Last 20 February 2019, the Philippine President signed into law Republic Act No. 11232 (copy available at https://www.officialgazette.gov.ph/downloads/2019/02feb/20190220-RA-11232-RRD.pdf), otherwise known as the "Revised Corporation Code of the Philippines". The new law expressly repealed and replaced the existing Corporation Code (Batas Pambansa Blg. 68).
As of this writing, the Securities and Exchange Commission (SEC) has not yet issued any Implementing Rules and Regulations for the new law. But here are six (6) things to watch out for:
1. The minimum 5-natural person requirement to incorporate has been REMOVED.
Section 10 of the law states that, "Any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes..."
By way of contrast, the provision under the old law reads: "Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes."
The new law has two (2) important consequences: first, the minimum 5-person requirement to incorporate has been removed; and second, incorporators could be persons other than natural persons.
What does this mean?
This means that even a single person can organize a corporation. This is a complete departure from the old law that required at least five (5) natural persons to incorporate.
This also means that incorporators of a new corporation (other than a One Person Corporation, who needs to be a natural person, trust, or estate, as will be discussed below) need not be natural persons. As stated in the new law, incorporators could be any "person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number."
Subject to the guidelines to be issued by the SEC, incorporators can either be a mix of natural or juridical persons (in other words, other corporations).
2. Yes, there can be a One Person Corporation.
True to its promise, the new law introduced a new concept in Philippine Corporation Law: a ONE PERSON CORPORATION. Yes, a single person can now form a corporation in the Philippines.
The law reads:
"Sec. 116. One Person Corporation. - A One Person Corporation is a corporation with a single stockholder: Provided, That only a natural person, trust, or an estate may form a One Person Corporation.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies, and non-chartered government-owned and -controlled corporations may not incorporate as One Person Corporations..."The definition sets out the limit of a One Person Corporation ("OPC"): only natural persons, trust, or an estate may form such a corporation. Other than the confusing fact that trusts are both allowed and disallowed to form an OPC (I'm guessing trusts are a fairly novel concept in Philippine law), the idea is pretty much straightforward.
The concept of an OPC is completely new so much so that the new law even devoted an entire chapter on it. The following concepts are interesting to note:
1. OPCs do not have a minimum authorized capital stocks, unless required by a special law (as of date, there is none) (Sec. 117)
2. OPCs do not need to submit corporate bylaws. (Sec. 119)
3. Corporate names should indicate "OPC" either below or at the end of its corporate name. (Sec. 120)
4. A single stockholder shall be the sole director and president of the OPC. No need to have multiple directors. (Sec. 121)
5. A single stockholder can be the Treasurer but NOT the Corporate Secretary. (Sec. 122)
6. There shall be a nominee/alternate who shall manage the corporation's affairs should the single stockholder be incapable of doing so. (Sec. 118 and 124)
7. The single stockholder need not conduct meetings (for obvious reasons) and all corporate acts are done through a written resolution, signed and dated by the single stockholder, and recorded in the minutes book of the OPC. (Sec. 128)
8. An OPC can be converted into an ordinary corporation and vice versa. (Sec. 131 and 132).This new innovation is a great help for people starting up a business who cannot meet the 5-person requirement under the old law. This will greatly reduce the instances of dummies being "elected" as members of the Board of Directors.
3. Corporations can exist in perpetuity.
Under the old law, corporations can exists only for fifty (50) years, renewable for another fifty (50) years. The new law removes this limitation. Corporations now exist in perpetuity by default. The law reads:
"Sec. 11. Corporate Term. - A corporation shall have perpetual existence unless its articles of incorporation provides otherwise.
Corporations with certificates of incorporation issued prior to the effectivity of this Code, and which continue to exist, shall have perpetual existence, unless the corporation, upon a vote of its stockholders representing a majority of its outstanding capital stock, notifies the Commission that it elects to retain its specific corporate term pursuant to its articles of incorporation: xxx"Under the new law, not only new corporations can exist in perpetuity, existing corporations shall also exist perpetually even if their articles of incorporation provides otherwise (except only if the corporation notifies the SEC that it elects to limit its corporate life, which I highly doubt).
As I see it, the major beneficiaries of this innovation are condominium corporations. One major drawback for condominium investors is the threat that their stake in the corporation (which is attached to their condominium unit) is limited by a 100-year existence. With the removal of the term limit, condominium owners can retain their stake in the corporation perpetually, unless of course the corporation itself dissolves voluntarily. This is good news for the country's real estate market.
4. The requirement for an Independent Director has been institutionalized.
Under existing laws prior to the Revised Corporation Code, companies specifically covered by Republic Act No. 8799, or "The Securities Regulation Code", and those required by the Bangko Sentral ng Pilipinas, are required to have independent directors on their board. Now, this requirement has been expressly extended by the new law to "banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, preneed, trust and insurance companies, and other financial intermediaries" (Sec. 22 [b]) and "Other corporations engaged in businesses vested with public interest" (Sec. 22 [c])
Under the new law, these newly-covered corporations (which are mostly financial institutions other than banks) need to have independent directors constituting at least twenty percent (20%) of such board. Thus, if the corporation has fifteen (15) Board Members, three (3) should be independent directors. This will cause major company overhauls in the country's financial sectors.
5. Supercharged powers of the SEC
Under the new law, the SEC was granted with what I call "supercharged powers" over corporations. Title XVI of the Revised Corporation Code grants to the SEC full administrative powers over corporations, up to the extent of conducting investigations, issuing subpoenas, issuing cease and desist orders, declaring a person in contempt, and the imposition of administrative fines.
Yes, you heard it. The SEC can issue cease and desist orders, or hold you in contempt if you refuse to do so. The SEC is also authorized to impose administrative fines against corporations, ranging from Five Thousand Pesos (P5,000.00) to Two Million Pesos (P2,000,000.00), and not more than One Thousand Pesos (P1,000.00) for each day of continuing violation. (Sec. 158) This is not to mention the SEC's authority to issue a permanent cease and desist order, to suspend or revoke the certificate of incorporation, and to dissolve the corporation and forfeit its assets.
With these powers, we would no doubt soon hear news of millions of pesos of administrative fines against corporations in the Philippines, similar to news that we hear from abroad, especially in the USA and in the EU.
6. Option to Arbitrate
Corporations have long suffered the slow and rigorous court processes in order to address intra-corporate controversies. Various methods have been implemented to alleviate this over the years, from the creation of Special Commercial Courts, up to the creation of special Rules for intra-corporate controversies. These efforts, however, were far from successful.
To address this, the Revised Corporation Code expressly recognized arbitration as a mode to settle disputes "between the corporation, its stockholders or members, which arise from the implementation of the articles of incorporation or bylaws, or from intra-corporate relations". (Sec. 181)
What this means is that intra-corporate disputes can be taken out of court and be resolved in arbitration, a method which has proven to be faster and more effective (although much more expensive).
In order to avail of this remedy, the articles of incorporation or the by-laws of the corporation need only include an arbitration agreement.
Arbitration practitioners, including yours truly, find this innovation very promising.
Joseph Migriño is a practicing lawyer in the Philippines since 2010 and currently the Managing Partner of Migriño and Dacanay
Website: https://migrino.ph
Email: jr.migrino@migrino.ph
LinkedIn: linkedin.com/in/joseph-migrino
Follow me on Twitter: @jrmigrino
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