The proposed Corporation Code

(Second of two parts)

The present Corporation Code only provides for two grounds for disqualifying a person from becoming a director, trustee, or officer, and that is conviction by final judgment of an offense punishable by imprisonment for a period exceeding six years; and violation of the code committed within five years prior to the date of his election or appointment.

As proposed, those disqualified include persons who within five years prior to their election or appointment are convicted by final judgment of an offense punishable by more than six years imprisonment, for violation of the Corporation Code and the Securities Regulation Code, those found administratively liable for fraud, theft, counterfeiting, and other fraudulent acts, and those found by foreign courts of regulatory authorities of similar acts.

The proposed amendments also provide for specific days when elections should be held in case vacancies arise in the office of director of trustee as a result of term expiration or removal by the stockholders or members, which must be no later than 45 days from the time the vacancy arose. The amendments also contemplate the designation of an officer of the corporation in case the vacancy prevents the remaining directors from constituting a quorum and emergency action is required, but the designated director’s term shall cease once the emergency terminates or upon election of the replacement director or trustee, whichever comes earlier.

The proposed new code also provides that contracts of the corporation with spouses and relatives within the fourth civil degree of consanguinity or affinity of directors, trustees and corporate officers are voidable unless certain conditions are present. An additional condition is provided: that in case of corporations vested with public interest, material contracts are approved by at least 2/3 of the entire board membership, with at least a majority of the independent directors voting to approve the contract.

It likewise proposes that in determining whether or not a sale involves all or substantially all of the corporation’s property and assets, the sale being subject to the provisions of the Philippine Competition Act, the basis will include the net asset value as shown in its latest financial statements.

In the case of founder shares, the exclusive right to vote and be voted for shall not be allowed if its exercise will violate SEC rules, Commonwealth Act 108 (Anti-Dummy Law), and RA 7042 (Foreign Investments Act).

The requirement that incorporators must be of legal age was also removed.

The proposed code also includes SEC’s right to remove corporate directors or trustees after due notice and hearing,

Other new features of the proposed code are as follows:

-In regular meetings of stockholders or meetings, the proposed bill encourages directors or trustees to present to stockholders or members the following: minutes of the most recent regular meeting, the list of current stockholders and their voting rights and members’ list for non-stock corporations, an explanation of the dividend policy or reasons for non-payment, directors or trustee’s attendance report as well as appraisal and performance reports, director or trustee compensation, among others.

-Directors or trustees with potential interest in any related party transaction must recuse himself from voting on the approval of related party transactions.

-Shares of stocks in another corporation, and other generally accepted form of consideration are now acceptable as consideration for issuance of corporate stocks.

-In the case of non-stock corporations, the requirement as to staggered election of trustees has been removed.

-After winding up of corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated in favor of the national government (at present, it is escheated in favor of the city or municipality where such assets are found).

-Natural persons licensed to exercise a profession cannot organize a one person corporation for the purpose of exercising such profession.

-One person corporations (OPC) are not required to submit by-laws; the single stockholder cannot be appointed as the corporate secretary, but he can be treasurer provided he gives a bond to the SEC; OPCs shall maintain a minute book which shall contain all actions, decisions, and resolutions taken by the corporation

-In the case of foreign corporations, the minimum amount of securities deposit to be submitted to the SEC will be increased to P500,000 from P100,000

-No court below the Court of Appeals can issue a restraining order, preliminary injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly or indirectly interferes with the exercise of SEC’s powers.

-Violations of the code not specifically penalized has been increased to a fine of P10,000 to P1 million, such separate from his administrative, civil, or criminal liability. At present, such violations are penalized by a fine not less than P1,000, but not more than P10,000, or by imprisonment of not less than 30 days, but not more than five years, or both, on the court’s discretion.

-Those retaliating against whistleblowers, or those providing truthful information relating to the commission or possible commission of an offense or violation of the code, shall be punished with a fine of P100,000 to P1 million at the court’s discretion.

-The SEC may impose a fine of from P5,000 to P2 million for violations of the code or its rules, regulations or orders.

The proposed new Corporation Code, likewise, provides for substantial fines for unauthorized use of corporate name; for directors, trustees or officers who wilfully hold office despite knowing a ground for his disqualification; unjustified failure or refusal to keep and maintain corporate records; wilful certification if false, inaccurate, or misleading reports required by the code; independent auditors who collude with corporate directors in certifying incomplete or inaccurate statements; obtaining corporate registration through fraud; fraudulent conduct of business; for corporations used for fraud, graft, or corruption; for directors, trustees, or officers allowing or tolerating graft and corrupt practices, among others.

I am not sure if all these changes will help ease doing business in the Philippines. But what I’m sure of is that the SEC will be stronger once this bill becomes a law, violations of the code are meted stiffer fines, stockholder rights are reinforced, and corporate responsibilities and accountabilities spelled out even more.

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