case before the end of the pretrial conference, if it determines that an arbitration agreement is written in the corporation’s articles of incorporation, bylaws, or even in a separate agreement. It should be noted, however, that under the RCC, unlike the standard practice of allowing the parties to choose their arbitrators, the power to appoint the arbitrators forming the arbitral tribunal is required to be given to a designated independent third party.The SEC will issue rules and regulations to implement this new arbitration option.
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Power to Enter into Partnerships, Joint Ventures, etc.
The RCC now expressly allows a corporation to enter into a partnership, joint venture, merger, consolidation or any other commercial agreement with natural and juridical persons. Previously, the SEC has opined that a corporation cannot enter into a partnership contract with an individual or another corporation, unless it complies with the following conditions: (a) the authority to enter into a partnership is expressly conferred by its charter or articles of incorporation; (b) the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or articles of incorporation of the corporation, and (c) in the case of foreign corporation, it must obtain a license to transact business in the Philippines in accordance with the OCC. The SEC has also opined that a corporation may enter into a joint venture agreement only if it is in line with the business authorized by its charter.
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Indefinite Corporate Term
Unless otherwise provided in their articles of incorporation, corporations can now enjoy perpetual corporate existence.The term limit of 50 years was removed.
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Effects of Non-Use of Corporate Charter and Continuous Inoperation
The RCC clarified the effects and procedural steps concerning corporations that cannot commence or revive their business operations for whatever reason. If a corporation does not commence its business within five (5) years (previously, just two (2) years)from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five (5)-year period. As to a corporation that has commenced its business but subsequently becomes inoperative for at least five (5) consecutive years, the SEC may consider it delinquent after due notice and hearing. As a new rule, a delinquent corporation is given two (2) years to resume operations and comply with all the requirements prescribed by the SEC to obtain an order lifting its delinquent status. Failure to comply with the requirements and resume operations within the period given by the SEC shall cause the revocation of the corporation’s certificate of incorporation. The previous exception for a failure by a corporation to organize, commence operations or carry out the construction of its works, or continuously operate due to causes beyond its control was dropped from the RCC.
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Revival of Corporate Existence
The RCC now permits a corporation whose term has expired to apply for a revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation, and subject to all of its duties, debts and liabilities existing prior to its revival, including, for example, any outstanding penalties for any non-compliance. Moreover, unless otherwise provided in its application for revival, it will also have perpetual existence upon its revival.This revival procedure offers a practical solution to corporations with fixed terms that inadvertently forget to extend their terms. Previously, the SEC has opined that it was mandatory for a dissolved corporation (e.g., one whose term has expired) to liquidate its assets and liabilities pursuant to Section 122 of the OCC.
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Corporate Dealings with Directors and Officers
To strengthen corporate governance, Section 31 of the RCC expanded the rules governing self-dealing directors and officers to cover contracts with spouses and relatives within the fourth civil degree of consanguinity or affinity.
Contracts of a corporation with one or more of its directors, officers or, now, including their spouses and relatives within the fourth civil degree of consanguinity or affinity, are voidable at the option of such corporation, unless all of the following conditions are present:
(a) the presence of such director in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;
(b) the vote of such director was not necessary for the approval of the contract; and
(c) the contract is fair and reasonable under the circumstances.
With respect to a potential contract involving a director, if any of the above conditions is absent, then the subject contract may still be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock in a meeting called for the purpose, provided that full disclosure of the adverse interest of the director involved is made at such meeting, and the contract is fair and reasonable under the circumstances (making this condition indispensable).
For corporations vested with public interest, material contracts must be approved by at least 2/3 of the entire membership of the board, including at least a majority of the independent directors.
As to contracts with officers, they must have been previously authorized by the board of directors.
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Electronic Notices and Remote Participation in Meetings
The RCC now promotes the use of technology, e.g., electronic notices of stockholders’ meetings, and board meetings conducted by remote communication such as videoconferencing, teleconferencing or other alternative modes of communication. Voting in stockholders’ meetings may also be done by remote communication or in absentia, if allowed by the bylaws or a majority of the board of directors. For corporations vested with public interest, directors may be voted by stockholders by remote communication or in absentia even without a provision in the bylaws authorizing such manner of voting.The SEC will issue rules and regulations governing participation and voting through remote communication or in absentia, taking into account the company’s scale, number of shareholders or members, structure, and other factors consistent with the protection and promotion of shareholders’ meetings.
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Local Corporate Political Donations Now Allowed
The RCC amended Section 36(9) of the OCC, which prohibited corporations, domestic or foreign, from donating to any political party or candidate, or giving donations for purposes of partisan political activity. The RCC now expressly bans only foreign corporations from giving such donations.
Companies with existing businesses in the Philippines and those looking to invest therein should consider the above changes, including those that could help simplify corporate structures or procedures, or improve corporate governance practices. Potential investors should also monitor the rules and regulations that the SEC will issue to implement the significant changes introduced by the RCC