An analysis of the new Corporation Code

Change is generally good. Revising obsolete laws is a good exercise. Old laws trap us and our businesses in old practices and mindsets. New ones provide a chance for a clear framework, simple implementation and a fresh start.

Contrary to popular wisdom that our problem is too many good laws that are not implemented well, the truth is we have too many bad laws. This is made worse by confusing rules, corrupted regulations and arbitrary enforcement.

The Revised Corporation Code now in effect is a big improvement from the past one. Let us look at some of the provisions and analyze their consequences. As in all things, there are unintended consequences.

ONE-PERSON CORPORATION
The new code allows the formation of a corporation by one person or one stockholder. The previous requirement was for at least five stockholders. This resulted in the use of nominal stockholders who do not contribute in any significant way, or in unnecessarily expanding the number of owners which made the corporate vehicle less efficient and more problematic.

A one-person corporation embodies the corporate law idea that a corporation is a different entity with a separate personality from the individual natural person.

The effect is that it is easier to set up corporations and entrepreneurs will use less of the sole proprietorship mode. The challenge is for the Securities and Exchange Commission to make it less expensive and faster to incorporate to make the change meaningful.

There is no longer a minimum authorized capital stock. Previously, there was an amount of which 25% was set as subscribed capital stock and another 25% to serve as the paid-up capital. This was a pointless mathematical exercise and did not create any value or better regulation. Everyone was just meeting the minimums regardless of the need of the business or the financial capacity of the incorporators.

PERPETUAL CORPORATE TERM
Corporations used to die at the end of their corporate life which is 50 years. A positive act was needed to extend it. The amended law allows companies to exist forever and applies to existing and future corporations. A positive act is required to kill the corporation.

Although the stated purpose is to prevent business from closing down because of non-renewal of registration, over the passage of time, we may see a slew of “zombie corporations” which exist in paper and hold assets but with none of the mortal stockholders around.

Under the new law, corporations with expired registration papers can be resurrected.

ADOPTION OF TECHNOLOGY
There is a semblance of electronic filing under the old regime. But as any user can attest, it is slow, with a clunky user interphase and very limited capability. SEC staff has a long wish list for a truly interactive system that will allow faster approvals and simpler monitoring. The current provider will have to step up or ship out.

A previous SEC circular allowed the use of videoconferencing and teleconferencing in certain instances. This rule is now in the new law. Stockholders may participate and vote without being personally present. Directors or trustees may also participate and vote in regular and special meetings through remote communication.

With this rule liberalization, stronger corporate cyber-security measures are essential. Otherwise, the next batch of intra-corporate disputes will revolve around the integrity of the communication by electronic means, the authentication of disputed identities and electronic record-keeping.

FORM OF ARTICLES OF INCORPORATION
In contrast with the recognition of technology, it is unfortunate that the new law copied and crystallized the form for incorporation in its Section 14. The superior approach is for legislation to provide guidelines on content and allow the regulator to prescribe the design and the procedure. This will provide flexibility and inject dynamism specially for the electronic system of filing and monitoring and the changing times.

To cast forms into laws is a bad practice that calls for rethinking to avoid this persistent bureaucratic problem. Forms are forms and laws should deal with substance.

ALTERNATIVE DISPUTE RESOLUTION
With the costly and lengthy formal, adversarial and court-based resort to solve conflicts, the new law calls for the institution of alternative dispute resolution mechanisms for intra-corporate issues. Given the powers of the SEC, it can answer the cry of business people for ways and means to address discord in the boardroom.

There are two key areas that the Revised Corporation Code does not answer.

The first is on control of corporation. One of the most contentious and vexing issues in our body of corporate laws is the question on how to determine control of the corporation — is it the “control test” or the “grandfathering rule.” Cases involving actual and beneficial interest are routinely ruled upon by the courts all the way up and down the Supreme Court. This affects business climate and affects investment certainty.

Recent laws and rulings may be pointing to convergence and a new law ideally can contain a chapter on control that will once and for all clarify the controlling regime.

The other is on rules on conflicts of interest. A form of private sector corruption that is particularly harmful and not easy to detect is the self-dealing of directors with their companies that is beneficial to the concerned individuals but not to the corporation even if knowledge or information was gained from their positions of trust and confidence. The new law is basically a rehash of the old provision.

Overall, the Revised Corporation Code is an improvement and the change is good.