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On the lifespan of corporations: Terms and conditions

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Miguel Jaime C. Encarnacion

Taxwise Or Otherwise

One of the vital considerations when setting up and maintaining a corporate entity in the Philippines is the length of its existence. Shareholders must decide how long they expect the corporation to stand on its feet and stay in operations. Previously, the answer to this inquiry has been restrictively time-bound. 

Under the previous Corporation Code of the Philippines (Batas Pambansa Bilang 68), a corporation cannot exist for a period exceeding 50 years. While this has always been subject to extension, corporations that have reached this maximum “point” cannot initiate the extension earlier than five years before the expiry date.

With various reports filed before state agencies, aggravated by day-to-day corporate documentation, corporations that have set their sights on operating longer than the statutory period run the risk of forgetting, or worse, losing their existence due to faulty filing. Moreover, long-term transactions, and those executed in the latter years of the corporate term, though brief in nature, may suffer or endure a corporate existence issue.

The Revised Corporation Code of the Philippines (RCC), which took effect on Feb. 23, 2019, has made a significant change in this aspect. Under Article 11 of the RCC, the term of a corporation is now perpetual, unless stated otherwise. Depending on their purposes and needs, companies are now conveniently given the option to exist for a prolonged period.

Under Memorandum Circular (MC) 22-2020, the Securities and Exchange Commission (SEC) has issued further guidelines on how corporations, current and prospective, may elect and modify their corporate life in the Articles of Incorporation (AoI).

As a rule, companies that were incorporated before the effective date of the RCC shall now automatically have perpetual existence. By law, the change shall not require further action on the part of corporations. For documentation purposes, however, companies may amend their respective AoIs to reflect this perpetual term. The amendment must be supported by a vote of a majority of the Board of Directors or Trustees, and a vote of the stockholders representing a majority of the outstanding capital stock, including the non-voting shares. For non-stock corporations, the vote of a majority of the members must be secured.

Understandably, some may prefer to keep their existence limited. Even if incorporated before the RCC, these companies should notify the SEC of the intention to retain their original term. The notice must be filed with a Directors’ Certificate, stating that the corporation has elected to maintain the original corporate term as approved by a majority vote of the Board of Directors or Trustees, and a vote of the stockholders representing a majority of the outstanding capital stock, including the non-voting shares, or a majority of the members, for non-stock corporations. Once validated, the SEC shall issue a Certificate of Filing Notice to Retain Specific Corporate Term.

Corporations intending to limit their term must notify the SEC on or before Feb. 23, 2021. Otherwise, their term is deemed perpetual.

Further, MC 22-2020 also grants corporations with a specific term the choice to extend or shorten their existence by amending their AoI. In case of an extension, the application should not be filed earlier than three years before the expiry date of the corporate term. In anticipation of possible changes in the business environment, corporations have the option to change their perpetual existence to specific terms and vice versa. These acts should be approved by vote or written assent of a majority of the Board of Directors or Trustees, and a vote or written assent of the stockholders representing at least two-thirds of the outstanding capital stock of the corporation.

It is instructive to mention that Article 11 of the RCC also allows the revival of corporate existence for corporations whose terms have expired.

This was clarified under MC 23-2019, where the SEC allowed the following entities to file a Petition for Revival of Corporate Existence (“Petition to Revive” for brevity):

a) Generally, a corporation whose term has expired;

b) An Expired Corporation whose Certificate of Registration has been revoked for non-filing of reports, provided that it shall file the proper Petition to Lift its Revoked Status, which may be incorporated in its Petition to Revive, and must settle the corresponding penalties thereof;

c) An Expired Corporation whose Certificate of Registration has been suspended, provided that it shall file the proper Petition to Lift its Suspended Status, which may be incorporated in its Petition to Revive, and must settle the corresponding penalties thereof; or

d) An Expired Corporation whose corporate name has already been validly re-used, and is currently being used, by another existing corporation duly registered with the SEC, provided it change its corporate name within 30 days from the issuance of its Certificate of Revival of Corporate Existence.

The act of revival must be accompanied by at least a majority vote of the Board of Directors or Trustees, and a vote of at least majority of the outstanding capital stock, or the members. Moreover, applications made by banks, banking and quasi-banking institutions, pre-need, insurance, and trust companies, non-stock savings and loan associations, pawnshops, corporations engaged in the money service business, and other financial intermediaries require a favorable recommendation from their respective regulators.

If the petition is meritorious, the SEC will issue a Certificate of Revival of Corporate Existence, restoring to the corporation all its duties, debts, and liabilities that were present before revival. As earlier discussed, the corporation will enjoy a perpetual term of existence, unless the petition specifies another period.

Equitably, stockholders who dissent to any of the changes in corporate term or the revival of the corporate existence must be allowed to exercise their right of appraisal, or the right to dissent and demand payment for fair value of their shares.

These amendments have been a welcome development enabling corporations to carry out their businesses unconstrained by a limited lifespan. With a guaranteed continuity of term, we can only expect a positive impact, and hopefully sustainable growth, on current and future corporate entities doing business in the Philippines.

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.

 

Miguel Jaime C. Encarnacion  is a senior associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 8845-2728

miguel.jaime.encarnacion@pwc.com

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