Decoding the revised Corporation Code (Part I)

On Feb. 20, Republic Act 11232 was signed into law, amending the more than 38-year old Corporation
Code of the Philippines. This comes at an opportune time, in the midst of an active government campaign
towards the promotion of the ease of doing business in the Philippines. In 2018, the Ease of Doing Business
Act was passed and a more liberal Foreign Investments Negative List was issued. Hopefully, the changes
brought about by the amendments in the Code can complement these laws in pursuing the ultimate goal
— to improve the Philippines’ competitiveness as an investment destination.

One of the most notable changes under the new Code is the grant of perpetual existence to all current
corporations. Prior to the amendment, corporations were only initially granted a term of 50 years, subject
to extension in accordance with the provisions of the old Code. Corporations with fixed corporate terms
may now file for extension via amendment of their Articles of Incorporation (AoI) not earlier than three
years prior to original or subsequent expiry date, unless earlier extension is justified. Once approved, the
extension shall take effect on the day following the original or subsequent expiry date/s. As for those with
expired terms, they are allowed to apply for revival of corporate existence subject to the approval of the
Securities and Exchange Commission (SEC).

The new Code imposes stricter rules on the use of corporate names by granting the SEC the power to
summarily order a corporation to immediately cease and desist from using a name found to be not
distinguishable, already protected by law, or contrary to law, as well as to cause the removal of all visible
signage bearing such name. In case of failure to comply, the SEC’s authority covers holding responsible
directors and officers in contempt and/or administratively/civilly liable, or revoking the corporation’s
registration.

Another significant change is the removal of the minimum subscribed and paid-in capital. Previously, at
least 25% of the authorized capital stock must be subscribed and at least 25% of the subscribed capital
should be paid at the time of incorporation. However, the “25% subscribed and 25% paid” requirement
was retained in case of an increase in capital stock. Moreover, the application for increase or decrease of
capital stock and creation/increase of any bonded indebtedness should now be filed with the SEC within six
months from the date of approval of the board of directors and stockholders, subject to extension for
justifiable reasons.

Incorporators now include “any person, partnership, association or corporation,” consistent with the
introduction of the One Person Corporation (OPC) which is governed by its own Chapter in the new Code
(the OPC will be covered in the next installment of this two-part article). The minimum required number
for incorporators has also been removed, while keeping the same maximum number. It thus went from
being “at least five but not more than fifteen” to merely “any number not exceeding fifteen.”

Next, the period of non-use of charter has been extended from two to five years. Thus, the certificate of
incorporation of those which failed to formally organize and commence business shall now be deemed
revoked “as of the day following the end of the said five-year period.” For those that commenced business
but have become inoperative for at least five consecutive years, the SEC may place them first under
delinquent status after due notice and hearing. Delinquent corporations shall have two years within which
to resume operations and comply with the SEC’s requirements to lift the delinquency status. Otherwise,
their registrations may eventually be revoked.
As regards the directors, the requirement that majority of them must be Philippine residents has been
lifted. Corollary to this, directors may now be elected via stockholders’ vote given through remote
communication or in absentia, provided such manners of voting are allowed under the by-laws or
approved by majority of the directors. Discussions on other changes on the by-laws shall be covered next
week in the second part of this article.

In addition, the boards of directors of corporations vested with public interest (such as listed corporations,
banks, quasi-banks, pawnshops, etc.) are now required to have independent directors which must
constitute at least 20% of such boards.

With regard to mandatory officers, the Code now requires that the treasurer be a resident of the
Philippines. Additionally, corporations vested with public interest are now required to elect a compliance
officer.

In the past, only the election of the directors and officers was required to be reported by corporations to
the SEC within 30 days from occurrence. Under the new Code, within the same period, a report should be
made in case of a change in shareholding and in the event of non-holding of elections together with the
reasons therefor and the new date of elections which should not be later than 60 days from the scheduled
date. In the absence of a new date, or unjustifiable failure to hold elections on the new date, the SEC upon
application of a stockholder or director may summarily order the holding of elections and the issuance of
the required notices as regards the place and time of the elections and designation of presiding officer,
among others.

Should a director, trustee or officer die, resign, or in any manner cease to hold office, the period within
which to file a notice to the SEC has now been fixed at seven days from knowledge thereof.

The SEC is now also vested with the powers to order on its own instance (motu propio) or upon verified
complaint, the removal of a director elected despite a disqualification, or whose disqualification arose or is
discovered subsequent to election. This is without prejudice to sanctions that the SEC may impose on other
members who, despite their knowledge of such disqualification, failed to remove such director.

When a quorum is still present, filling up vacancies in the board of directors should now be made no later
than 45 days from the vacancy, or not later than the day of expiration at a meeting called for that purpose
in case of term expiration, or during the same meeting when removal was authorized, as the case may be.
However, in the absence of quorum and when emergency action is necessary, the vacancy may be
temporarily filled from among the officers by unanimous vote of the remaining directors. The authority
shall only be limited to the necessary emergency action and should cease upon termination of the
emergency or election of replacement, whichever comes earlier. The SEC should be notified as well within
three days from the emergency designation.

New additions also include the option to incorporate an arbitration agreement in the AoI and the limitation
on the management contract to a maximum of five years for any one term.

Decoding the revised Corporation Code (Part II)

In the first part of this article on the revised Corporation Code of the Philippines, I mentioned that directors
may now be elected by stockholders through remote communication and in absentia if allowed in the by-
laws or approved by majority of the board of directors. The Securities and Exchange Commission (SEC) will
issue rules and regulations to govern the manner of participation through these means. In consonance with
this, the by-laws should now mention the allowable modes by which stockholders and directors may
attend meetings. In addition, the by-laws should also provide guidelines for setting a director’s
compensation, the maximum number of independent directors (which should not exceed the limit under
the Code), and the arbitration agreement, if any.

Under the new Code, stockholders are now allowed to vote via remote communication, in absentia or
through the traditional proxy. As for the schedule of the regular stockholders’ meeting, if the date is not
fixed in the by-laws, it should now be on any date after April 15 of every year, as determined by the board.
The period within which to serve the notice has also been changed from two weeks to 21 days prior to the
meeting, unless the by-laws provide a specific notice period. Service may now be made electronically or in
any manner the SEC may allow.

As for the venue, if holding the meeting at the principal office is not practicable, it may now be held
elsewhere within the same city/municipality. Moreover, unless the by-laws provide a longer period, the
stock and transfer book should be closed at least 20 days prior to the regular meeting and seven days
before a special meeting.

With respect to directors’ regular meetings, notice should now be served within two days instead of only a
day prior to the meeting, unless otherwise fixed in the by-laws. Directors may now participate and vote
through remote communication such as videoconferencing, teleconferencing, or other alternative modes
of communication that will reasonably allow participation, but they still cannot attend or vote through
proxy.

In case of mergers and consolidations, the following are now specifically required to be reflected in the
Articles of Merger: a) carrying amounts and fair value of the assets and liabilities of the respective
corporations as of an agreed cut-off date, b) method to be used in the merging/consolidating the accounts
of the companies, c) provisional or pro-formal values, as merged or consolidated, using the applicable
accounting method, and d) such other information the SEC may prescribe.

Appraisal right may now be exercised in case the stockholder dissents to the proposed investment of
corporate funds for any purpose other than the company’s primary purpose.

The rules on stock corporations and the corresponding changes shall apply to non-stock corporations
insofar as stated in the Code. As for the term of the trustees, they shall now all hold office for three years
until their successors are elected and qualified. Except for independent trustees of non-stock corporations
vested with public interest, only a member can be elected as a trustee of non-stock corporations. Also, a
record should now be kept of the list of members and their proxies as may be required by the SEC, and this
should be updated 20 days prior to any election.

A distinctive addition under the new Code is the One Person Corporation (OPC). It is worth noting that only
a natural person, trust or estate may form an OPC. However, natural persons cannot set up an OPC for the
purpose of exercising a profession, except if allowed under special laws. Moreover, banks, quasi-banks,
pre-need, trust, insurance, public, publicly-listed and non-chartered government owned and controlled
corporations cannot incorporate an OPC.

The OPC has no minimum required capital stock except as provided otherwise by special laws. Its Articles
of Incorporation shall be filed similarly to that of a regular stock corporation but the letters “OPC” must be
indicated either below or at the end its corporate name. For obvious reasons, it is not required to file by-
laws.

The single stockholder (SH) shall be the sole director and president of the OPC. Within 15 days from
incorporation, the SH should appoint a treasurer, a corporate secretary (who should be another person),
and any other officer he deems necessary. Notice should be filed with the SEC within five days of their
appointment. If the SH will also be the treasurer, the SEC will require the submission of a bond and an
undertaking to faithfully administer the OPC’s funds. The bond is renewable every two years or as often
required.

The SH should also appoint a nominee and an alternative nominee whose details and extent of authority
must be stated in the AOI and whose written consent must be attached to the SEC application. The
nominee or alternative nominee shall assume and manage the OPC in case of the SH’s death or incapacity.
In the event of the SH’s death, the alternate shall transfer the shares to the heirs within seven days from
receipt of legal documents from the heirs and notify the SEC, and the heirs should notify the SEC within
sixty days after, of their decision either to wind up and dissolve the OPC or to convert it into an ordinary
stock corporation. In case of a sole heir, he should be allowed to continue the OPC, if he wishes to.

As regards the liability, upon failure to provide proof that the property of the OPC is independent of the
SH’s property, the SH shall be solidarity liable for the debts and liabilities of the OPC. The principle of
piercing the corporate veil shall equally apply to the OPC.

An OPC may be converted into an ordinary corporation and vice versa, subject to compliance with the rules
that the SEC may promulgate.

The OPC may be dissolved voluntarily upon a duly filed petition by the SH, or by the SEC motu propio or
upon verified complaint on the grounds of non-use, in operation, fraud on procuring registration, final
judgment of crimes such as tax evasion, smuggling, graft and corrupt practices, among others, as
enumerated in the Code. Also, the OPC may be placed under delinquent status upon failure to file three
reports to the SEC consecutively or intermittently.

For foreign corporations, the amount of the initial security deposit applicable to branch offices has been
raised from P100,000 to P500,000, or such amount that the SEC may fix. The threshold for the additional
security deposit has also been increased to 2% of the gross income for the year exceeding P10,000,000
(formerly P5,000,000 only). Moreover, domestic corporations appointed as resident agent should be of
sound financial condition and must show proof of its good standing as certified by the SEC.

As to the reports, the annual financial statements of corporations with total assets or liabilities not
exceeding P600,000 may merely be certified under oath by the corporation’s treasurer or chief financial
officer. In all other cases, the financial statements must be audited by an independent certified public
accountant.
The Code also further defined the coverage of the SEC’s power and authority with respect to supervision
and regulation of corporations and mandated the development and implementation of an electronic filing
and monitoring system which the SEC has already started.

Although it can be said that the much is still left to be done, the significant changes under the Code, such
as the introduction of the OPC, removal of minimum paid-in capital, or the grant of perpetual existence to
corporations, among others, indicate that deliberate steps are being taken to ease doing business in the
Philippines.