THE REVISED CORPORATION CODE OF THE PHILIPPINES (Its Theories and Applications) TERESITA J. HERBOSA AND ERIC R. RECALDE (2019) Published & Distributed by REX Book Store Scanned with CamScannerChapter I-A. Chapter I-B Chapter IT Chapter III-A: Chapter III-B Chapter III-C : Chapter IV. Chapter V Chapter VI Chapter VII Chapter VIII Chapter IX Chapter X Chapter XI Chapter XII Chapter XIII Chapter XIV Chapter XV Chapter XVI Chapter XVII: CONTENTS Introduction.. General Provision: Incorporation and Organization of Private Corporations Board of Directors/Trustees . Election of Board of Directors/Trustees; Nomination of Officers and Compensation... Fiduciary Duties of Directors, Trustees and Officers. Powers of Corporations... Bylaws . Meeting: Stocks and Stockholders... Corporate Books and Records . Merger and Consolidation .... Appraisal Right ... Non-stock Corporation . Close Corporations ... Special Corporations ..... Dissolution .. Foreign Corporations... Investigations, Offenses, and Penalties. Miscellaneous Provisions 28 60 96 108 149 165 203 217 251 279 290 302 311 334 350 387 407 433 464 Scanned with CamScannerABBREVIATIONS { Unless the context provides otherwise, abbreviations used in this work shall have the following meaning: BIR BOC BSP Civil Code Code Commission or SEC Company or corporation Cooperative Code DOLE DPA FIA PCC Public Interest Company Rules of Court SRC sss Tax Code or NIRC Bureau of Internal Revenue Bureau of Customs Bangko Sentral ng Pilipinas Civil Code of the Philippines Revised Corporation Code of the Philippines Securities and Exchange Commission Corporation formed under the Corporation Code Cooperative Code of the Philippines Department of Labor and Employment Data Privacy Act Foreign Investments Act Financial Rehabilitation and Insolvency Act Insurance Commission Intellectual Property Code Local Government Unit Mergers and Acquisitions Philippine Competition Commission Corporation vested with public interest Revised Rules of Court of the Philippines Securities Regulation Code Social Security System National Internal Revenue Code Scanned with CamScannerChapter I-A INTRODUCTION The Revised Corporation Code (hereafter “the Code”) regulates various but intertwined corporate and personal relationships, mainly: (a) between or among shareholders or members whether controlling, majority, minority, nominal, legal and/or beneficial owners; (b) between shareholders and the corporation, as represented by the directors or trustees; (c) between the corporation and/or shareholders and stakeholders, including employees, creditors, suppliers, contractors and other third parties; and, (d) the corporation and the State.-The Securities Regulation Code (SRC) supplements the Code in that it deals with the protection of investors and promotion of the capital markets, among others. Another related law is the-Fimancial Rehabilitation and insolvency Act(FRIA) as it applies to corporate rehabilitation or liquidation, and the recognition of creditors’ rights and respect of priority of claims. Intra-corporate relations — When persons, natural or juridical, subscribe to the capital of a corporation, there is an assumption that they agree with, and bind themselves to, the lawful terms and conditions set by the incorporators. While such terms and conditions may be found in the articles of incorporation, it is the Code that provides the basic framework of their relationship, and governs the proper implementation of their articles and valid exercise of corporate powers. a. There is a distinction between ownership and management. The board (a select group of registered stockholders or members) controls, operates and exercises the powers of the corporation upon election by their co-stockholders or co-members until expiration of term, removal or replacement. The Code ensures that each action or process involved in the selection of management is in accordance with and in furtherance of the will of the majority. b. The shareholders may receive dividends from the unrestricted retained earnings of the corporation (when the board determines it to be in line with the purpose, operations and plans of the Scanned with CamScanner2 ‘THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) corporation) or from net assets upon liquidation. However, shareholders are subordinate to corporate creditors. Corporate capital, after all, is regarded as a trust fund (or buffer against losses) for the primary benefit of creditors. c. The board may initiate changes in the corporate term, structure, relationships, operations, or financial condition, but subject to the approval of the prescribed number of shareholders or members in accordance with the Code. The dissenting shareholders or members are bound by the decision of the prescribed majority, If the changes are material, the Code gives them the option to divest and receive the fair value of their shares, out of unrestricted retained earnings, from the corporation. d. Corporate actions may only be undertaken following the collective decision of the board and/or shareholders at a properly called meeting with prior notice, except only where written assent is allowed specifically in the amendment of the articles of incorporation.'! The members of the board and all shareholders of record must be given sufficient opportunity to prepare, attend, participate and vote at such meetings. Otherwise, the proceedings and any business transacted at the meeting are deemed not valid. The State, in turn, grants corporate franchise on the assumption that it will not be used for purposes that are unconstitutional, illegal, fraudulent, or contrary to public policy and morals. Otherwise, it may revoke such franchise. The Commission is the lead implementing agency of the Code and the SRC, and tasked to issue implementing rules, regulations, circulars, and guidelines. The Commission, when it approves or permits changes in the corporate charter, or when it makes rules, must ensure that such charter and tules are aligned with international best practices and highest standards that promote good corporate governance, provide ease of doing business, protect investors, and result in effective enforcement and compliance. This Introductory Chapter highlights the features of a corporation, how a corporate franchise may be used in raising funds and doing business, and how the corporate relationships and conduct are regulated. They provide the rationale behind the key aspects of the Code. This Chapter likewise highlights the recent changes in the re-enacted law on corporations, known as the “Revised Corporation Code of the Philippines” (or the Code), which took effect on February 23, 2019. "Sec. 15. a | Scanned with CamScannerCHAPTER I-A 3 INTRODUCTION Features of a corporation — The corporation, by fiction of law, has personality separate and distinct from its shareholders or members.dts management owes fiduciary duties to the corporation rather than to its shareholders or members.The latter do not have ownership and attendant rights over corporate properties, and are not liable for corporate obligations. This encapsulates the principle of “separate legal or juridical personality.” Unlike in a business partnership, the persons who comprise the corporation, the shareholders or members, are principally liable to the corporation and subsidiarily liable to third parties up to their contributed (or subscribed) capital to the corporation. Thus, the shareholders or members have “limited liability.” Nevertheless, they assume risks by selecting managers who are expected to implement their shared objectives. This relationship between the corporation and its shareholders or members attracts others to likewise invest or provide capital to the corporation. The managers, not the shareholders or members, exercise the corporate powers, conduct all business and control all properties of the corporation.” In a corporate set-up, there is bifurcation of management and ownership. Decision- making is centralized in the managers comprising the board of directors or trustees. “Centralized management” is characterized by speed, expertise, and motivation. Shareholders or members exercise certain rights over the corporation’s charter and management. “Ownership contro!” means the majority lay down the basic rules in the conduct of intra-corporate relations, including the manner of electing, removing, and replacing the members of the board. The Code, however, limits such control to protect the rights of minority shareholders or members and stakeholders. To maximize the corporation’s ability to raise capital, the Code does not impose special conditions or requirements in order for the owners to be able to transfer their interest in the corporation. The “transferability of interest” makes the corporation different from a business partnership. However, they have a limited right to surrender their interest to, and withdraw from, the corporation. In this sense, they have “locked in investment,” unlike in a partnership. This Provides financial stability to corporations, in general. *Sec. 22. Scanned with CamScanner4 THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) Corporation as a tool in raising funds — A corporation may be viewed as a vehicle to raise capital from various sources. The corporation may rely on internally generated funds, specifically those which are generated from reduced inventory levels, delayed payment to trade payables, tighter credit control (collectively, working capital sources) and retained earnings.’ In managing these working capital sources, the corporation considers the exigencies of business and its goodwill from customers and suppliers.‘ The use of retained earnings, on the other hand, depends on its dividend policy and influenced by its free cash flows.5 The corporation may opt to rely on external sources, such as borrowings (either private or public), finance leases, securitization of assets, preference shares and ordinary shares.‘ For this purpose, the law generally requires approval by “majority vote of the board of directors and’ by two-thirds (2/3) of the outstanding capital stock at a stockholders’ meeting duly called for the purpose.”Specifically: a. Incase of additional issuance of shares requiring increase in capital stock, or incurring, creating or increasing bonded indebtedness” and b. In case of private borrowing requiring the lease, exchange, mortgage, or pledge of all or substantially all assets of the corporation.* They may be broadly classified into two categories: debt and equity. Where 'shares or debt will be offered to the public; the law generally requires prior SEC registration.’ There is:public offering when shares or debt are offered to 20 persons or more during any 12-month period. The transaction may also meet the prescribed notification thresholds under the PCA’s implementing regulations. In such case, the PCC approval is likewise necessary, There is some form of partnership between debt and equity holders. They are expected to take the necessary caution and adopt appropriate safeguards *Atrill and McLaney, “Accounting and Finance for ‘Non-Speci “Ibid., pp. 390-391. “Brierley and Bunn, “The determination of UK corporate capital gearing,” p. 359; See also Brealey Myer rand Allen, “Principles of Corporate Finance,” 11th Ed (Global Bd). Chap. 16. See ‘Atrill and McLaney, p. 393. "See discussions under Sec. 37. See discussions under Sec. 39. SRC, Sec. 8. »” 8th Ed., pp. 387-388. Scanned with CamScannerCHAPTER I-A 0 INTRODUCTION to protect their own interest in dealing with the corporation. The government generally limits itself to the regulation of corporate activities. In case of public offerings, it is a disclosure-based system whereby the public has fair and full knowledge about the securities offered, and there is absence of fraud. However, the government does not ensure the absolute protection of all parties in a commercial activity, The corporation’s capital primarily serves as buffer for its creditors. It may not necessarily secure them from the possibility that their claims will not be settled when they fall due. Setting a high level of capitalization, however, may, reduce such possibility. The problem lies in its determination. Each business has different capital requirements. The ideal capital for one may not necessarily be ideal for the other. Prospective creditors should instead properly evaluate the risks they face in dealing with the corporation, given the level of its capitalization. The role of the government is to require that relevant, accurate, and timely information are disclosed and made available to creditors and other persons dealing with the corporation. In raising externally generated capital, the corporation may issue several types of debt and equity (including hybrid securities). The corporation, in this case, serves as a business vehicle that brings together numerous persons with different risk profiles and profit requirements. A person who is risk averse cannot expect a high return from his investment in the securities of his choice. In contrast, a person who is willing to assume a greater degree of risk is expected and logically entitled to a higher return on the kind of securities in which he has invested. The Code provides the appropriate mechanisms that will enable these persons with conflicting interests to realize their expectations.” Unless the corporation is vested with public interest, the government does not impose a particular capital structure, extent of minority ownership, type of financial products or securities issued or offered to investors, qualifications of directors or officers, or the like. The government cannot foresee the appropriate structure for all types of business activities. What it does is to provide the regulatory framework that will serve as a guide to persons with different risk Profiles and profit requirements. In a liquidation scenario, holders of a senior debt, considering their stipulated marginal return, are expected to have the first claim on the assets, while the shareholders who may have received surplus Profits in case of the successful operations of the business may claim only on the net assets. The law permits controllers to design the capital structure and define the extent of all claims. "Sec. 6. Scanned with CamScanner‘THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) One popular theory in corporate finance is that firm value is independent of capital structure, provided: cash flows and investment policies are constant to perpetuity, and capital markets are perfect (i.c., perfect competition, no taxes, no transaction or bankruptcy costs, firms and investors can borrow at the same rate, no informational asymmetries, no agency costs)."' Since capital markets are imperfect in reality, company controllers need to find the best possible capital structure to enhance firm value, taking into account the causes of and other variables affecting such imperfection. Capital structure matters because of tax considerations, financial distress costs, the idea conveyed when equity is given preference over debt in financing the business,” and agency costs. Regulation of corporate relations — The Code defines the rights and obligations of a corporation as a juridical person, from its incorporation up to its dissolution and liquidation, regulates the various relationships that revolve inside and around it, and its activities vis-a-vis the corporate stakeholders. All these relationships are fundamentally founded on contracts, primarily through the corporate charter or articles of incorporation. The same must be approved by and registered with the Commission to bind third parties. The Code serves as gap-filler. Its provisions may be broadly categorized into two — mandatory and directory. Mandatory provisions cannot be altered in the corporation’s charter, specifically the corporate name, commencement of corporate existence, prescribed minimum qualifications of directors, trustees, and corporate officers, powers of the board, capital-related rules, and protection of minority shareholders. Directory provisions are supplementary in character. The corporation’s charter may alter such provisions, provided it will not prejudice the rights of shareholders, particularly the minority, and stakeholders especially the creditors. As a rule, the board exercises the corporate powers, conducts corporate business and controls its properties. However, the situation becomes slightly "'Modigliani-Miller Theory. "Pecking Order Theory postulates managers prefer to finance business operations follow- ing a certain order of preference: internally generated funds, debt, and equity. Resorting to & different order gives investors certain signal that may have an impact on the value of equity. For example, when managers issue equity (instead of debt), the investors believe that managers know that the firm is over valued and they should take advantage of the same. In reaction, investors place a lower value the new equity issuance. Scanned with CamScannerCHAPTER I-A 7 INTRODUCTION different upon liquidation or rehabilitation. In case of the latter, the board’s authority is generally limited to the conduct of affairs of the corporation consistent with the rehabilitation plan." The zone of insolvency generally commences when a court acts on a petition for corporate rehabilitation, and appoints a rehabilitation receiver. The board action must be consistent with the court-approved rehabilitation. Its pre-commencement transactions, i.e., those executed within 90 days prior to the commencement date, may be closely scrutinized and in proper cases rescinded or nullified.'* Measures to minimize transaction barriers — Both the Code and the SRC provide measures to mii barriers. “Information asymmetry” and “moral hazard” typically discourage parties or make it costly for parties to enter into transactions. Information asymmetry — There is .information asymmetry when there is imbalance of power between parties having different levels of information relative to a particular transaction, Such imbalance happens before (ex-ante) or after-(ex-post) the transaction. To address information asymmetry ex-ante, the law limits pre- incorporation contracts to a small number of persons, i.e., not more than 15, persons. The SRC forbids the sale or offer for sale of shares to the public (or more than 19 persons), unless there is an accompanying registration statement duly filed with and approved by the Commission. Specifically: “securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.”"’ This prompts the corporation to make full and adequate disclosure, and allows the Commission to conduct audit and investigation. Shareholders and investors are protected from-information asymmetry ‘ex-post, when they are given access to corporate books, records and financial statements, and may demand that they be provided adequate and timely information. The SRC mandates specific standards for internal record keeping “RIA, Sec. 47. '4Ud,, Sec. 58, 'SSRC, Sec. 8. Scanned with CamScanner8 THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) and accounting control.'* It likewise requires a corporation to make adequate and timely disclosure, in addition to the reportorial requirements under the Code and relevant laws. Specifically, the corporation must file structured and non-structured reports.'’ The shareholders having a substantial equity interest must immediately disclose the extent of their beneficial interest," and the change in such interest.”® In a non-public corporation, the disclosure requirement in the past was less stringent. However, the Code presently enumerates 11 items that the board must present at each regular meeting of sharcholders or members.”” There must be enhanced disclosure in periodic reports and strengthened auditor independence (together with quality audit) with the aim of giving investors the “whole picture.” In particular, the financial and operating results of the company must clearly disclose material and significant financial transactions relating to an entire group of companies, and include information about contingent liabilities and off-balance sheet transactions, as well as special purpose entities.” There must be disclosure of both long-term and short-term goals, the company’s ownership structure, remuneration of members of the board and key executives, material related party transactions, foreseeable risk factors, and major transactions. There must be sustainability reporting and integrated reporting.” “Financial disclosure must be extensive and should include independent audits of public companies’ financial statements. Accounting and auditing Tules must address investors’ need for reliable information. The rule writing institution must be competent, independent, and with incentive to write good accounting rules and keep the rules up-to-date." Relatedly, the Code now specifies as offenses wilful certification of incomplete, inaccurate, false or misleading statements or reports,” independent auditor collusion,* in addition to violation of the duty to maintain records, and allow their inspection or reproduction. "Id, Sec. 22. "SRC, Sec. 17. "Id, Sec. 18. "id, Sec. 23. Sec. 49, "id, p. 26. 21d, pp. 26-31. Professor B.S. Black (The Legal and Institutional Preconditions for Strong Securities Markets). Sec. 162. Sec, 163. Sec. 161. Scanned with CamScannerCHAPTER I-A 9 INTRODUCTION Moral hazard. There is moral hazard when one party may benefit from a conflict of interest or related party transaction to the detriment of the corporation. In the case of controllers of the corporation, the risk of moral hazard typically takes the form of self-dealing. It may be direct or indirect. The Code adopts the rules on self-dealing directors and officers,” regulates contracts between corporations with interlocking directors" and captures corporate opportunities diverted away by a director or controller of the corporation.” Further, the law requires a higher voting requirement relative to the controllers’ exercise of special corporate powers. Even shareholders who own non-voting shares are permitted to vote in any of such cases.” In relation to an eminent material change of controllers in a publicly listed corporation, the SRC prescribes a “tender offer” requirement™ and regulates “proxy solicitations.””? The SRC addresses an example of indirect self-dealing. It prohibits insider trading (or improper use by insiders of material non-public information), and regulates swing profits of principal shareholders.» Further, the SRC penalizes the manipulation of security prices and perpetration of certain devices and practices that could lead to such manipulation and fraudulent transactions.* The law regulates trading of synthetic products, such as the performance of any put, call, straddle, option, or privilege.” Code of Corporate Governance — The Commission recently adopted a new Code of Corporate Governance for Publicly Listed Companies, even as it retained the Revised Code of Corporate Governance for public companies and financial intermediaries. It is essentially permissive in that a corporation may opt-out from its requirements, on a.comply-ox-explain:basie. The covered corporation must comply, but if it opts outy must adequately explain to avoid stakeholders’ negative reaction and set forth how it plans to comply within a definite timeline. It recognizes the Id, Secs. 20 and 21. "Id, Sec. 27. Id, Sec. 23. 31d, Sec. 24. %Id,, Sec. 26. "ld., Sec. 25. Scanned with CamScanner10 THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) principle of proportionality, i.e, no one rule equally applies to all corporations having different circumstances, The Commission is planning a separate code of corporate governance for other kinds of corporations, including MSMEs Legal protection to other persons dealing with corporations — The law affords protection to third persons dealing with the corporation The érust fund doctrine gives basic protection to corporate creditors, without Prejudice to the additional protection that special laws may provide and they may contractually require. Trust fund doctrine Corporate creditors, up to the extent they have unpaid claims, may look up to the corporation’s assets equivalent to its capital as “trust fund.” It serves as a buffer before creditors’ claims are defeated by corporate losses. In @ng,-et-ale-v. Tiu,et-ak,® the Supreme Court explained the trust fund doctrine in the following manner: “The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. v. Rivera, provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodiedm-the ‘Gorperation-Code, which allows the distribution of corporate capital only in three instances: {1') amendment of the Articles of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the «existence of unrestricted retained earnings, and.(3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with.” Further, inddalleya-Prinewell,dng.,” the Supreme Court clarified: “Sux the trust fund doctrine. is not limited to reaching the stockholders unpaid subscriptions. The scope of the doctrine when *G.R. No. 144476, April 8, 2003. G.R. No. 157549, May 30, 2011. Scanned with CamScannerCHAPTER I-A n INTRODUCTION the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. Alll assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim. Also, under the trust fund doctrine, a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shaves,’intwhole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its debt. To make out a prima Jacie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that these stockholders have not in good faith paid the par value of the stocks of the corporation.” Contract and special laws — Persons who have the capacity to bargain ordinarily negotiate for some form of protection. In this case, they exercise their so-called self-help.” Thus, those who extend credit may negotiate for sufficient security, consistent with the law on credits. On the other hand, special laws protect those who do not have the capacity to bargain. For example, labor laws protect employees, laws on sales and credit transactions protect: buyers,pf real or personal properties, and consumer laws Protect end-users, The law likewise steps in should there be a conflict in the resolution of their rights and satisfaction of their claims, especially when the corporation becomes unable to meet obligations, or is insolvent. The Civil Code classifies and ranks the claims of these stakeholders. The FRIA, in turn, provides them with remedies, ‘Changes introduced by the Code — The Code consolidated existing policies, rules and practices, introduced certain policy changes, and strengthened the Commission to enable it to adequately implement its mandate. Scanned with CamScanner12 THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) Commission's practices and policies As the main corporate regulator, the Commission has adopted in the past certain practices and policies geared toward aligning corporate actions with new laws, best international practices and modern trends. The Code, a re- enactment of its predecessor Corporation Code, gives corporate actors a single framework that will guide them in making corporate decisions for the benefit of their shareholders or members, and stakeholders. a. Fhe Code incorporates restrictions imposed by special laws to reduce “oxi: By management risks. The Anti-Dummy Law and Foreign Investments Aet, on corporations engaged in nationalized or partly nationalized activities. Phe Code did not change the rule set by jurisprudence adopting the control test. and espousing political control, rather than economic control (Roy III v. Herbosa, et al.)..The grandfather rule specially applies only when there is doubt on who controls the corporation considering the circumstances (Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp.). Following the earlier case of Gamboa v. Teves, the Commission adopted a new two-tier rule, whereby “the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; ‘AND (b)‘the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors,” which rule was affirmed in the case ofReyJil-v-Herbosa, ot ak Philippine Competition Aat.(R-8-NO- 10007) The Code prescribes compliance with the Philippine ‘Competition-Act in relation to certain agreements that will adversely affect market competition, specifically: in all forms of mergers and acquisitions, joint ventures,*andagreements on corporate control.” Further, the contents of the proposed Articles of Merger or Consoli on must include additional “SEC Memorandum Circular No. 8-13, “Guidelines on Compliance with the Filipino- Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corpo- rations Engaged in Nationalized and Partly-Nationalized Activities.” “'Secs. 37, 39, 41, and 78. Sec. 58. Scanned with CamScanneriii. CHAPTER L-A 13 INTRODUCTION information consistent with the Act.” On the other hand, a competitor-stockholder may not fully exercise its right of inspection. Existing laws on confidential informati The right to information of shareholders or members has been explicitly made subject to confidentiality rules under Prevailing laws, such as the-DPA, 4P-Code, SRG, and-Rules ‘of Court.® The Code itself mandates any person required to file a report with the Commission may redact confidential information: provided, such information shall be filed in a supplemental report prominently labelled “confidential,” together with a request for its confidential treatment and the specific grounds for the grant thereof. Anti-Graft and Corrupt Practices Act. Bylaws may incorporate rules “for the promotion of good governance;andsanti-graft and corruption measures.”"” The law imposes criminal sanctions against corporations acting as intermediaries or engaging intermediaries for, or tolerating, graft and corrupt practices. * It likewise penalizes retaliation against whistleblowers.” The prescribed penalty may be imposed on the corporation and/or the concemed directors, trustees, officers, or employees. The prohibited acts involving graft and corruption, fraud, money laundering, tax evasion, smuggling and securities violation, may also result in the dissolution of the erring corporation and forfeiture of its assets." B. The list of disqualifications of directors, trustees or officers has been expanded. On the basis of such list, the Commission may remove disqualified directors, trustees or officers, and blacklist them in ——_ Sec. 77, pars. (d) to (g). “Sec 73, “Sec. 73(g). 177, “See, 46. “Secs. 166 to 168. Sec, 169, “Sec. 171, “Sec 138, Sec, 26. Scanned with CamScanner4 THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) proper cases. It may also sanction the other directors or trustees who knowingly caused their election despite disqualification or failed to remedy the situation.” Further, they may be subject to civil and criminal liability. The Code permits the board to establish “special committees,” in addition to executive committees, with or without bylaw authority, The Code of Corporate Governance for Publicly Listed Companies, ‘on comply or explain basis, enjoins corporations to create special committees, This is in addition to the board’s existing power to create an executive or management committee (“small board”) that has been retained in the Code. The Code provides legal basis for virtual attendance, participation, voting through remote communication and voting in absentia in shareholders’ or members’ meetings. It likewise permits corporations to file applications with the Commission and to send notices through electronic means. The Commission is mandated to craft rules that will ensure the contemplated participants will be given adequate opportunity to prepare, attend and actively Participate in the meeting. It must consider the company’s scale, number of shareholders or members, structure, and other factors consistent with the protection and promotion of shareholders’ or members’ meetings. Despite the silence of bylaws, directors or trustees who cannot physically attend or vote at board meetings can participate and vote through remote communication such as videoconferencing, teleconferencing, or other alternative modes of communication that allow them reasonable opportunities to participate.” The Code provides sanctions against corporations, specifically: (i) eon deli those who fail to comply with reportorial requirements at least three times within the five-year period;* (ii) deem istrati. those that fail to operate within a five-year period from date of their incorporation; and (iii) place on delinquent status those who commenced business but became Secs. 27 and 160. Sec. 34, Sec. 49. "Sec. $2. Sec. 177. Scanned with CamScannerCHAPTER L-A 15 INTRODUCTION inoperative for a period of five consecutive years.” The Code extended the period (two years under the old Code, five years under the Code) when newly incorporated entities must formally organize and commence transaction of their business from the date of their incorporation. Further those placed on delinquent status are given two years to resume operations and comply with the requirements that the Commission may impose. However, their failure to do so would lead to revocation of their registration. Accordingly, non- use and continuous non-operation are also grounds for involuntary dissolution. f. Corporations may “enter into a partnership, joint venture xxx or any other commercial agreement with natural and juridical persons.”*° g. The Code prescribes additional information in the plan and articles of merger or consolidation, such as the “carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date, the method to be used in the merger or consolidation of accounts of the companies, and the provisional or pro forma values, as merged or consolidated, using the accounting method.”*' This facilitates understanding of the effects of reorganization, especially on the faimess of the exchange of shares and properties. Policy changes — a. Corporations that are subject to special requirements and prohibitions now broadly include public interest companies or “corporations vested with public interest.” i. In general public interest companies are those that issue or offer financial products or securities to investors,«ar those where there is public interest involved in its operations. These include corporations that enjoy secondary license or are subject to special regulation. Thus, the following have been specifically identified to be corporations vested with public interest: “Sec. 21, Sec. 35(h). “Sec. 77, Scanned with CamScannerTHE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) * Corporations covered by Section 17.2 of the SRC, i.e, those whose securities are required to be registered with the Commission, those with a class of securities listed for trading in an exchange (i.e., “publicly listed companies”), and those with assets of at least PSO million, with 200 or more shareholders where each shall hold at least 100 shares (i.e., “public companies”). . Corporations that are especially regulated by the BSP or IC, namely: banks and quasi-banks, non-stock savings and loan associations (NSSLAs), pawnshops, corporations engaged in money service business, preneed, trust and insurance companies, and other financial intermediaries. Non-stock corporations (e.g., Micro-finance NGOs) may qualify as public interest companies.* “Mining or oil companies, stock exchanges, xxx public utilities, educational institutions"? may be considered as public interest companies. For this purpose, the Commission should consider the extent of minority ownership, the type and nature of the industry, size of the enterprise, economies of scale, geographic location, extent of Filipino ownership, labor intensity of the activity, export potential, as well as other factors which are germane to the realization and promotion of business and industry. Public interest companigs currently follow the ede ef Corporate Governance for Publicly. Listed Companies or the Revised Code of Corporate Governance for public companies. They should evaluate whether it is expedient to comply with existing standards in light of the changes introduced by the Code. For publicly listed companies, since their Code of Corporate Governance operates on a “comply or explain” premise, their decision depends on the feedback of their stakeholders. However, they should adequately explain why they have not followed the new minimum standards and offer a plan to comply within a given time Period. Otherwise, they will be subject to the prescribed sanctions. Sec. 91. Sec, 95, “Sec. 176, Scanned with CamScannerCHAPTER I-A " INTRODUCTION The above is independent of and subject to the special requirements of their concerned regulator. For example, BSP requires independent directors must be at least 1/3 of the members of the board, or two directors, whichever is higher. On the other hand, rural banks shall only have one independent director. Further, an independent director may only serve as such for a maximum cufnulative term of nine years, and that a non-executive director may concurrently serve as director in a maximum of five publicly listed companies. All corporations “authorized to obtain or access funds from ‘the public” may not issue no par shares. This prohibition is not anymore limited to “banks, trust companies, insurance companies, public utilities and building and loan associations. ”* Their primary regulator must support and recommend the formation and subsequent changes or amendments to their corporate charter. iv. They must appoint independent directors (constituting at least 20% of the board membership) and compliance officers.” Their bylaws may provide requirements relative to their appointment, e.g., their qualifications (fit and proper requirement), duties and responsibilities, guidelines for setting their compensation, maximum number of other board representations (subject to additional requirements that the Commission may prescribe). vy. They must permit voting through remote communication or in absentia, notwithstanding the absence of a provision in their bylaws.” vi. Their material self-dealing contracts must be approved by at least 2/3 of the entire membership of the board, and by at least a majority of the independent directors.” —_—__ “Sec. 6, “Sec. 16, "Secs. 22 and 24. “Sec, 46. Sec. 23. Sec. 31. Scanned with CamScannerTHE REVISED CORPORATION CODE OF THE PHILIPPINES, vii, viii (ITS THEORIES AND APPLICATIONS) They must submit to their shareholders and the Commission an annual report with the prescribed details that will give shareholders a “‘say-on-pay” of their directors.” Some provisions found in the pertinent Code of Corporate Govemance may be made mandatory not only permissive. b. The Code simplifies the formation of corporations, reduces requirements-and liberalizes effects in order to have more ease of doing business. i, ii, vi. As to the incorporators, the Code removed the prescribed minimum number of incorporators (previously no less than five except for special corporations), permitted juridical entities to be incorporators (not as mere initial subscribers ander the eld Code), and removed the-Philippine resideney «equirement for the majority of the incorporators. ‘As to the directors or trustees, ¢he»Code removed the prescribed minimum number of directors (previously no less. than five) except for special corporatiens,.and removed the Philippine residency requirement for majority of directors. The law permits bylaws @f.non-stock corporations to fix the term of trustees to not exceeding three years (previously fixed at three years). Further, the law does not anymore mandate alassified board. The-Code removed the minimum capital requirements, unless required by special laws. However, the increase in capital remains subject to the 25% subscription and 25% payment of subscription rule.” The authorized capital stock may now be paid and expressed in any lawful currency,” In lieu of a separate treasurer’s affidavit required under the old Code, the Code incorporated the prescribed attestations (regarding the receipt of initial subscription payments) into the articles of incorporation. The treasurer-in-trust remains to be primarily responsible in attesting to the corporation’s initial capital.” "Sec. 29, "Sec. 37. "Sec. 13. Sec. 14, Scanned with CamScannervii. viii. CHAPTER I-A 19 INTRODUCTION The Code introduced a more effective criterion relative to the use of corporate name, i.e., it must be “distinguishable from that already reserved or registered for the use of another corporation.””’ It also incorporated in the standard form of the articles of incorporation an undertaking to change corporate name.’ The treasurer must be a resident (but need not be a citizen) of the Philippines. The Code, however, retained the prescribed qualifications (under the old Code) for the president (who must be a director, but need not be a resident or citizen of the Philippines) and corporate secretary (who must be a Filipino citizen).” Corporations may now file their application for registration through electronic means.” c. Perpetual corporate term is the default regime under the Code, unless the prescribed number of shareholders or members prefers a limited corporate existence.” There is a curative provision for corporations whose terms had expired but choose to continue with their operations. The rules may be summarized as follows: For newly established corporations, the same will automati- cally have a perpetual term, unless their articles of incorpo ration specifically indicate a specific corporate term." For existing corporations, their articles of incorporation shall be deemed amended to reflect their perpetual term, unless the concerned corporation elects to retain its existing term. This requires the majority vote of shareholders or members and special notice to the Commission." For corporations with expired terms, they may apply with the Commission for their revival. Upon approval, they will have perpetual term unless they prefer a limited term as indicated in their application.” Scanned with CamScanner20 THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) iv. For corporations with a limited term, the period within which to file an application for extension of such term has been shortened to three years (five under the old Code) prior to the expiration of term, unless there are justifiable reasons for an earlier extension." d. With the deletion of the minimum number of incorporators, one- person corporations (OPCs)*are allowed under the Code. Existing (ordinary) corporations may be converted into OPCs. The Code details the formation, organization and operation of OPCs, including their conversion into ordinary corporations® and how to preserve their limited liability. €. The Code extends more protection to minority shareholders: (i) by recognizing, and requiring compliance with good governance principles from, corporations vested with public interest; and, (ii) by requiring material self-dealing contracts to be approved by at least 2/3 of the entire membership of the board, with at least a majority of the independent directors voting to approve the material contract. Further, where any of the conditions set forth is absent, in the case of a contract with a director or trustee, such contract may be ratified by stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members subject to full disclosure of the adverse interest and that the contract is fair and reasonable. The concept of self-dealing contracts now extends to contracts with spouse and relatives within the 4th civil degree of consanguinity or affinity.” Further, a director or trustee who has a Potential interest in any related party transaction must recuse from Voting in the approval thereof.* f. Arbitration as the mode of resolution of, intra-corporate disputes or controversies is an option under the Code. In particular, arbitrable disputes refer to those arising “from the implementation of the (corporation’s) articles of incorporation, bylaws, or from intra- corporate relations."” Where there is an arbitration provision in the corporation's articles or bylaws, the court is mandated to "Supra, “Sec. 10. "Sec. 131 “Sec. 132, "Sec. 31 "Sec. $2. Sec. 181. Scanned with CamScannerCHAPTER I-A 2 INTRODUCTION immediately dismiss the action and refer it to arbitration (i.e., before the termination of pre-trial conference). g. The Code does not impose any period (one month under the old Code) after incorporation within which bylaws should be filed with the Commission.” h. To ensure adequate preparation and active engagement of participants at meetings, the Code provides: For shareholders’ or members ’ meetings — i. Annual meeting, in the absence of specific provision in the bylaws, may be set “on any date after April 15 of every year," substituting “on any date in April of every year.” Notice for annual meeting (with prescribed information”) must be sent at least 21 days (replacing “at least two weeks”) prior to the meeting.” At least 21 days, which is longer than two weeks by seven days, is the standard corporate governance practice. The closure of the stock and transfer book at least 20 days for regular meetings and seven days for special meetings before the scheduled date of the meeting. iv. Meetings may be held in the principal office of the corporation as stated in the articles, or if not practicable in the city or municipality where such office is located. Any city or municipality in Metro Manila, Metro Cebu or Metro Davao, and other metropolitan area shall be considered a city or municipality.* This replaces the order in the old Code mandating the meeting should be held in the city or municipality where the principal office is located, and if practicable in the principal office of the corporation. Further, this changes the concept of Metro Manila being considered one city or municipality. The change thus limits place of meetings to the principal office and the city or municipality —_—_—_ Sec. 45, *"Sec, 49, Sec, 50. "Sec. 49, “Id. "See. 50, Scanned with CamScanner22 ‘THE REVISED CORPORATION CODE OF THE PHILIPPINES vi. (ITS THEORIES AND APPLICATIONS) where the principal office is located, disregarding other cities or municipalities even though parts of the same metropolitan area. The Chairman (replacing the president) presides meetings of the board, and shareholders or members. However, in the absence of the Chairman, the president presides such meetings.” The board must endeavor to present the prescribed adequate information to shareholders or members.” The corporate secretary must reflect such fact in the minutes of meetings.* vii. A director, trustee, stockholder, or member may propose any other matter for inclusion in the agenda at any regular meeting of stockholders or members.” viii. A stockholder or member may propose the holding of a special meeting and items to be included in the agenda." ix. Should there be postponement of the annual meeting, the prescribed notice must be sent to all shareholders or members at least two weeks prior to the next scheduled meeting.'" The shorter period is justified since there has been a prior longer notice to the postponed meeting. x. Secured creditors (as defined in the Personal Property Security Act") and administrators may vote the shares through proxies." For board meetings — xi Notice of regular or special meetings of directors or trustees must be sent to every director or trustee at least two days Sec. $3. "Sec. 49. "Sec. 73. "Sec. 49, ld. 104g "R.A. No. 11057, Sec. 3(i) defines a secured creditor as “a Person that has a security interest.” Security interest is, in turn, defined as “a property right in collateral that secures payment or other performance of an obligation, regardless of whether the parties have denominated it as & ‘Security interest, and regardless of the type of asset, the status of the grantor or secured creditor, oF the nature of the secured obligation xxx.” Sec, 54. Scanned with CamScannerxiii. CHAPTER I-A 23 INTRODUCTION (replaces “at least one day”) prior to the scheduled meeting, unless otherwise provided by the bylaws.'™ The Code mandates a director or trustee to disclose a potential interest in, and to recuse from voting on the approval of, the related party transaction, subject to its proper treatment as a self-dealing contract." Despite the silence of bylaws, directors or trustees who cannot physically attend or vote in person at board meetings can participate and vote through remote communication, such as videoconferencing, teleconferencing, or other alternative modes of communication that allow them reasonable opportunities to participate.'® i. The Code has measures to prevent entrenchment or hold overs, and vacuum in management in case of emergency. iii. Corporations vested with public interest must permit voting through remote communication or in absentia, notwithstanding the absence of a provision in the bylaws.” Each stockholder or member is given the right to nominate any stockholder or member for appointment as director or trustee.'* This is important in the context of a corporate takeover, especially in public companies. In such case, the board need not recommend such nominee. The Code prevents abuse of the carry-over tenure of board members. It mandates the conduct of a special meeting shortly after the cancelled scheduled meeting. If the non- holding of meeting is unjustified, the Commission may summarily order a special election and treat the attendance of those present as sufficient for quorum purposes.'” iv, The Code mandates the immediate election of replacement directors or trustees in case of vacancy. It sanctions the creation of an emergency board, where a corporate officer ———__ ‘Sec, 52, '°5Sec, 52, in relation to Sec. 31. "Id, "Sec, 23. "8Sec, 23. "Sec, 25. Scanned with CamScanner24 ‘THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) may act as director or trustee by unanimous vote of remaining directors or trustees, for the duration of the emergency." The Code prescribes the steps in properly calling or conducting a special meeting to remove and replace directors or trustees. Further, the Commission has authority to remove a disqualified director or trustee." As a rule, the corporate secretary or any concerned officer is mandated to render the prescribed report to the Commission, specifically: iii. In case of non-holding of regular election, 30 days from the scheduled election. The report must specify a new date for the election, which shall not be later than 60 days from the originally scheduled date.'"? In case of vacancy arising from removal by shareholders or members, 30 days from the election of replacement director or trustee. Such election must be held no later than 45 days from shareholders’ or members’ action.'"> In case of vacancy arising from death, resignation or other causes, seven days from knowledge of vacancy. In case an emergency board is created, three days from its creation. The notice must state the reason for its creation." Domestic corporations may now make campaign or political contributions, subject to compliance with the Teportorial requirements under existing election rules and provided they do not fall among those absolutely prohibited to donate for political Purposes.'"* Foreign corporations remain prohibited from making Political donations. The removal of the ban against domestic corporations is offset by the inclusion of special offenses, such as acting as intermediaries, engaging intermediaries for, or tolerating, graft and corrupt practices. Sec. 28, Sec, 27. "Sec. 25. "Sec, 28, Sec. 28, "Sec. 35(i); Omnibus Election Code, Sec. 95; R.A. No. 7166, See. 13, Scanned with CamScannerCHAPTER I-A 25 INTRODUCTION k In case of increase or decrease in capital stock, or incurring, creating or increasing any bonded indebtedness, the Code requires the filing of the corresponding application with the Commission within six months from the date of approval of the board of directors and stockholders. This period may be extended for justifiable reasons," i The determination of whether a sale involves all or substantially all of corporate assets is now based not only on the business enterprise theory but also on the net asset value per the latest financial statements of the corporation." The Code restored the primary authority of the Commission to summarily order the proper exercise of the right of shareholders or members to inspect or reproduce corporate books and records. Whereas, before, the requesting shareholder or member may have to secure a preliminary mandatory injunction to be able to expeditiously exercise his right of inspection, presently, the Commission may compel immediate inspection, upon report of the aggrieved party.""* This does not divest the ordinary courts with jurisdiction over commercial cases to hear and try the merits of the case, if any of the parties is still minded to file a complaint. Further, where the articles or bylaws contains an arbitration clause, it is possible that the dispute over the right of inspection may properly be subject to arbitration proceedings. n. The liquidated corporation’s residual assets without known claimants are now to be escheated in favor of the national government, instead of the LGU where such assets are located." ©. There is an increase in the threshold amount to file independently audited financial statements (at six hundred thousand pesos, but may be increased later by the Department of Finance),”® and in the prescribed bonds and securities on foreign corporations to secure license to do business.'" p. _ Relative to the financial statements of small corporations, the Code only requires the certification under oath by the treasurer and the "6Se0, 37. "Sec, 39, "Sec. 73. "Sec, 139. Secs. 74 and 177. "'Sec. 143. Scanned with CamScanner