Redefining corporate rules Part 1

Cecille S. Visto

First of two parts

For nearly 40 years, Batas Pambansa 68 or the old Corporation Code governed the way corporations operate in the Philippines. While the Code has been interpreted by jurisprudence and has been complemented by the Securities Regulations Code (SRC), the Revised Code of Corporate Governance, and the Foreign Investments Act, among others, it has taken nearly four decades to overhaul its provisions.

In a recent study by the World Bank on the ease of doing business across 190 countries, the Philippines ranked 124th, lagging way behind its Southeast Asian neighbors like Malaysia (15th), Thailand (27th), and Vietnam (69th). In the 2019 World Competitiveness Report of the Swiss-based International Institute for Management Development (IMD), the Philippines ranked 46th out of 63 economies. While it improved its standing from 50th in 2018, the Philippines still ranked 13th out of 14 countries in the Asia Pacific Region alone, beating only Mongolia.

Republic Act (RA) 112321 or the Revised Corporation Code of the Philippines (RCC), signed into law by President Rodrigo R. Duterte on Feb. 20, has redefined the corporate rules to promote ease of doing business, foster flexibility, and take full advantage of technological innovation.

This article will discuss the key provisions, which are either new or are amendments to the old Corporation Code, making RA 112321 relevant, timely and more in step with the changing global business landscape.

In the past, one of the main concerns of foreign investors in establishing a local subsidiary was the difficulty in complying with incorporator-related requirements under the old Corporation Code. Prior to the RCC, the minimum requirements for incorporation included the participation of at least five incorporators, all of whom are natural persons. These requirements appeared simple, but often proved difficult for a foreign investor who did not have the ready support of another incorporator, let alone four others.

Another concern was the need for majority of these incorporators, along with the directors, to be residents of the Philippines. In SEC-OGC Opinion No. 04-18 dated March 19, 2018, the Securities and Exchange Commission (SEC) said the residency requirement, particularly for directors, is mainly for the protection of stockholders “against inactivity of the board where no quorum can be mustered due to repeated absence of a director who resides abroad.” Legislators, however, recognized that with advances in technology, foreign investors and multinational companies can continue to conduct their business in the Philippines even if they are not physically present all the time.

Aside from natural persons, a partnership, association, corporation, trust or estate are now allowed in the RCC to act an as incorporator, subject to the compliance with certain requirements, including the approval of their respective boards or members to invest in the corporation.

With the relaxed minimum number of incorporators, it follows that the RCC allows the formation of an OPC, which is a corporation with a sole stockholder having a legal personality separate and distinct from that of such sole stockholder.

The SEC issued the guidelines for incorporation of OPCs and began accepting applications on May 6. It approved the first OPC application a day after.

OPCs are only required to submit Articles of Incorporation (AOI) but can forego the standard submission of the By-Laws.

The OPC is a welcome development, particularly for entrepreneurs without business partners but who would like to set up an entity.

Even a foreign natural person may put up an OPC, subject to the applicable capital requirements, as well as the constitutional and statutory restrictions on foreign participation in certain investment areas or activities.

As to liability, the sole stockholder in an OPC can claim limited liability, provided he is able to prove that the corporation is adequately financed. Otherwise, the stockholder becomes jointly and severally liable with the OPC for the latter’s debts and other liabilities. Moreover, if the sole stockholder serves as the corporation’s concurrent treasurer, he is required to post a bond of at least P1 million. The rule on the “piercing of the corporate veil,” which holds a corporation’s shareholders personally liable for the corporation’s actions or debt in lieu of limited liability, is applied with equal force to an OPC as with other corporations.

An ordinary stock corporation may apply for conversion to OPC when a single stockholder acquires all the stock of such a corporation, with the OPC succeeding the ordinary stock corporation in the outstanding liabilities as of the date of conversion. Conversely, the OPC may also be converted into a stock corporation after compliance with the requirements provided by law.

In next week’s article, we will continue the discussion on the changes brought by the RCC, looking closely at three other important provisions, namely the corporate term, the use of arbitration and guidelines on appointing an emergency board, and the more effective use of technology to comply with regulatory requirements.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Cecille S. Visto is a Senior Tax Director of SGV & Co.

Leading the way in business

Other SGV News and Publications