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.

To be continued….

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
 
Aimee Rose DG. dela Cruz is a senior manager with the Tax Services Group of Isla Lipana & Co., the Philippine member firm of the PwC network.
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aimee.rose.d.dela.cruz@ph.pwc.com