The proposed Corporation Code

(Part One)

It’s just a matter of time before the country has a new Corporation Code.

Last Monday, the bicameral conference committee approved the reconciled House and Senate versions of the bill seeking to amend Batas Pambansa 68 or the Corporation Code of the Philippines which became effective in 1980, or almost four decades ago.

According to legislators, the amendment aims to strengthen and simplify corporate governance standards for a more business-friendly environment amid the drop in the country’s rank in the latest Ease of Doing Business Report of the World Bank.

Senate Minority Leader Franklin Drilon, the principal sponsor and author of Senate Bill 1280, noted that in the latest Ease of Doing Business Report released earlier this month, the Philippines fell to 124th out of 190 economies, from 113th previously.

Drilon said it was too difficult to open a business in the country under the old law due to numerous and stringent incorporation and regulatory requirements, which discouraged investors and Filipino entrepreneurs to enter the local market.

He pointed out that the new Corporation Code will improve ease of doing business in the country by allowing a one-person corporation, removing the minimum capital requirement, and providing for perpetual existence of corporation.

With the new code allowing a one-person corporation, Drilon said local business owners and investors could already stop the practice of even naming their entire household as incorporators simply to comply with the stringent requirement of the law.

The new code also introduces provisions that seek to remove the minimum number of incorporators, permit the electronic filing of reportorial requirements and attendance in meetings via remote communication or in absentia, among others – practices that were not recognized in the old law.

The amended Corporation Code will strengthen corporate governance standards and provide protection to minority stockholders by requiring, among others, corporations vested with public interest to have independent directors.

Let us look at these proposed amendments in more detail.

The present code requires that all corporations organized under the said law must have not less than five nor more than 15 incorporators, except in the case of corporations solely, created for the purpose of administering and managing as trustee the affairs, property, and temporalities of any religious denomination, sect or church, which can be formed by one person. All incorporators must be natural persons.

As proposed, any person, partnership, or corporation, many now singly or jointly with others but not more than 15 in number, organize a corporation. A corporation with a single stockholder will be considered a one-person corporation. Thus, incorporators can now be natural or juridical persons.

At present, individuals only have one option – they can register as a sole proprietorship, which unfortunately does not have a juridical personality separate and distinct from the proprietor. This means that the owner and the sole proprietorship are treated as one and the same, and the liabilities of the latter are also that of the former. On the other hand, in the case of a one-person corporation, the single stockholder’s liabilities will be limited to his investments in the corporation.

One disadvantage of a one-person corporation, though, is that it will have to be subject to certain formalities, such as appointing corporate officers, maintaining corporate books, and submitting financial statements.

Another proposed major amendment would be in the term of existence of a corporation. Section 11 of the Corporation Code provides that a corporation shall exist for a period not exceeding 50 years from the date of incorporation unless sooner dissolved. The corporate term may be extended for periods not exceeding 50 years in any single instance.

Under the proposal, a corporation shall have a perpetual existence unless its certificate of incorporation provides otherwise. A corporation whose term has expired may at any time apply for a revival of its corporate existence and an amended certificate of incorporation shall be issued, giving it perpetual existence unless its application for revival provides otherwise.

But just like in the present code, the proposed code also provides that stock corporations incorporated under it shall not be required to have any minimum authorized capital stock, except as otherwise specifically required for by special law.

Another change is in the number of years before a corporation can be deemed dissolved for failure to formally organize and commence business. Presently, the period is two years from date of incorporation. It is proposed that this be extended to five years.

Also, at present, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five years, the same shall be a ground for suspension or revocation of its corporate franchise or certification of incorporation. As proposed, after the five-year period, the Securities and Exchange Commission may after notice and hearing place the corporation under delinquent status and will be given two years to resume operations. It is only after it fails to resume operations that the SEC can revoke its certificate of incorporation.

The proposed code will also require boards of certain corporations vested with public interest to have at least two independent directors or the number of independent directors must constitute at least 20 percent of the board, whichever is less. These corporations include public corporations (those with assets of at least P50 million and having 200 or more shareholders, each holding at least 100 shares of a class of its equity shares); banks and quasi-banks, pre-need, trust, and insurance companies; and other corporations with public interest as may be determined by the SEC.

It is also proposed that when authorized in the by-laws or by majority of the board of directors, stockholders or members (of non-stock corporations) may now vote through remote communication or in absentia. In corporations vested with public interest, such means of voting may be exercised even without a provision in the by-laws. At present, stockholders may only vote either in person or by proxy.

In the case of corporations vested with public interest, the proposed code requires the board to elect a compliance officer, in addition to the president, secretary, treasurer and the other officers provided in the by-laws (corporate officers).

The present version of the code only requires the corporate secretary to be a resident and citizen of the Philippines while the treasurer may or may not be a director. As proposed, the president and treasurer must be directors and at least one of them must be a resident of the Philippines, just like the secretary. (to be continued)

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