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Corporation 101 and amending the Corporation Code

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Ariel F. Nepomuceno

North Point

Corporation 101 and amending the Corporation Code

Corporations have a crucial role in the overall economic well-being of the country. Most businesses prefer the corporation as an efficient and rational legal structure in order to conduct their commercial pursuits.

Essentially, a corporation has a personality separate and distinct from its board of directors, officers and stockholders. The liabilities of the stockholders are limited to their shares, thereby encouraging more investors’ participation in the growth plans of the company. It has the power of succession, ensuring continuity of its existence, managed centrally by a board and corporate officers.

Except as otherwise provided by law, a corporation can deal with property, shorten its term, freely transact with respect to its corporate assets, transfer its shares, invest in another corporation, declare dividends and can enter into contracts to further its interests. Supporting corporations as fundamental business organizations makes good business sense.

With the organizational advantages of a corporation, the avenues for expansion are close to boundless. As the company grows, their operational capabilities increase, enabling it to widen the scope of its delivery of goods and services and maximizing satisfaction in the market. Profits are huge and steady thereby justifying the sale of more quality products at lower prices. With more financial resources, they could hire the best and brightest talents to do more research, development and innovation, produce new goods and technology.

All of these activities stimulate competition among market players, thereby fueling economic growth. Studies have shown that there is a very strong linkage between positive national economic performance and the growth of corporations.

IMPROVING THE CORPORATE LEGAL BASIS
Given this context, Senate Bill 1280 which introduces amendments to the Corporation Code of the Philippines (“Code”) can indeed be considered as a milestone piece of legislation. The bill, approved in August 2018, is one that the investment community is looking forward to because of its attempt to make “doing business” via the corporate vehicle a more simple and rational process.




Most of the changes to the Code cover some of the key issues that confront corporations such as corporate continuity and stability, ease in doing business, directors and officers’ accountability, and process improvements in corporate activities, public interest and corporate governance.

BUSINESS CONTINUITY
Perpetual existence for corporations — Unless otherwise provided in the corporation code, a corporation shall have perpetual existence. The original term of 50 years is too short a period for corporations to achieve its purposes and these organizations should be able to exist even if its incorporators are no longer living.

Revival of existence — Companies whose life has expired can apply for a revival of its existence. Upon revival, its rights under its certificate of registration are also reinstated.

EASE OF DOING BUSINESS AND STIMULATING INVESTMENTS
One-Man Corporation — The new Code allows a single shareholder to form a one-person corporation. The requirement for at least five (5) incorporators was removed. There is also no minimum authorized capital stock but 25% must be subscribed. This feature will allow entry of small investors and will pose a better alternative to sole proprietorships which are exposed to personal liabilities. No meeting is needed and one person can just sign a resolution for a particular corporate action.

SEC to call and hold elections — Upon petition by any member or stockholder, the SEC can summarily hold elections. The purpose is to prevent excesses brought about by holdover boards due to failure to conduct elections.

Emergency boards — If no quorum results from a vacancy in the Board of Directors and there is a need for immediate action to prevent damage to the corporation, the remaining directors may fill up the vacancy from its remaining officers

Use of technology for board meetings — Video or teleconferencing and any other form of remote attendance are now allowed for board meetings. Stockholders can also vote in absentia or thru electronic means.

CORPORATE GOVERNANCE AND PROTECTION OF PUBLIC INTEREST
Independent Directors’ role — At least 20% of the entire board should be independent directors particularly in companies vested with public interest. Included in this enumeration are educational institutions, public utilities, banks and other similarly situated companies whose securities are registered under the Securities Regulations Code, including publicly listed or public corporations.

Material Contracts — Corporations vested with public interest should acquire the approval of at least 2/3 of the entire membership of the board for material contracts.

Stopping Anti-Competition — Voting trust agreements that have been executed to violate anti-trust laws and whose purpose is to stifle competition are prohibited.

Removal of Directors – A disqualified director can be removed by the SEC on its own initiative or upon a verified complaint especially in relation to those convicted of violations of the Securities Regulation Code, offenses such as fraud, deceit and crimes like graft and corruption.

Stockholders’ right to disclosures — Formerly considered as sensitive and confidential, stockholders are entitled to have information about compensation and other remuneration of its directors, business strategies, risk management and other related matters. Transparency is the objective here.

WAY FORWARD
On paper, the changes seem encouraging.

Hopefully, when carried out, the aforementioned amendments do not add to the complicated processes, requirements and bureaucratic red tape that hound individuals or groups locally or abroad who intend to start a business enterprise by using the corporation as its organizational form.

The different agencies of government — from the SEC, to the law-enforcement agencies, the departments belonging to the Executive branch and the judiciary — should make this law work. Unless the corporation is used to violate the law, trample on the rights of the populace or perpetuate crime or wrongdoing, no niching, compartmentalization or misplaced independence should stop our economy from being given a positive boost by the passage of the new Corporation Code.

As earlier raised, not only international players but small to medium-size investors and capitalists should be freed from excessive regulatory and legal burdens. More doors should be made open to them so they can innovate and grow. Participation in wealth creation can be facilitated by allowing them to build their own corporations, grow their businesses, pump up the economy and in the future, significantly contribute to nation-building.

 

Ariel F. Nepomuceno is a management consultant on strategy and investment.