Philippines

5 Chapter Corporation Laws

    • Introduction

       The Corporation Code of the Philippines (Batas Pambansa Bilang 68), which was approved and became effective on May 1, 1980, is the law that governs the rules and regulations in the establishment and operation of stock and non-stock corporations in the Philippines. It consists of 149 sections that are grouped into 16 titles.

       

      It gives the legal definition of a corporation and clarifies the basic classifications of corporations, which can be a stock or a non-stock corporation. It provides a discussion on the classifications of shares in a stock corporation, like common stocks and preferred stocks.
       
      In Title 2, Incorporation and Organization of Private Corporations, the requirements for incorporation are provided for. These requirements such as the number and qualifications of incorporators, minimum capital stock required for stock corporations, amount of capital stock to be subscribed and paid during incorporation, and the contents of the articles of incorporation. The title also includes a sample standard form of articles of incorporation, which can be used by any corporation unless required to use other format prescribed by a special law.
       
      In title 3 of the Code, the regulation of the board of directors, trustees or officers of the corporation is discussed. It also tackles the creation of an executive committee inside the corporation.
       
      The Corporation Code of the Philippines also covers the basic powers and capacity of corporations. It also discusses the powers of the corporation to extend or shorten corporate term, to increase or decrease capital stock, to declare dividends, and other powers given by the code. This can be found in the Title 4 of the Code.
       
      The Code also discusses the regulation on the adoption of by-laws, its contents, and its amendment. It also tackles the rules on meetings of directors, trustees, stockholders, or members in the corporation, which may be regular or special. It covers the rules on voting and quorum. Every person or entity that has interest in a corporation, whether they are corporate owners, members, investors, officers or directors, have to look and learn the content of the Corporation Code of the Philippines so that they may know their rights and privileges of being part of the corporation.

    • Kinds Of Corporations

       
        1. Stock versus Non-stock
       
      Stock corporations are corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. On the other hand, non-stock corporations do not distribute dividends and profits to their members and as such these corporations do not have stockholders.
      Under the Corporation Code and other pertinent laws, these are the pertinent differences between a stock corporation and a non-stock corporation:

      Stock Corporation

      Non-Stock Corporation

      For profit

      For purposes other than for profit, such as, for Religious, charitable, education, scientific etc.

             Profit distributed to shareholders

             Profit is used for furtherance of the purpose

       

             Has stockholders

             Has members

             Right to vote according to no. of shares

             Each member is entitled to only one vote

             Voting right may be denied

             Voting right cannot be denied

       

             Voting by proxy may be denied

              Voting by proxy cannot be denied

             Voting by mail possible

              Voting by mail not possible

             Control by Board of Directors

              Control by members of the corporation

             Board of Directors

              Board of Trustees

             Term of Directors: 1 year

              Term of Directors: 3 years

             Officers appointed by board

              Officers elected by members

             Rights transferable

                Rights are not transferable

       
        1. Domestic vs. Foreign (Branch/Representative Office)

       

      Under the Place of Incorporation Test, the corporation is a national of the country under whose laws it is organized or incorporated. As such, domestic corporations are those organized under and governed by Philippine law. On the other hand, foreign corporations are corporations organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country and state.

      A foreign corporation may opt to utilize any of the following common forms of business entities:

      1.   Domestic Subsidiary

      This is a corporation wholly-owned or at least majority-owned by a foreign "parent" corporation although incorporated and existing under Philippines laws. By virtue of its incorporation under the laws of the Philippines, it is considered a Philippine corporation but is also considered foreign because its shares of stock are wholly or majority-owned by a foreign corporation.

       

      The advantage of choosing to create a domestic subsidiary over a branch office is that a subsidiary has a separate and distinct juridical personality from its parent corporation, so that the liability of the parent corporation to creditors of the subsidiary is limited to its shareholdings in the domestic subsidiary. The parent foreign corporation is fully protected from the liabilities of the subsidiary in excess of its shareholdings in such subsidiary. Nationality requirements with respect to certain industries must be observed.

       

      2.   Branch

      A branch is an extension of the foreign corporation which may engage in exactly the same activities as its parent company. However, existing nationality requirements with respect to certain industries must be observed. A foreign corporation may set up a branch in the Philippines by obtaining a license to transact business.

       

      Since it is a mere extension of its parent corporation, the branch does not have a personality separate and distinct from its parent company. Thus, the parent corporation may be held responsible for any liability of the branch in excess of its investment.

       

      3.   Representative Office

      A representative office promotes the products and/or services of the Company it represents. Its activities are limited to the promotion and dissemination of information about the Company's products and/or services. It cannot conclude contracts with local entities on behalf of its parent Company. Such contracts must be directly entered into between the Company head office and the local entity.  By the nature of the activities allowed of a representative office, it cannot derive income from the Philippines. The test of whether an office is a representative office or not, is whether it derives income from its operations.

       

      Some of the acceptable activities of a representative office are the following:

       a) dissemination of foreign market information;

       b) promotion for export of Philippine products specially nontraditional products;

       c) acting as a message center or a communication center between interested parties and the head office;

       d) promotion of products presently being distributed in the Philippines;

       e) to render, assist and give technical know-how and training to existing and future customers of the Company's products;

       f) to provide and facilitate better communication and contact between its head office and affiliated companies on one hand and present and future customers on the other;

       g) to inform potential customers of price quotations of the head office and affiliated companies;

       h) to conduct and make surveys and studies of the market, economic and financial conditions in the Philippines; and

       i) attend to the needs of end-users of its products in the Philippines, advising them on the proper care and maintenance of their equipment and to communicate to its head office problems that call for consultations.

       

       4. Regional or Area Headquarters

       

      This is an administrative branch which principally acts as a supervision, communications and coordination center for the subsidiaries, branches or affiliates of a multinational company in the Asia-Pacific Region. It is not allowed to do business or earn income from the host country, unlike a branch or subsidiary nor is it allowed to deal directly with the clients of the parent company, unlike a representative office, when it undertakes such activities as information dissemination and promotion of the company's products for export.

       

      5.  Regional Operating Headquarters

                   

      A regional operating headquarters of a multinational company is a branch office established in the Philippines engaged in any one of the following services:

       

      a. general administration and planning;

      b. business planning and coordination;

      c. sourcing and procurement of raw materials and components;

      d. corporate finance advisory services;

      e. marketing control and sales promotion;

      f. training and personnel management;

      g. logistic services;

      h. research and development services and product development;

      i. technical support and maintenance;

      j. data processing and communication; and

      k. business development.

       

      Unlike the other forms of business enterprise, it is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets. However, regional operating headquarters are prohibited from offering qualifying services to entities other than their affiliates, branches or subsidiaries, as declared in their registration with the Securities and Exchange Commission nor shall they be allowed to directly and indirectly solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company.

       
       

    • Minimum Requirements Under The Code

       
        1. Number of Incorporators/Directors
       
      Under the Corporation Code, in the creation of a corporation, the following requirements must be complied with:
       
      a. Number of incorporators: Incorporators are required to be not less than five (5) but not more than fifteen (15)
      b. Residency requirement: Majority of the incorporators are required to be residents of the Philippines
      c. Qualifications:
       
       All incorporators
          1. must be natural persons
          2. must be of legal age
       
      A corporation or a partnership cannot be incorporators of a Philippine corporate entity.  The only way a corporation or a partnership may become stockholder of a Philippine corporation is by acquiring a stock thereof but only after it shall have been duly incorporated
       
      d. Subscription requirement: All incorporators must subscribe to at least one (1) share of stock of the corporation being organized
       
        1. Capitalization Requirements (based on proposed business)
       
      Generally, the paid-up capital of a Philippine corporation must not be less than        P 5,000. Thus, it is required that at least twenty-five percent (25%) of the subscribed capital stock should be fully paid up but the amount of which should not be less than said P 5,000. However, for certain industries, the Securities and Exchange Commission provides for the following minimum paid-up capital:
       
      Based on Industry

       

      Industry

       

      Minimum Paid Up Capital

       

      Break Bulk Agent

       

      P 250,000.00

       

      Cargo Consolidator

       

      P 400,000.00

       

      Financing Company

       

      Metro Manila and other 1st class cities

       

      P 10,000,000.00

       

      Other classes of cities

       

      P 5,000,000.00

       

      Municipalities

       

      P 2,500,000.00

       

      Freight Forwarders

       

      Domestic

       

      P 250,000.00

       

      International

       

      P 2,000,000.00

       

      Health Maintenance Organization

       

      P 10,000,000.00

       

      Insurance

       

      Insurance Broker  

       

      P 20,000,000.00

       

      Reinsurance Broker            

       

      P 20,000,000.00

       

      Insurance Broker and Reinsurance Broker        

       

      P 50,000,000.00

       

      Life Insurance Company

       

      P 1,000,000,000.00

       

      Non-Life Insurance Company

       

      P 1,000,000,000.00

       

      Reinsurance Company

       

      P 2,000,000,000.00

       

      Investment Adviser/Manager

       

      P 10,000,000.00

       

      Investment Company

       

      P 50,000,000.00

       

      Investment House

       

      P 300,000,000.00

       

      Lending Company-Main

       

      P1,000,000.00

       

      Lending Company-Branch

       

      1st class cities 

       

      P300,000.00

       

      Other cities

       

      P150,000.00

       

      Municipalities

       

      P75,000

       

      Mining

       

      Authorized Capital Stock

       

      P10,000,000.00

       

      Paid-up Capital Stock

       

      P 2,500,000.00

       

      Non-Vessel Operating Common Carrier

       

      P 4,000,000.00

       

      Pawnshop

       

      P 100,000.00

       

      Pre-Need Plan Issuer

       

      P 100,000,000.00

       

      Pre-Need Plan Agent

       

      P 5,000,000.00

       

      Real Estate Investment Trust (REIT)

       

      P 300,000,000.00

       

      Recruitment for Local Employment

       

      Corporation

       

      P 500,000.00

       

      Partnership

       

      P 200,000.00

       

      Recruitment for Overseas Employment

       

      P 2,000,000.00

       

      Retail Trade with Foreign Equity        

       

      US$ 2,500,000.00

       

      School (for stock corporations)        

       

      Pre-elementary/Elementary Education

       

      P 1,000,000.00

       

      Elementary & Secondary Education  

       

      P 2,500,000.00

       

      Elementary, Secondary, Tertiary        

       

      P 5,000,000.00

       

      Security Agency   

       

      P 500,000.00

       

      Securities Broker/Dealer (New/SRO-Member)

       

      P 100,000,000.00

       

      Securities Broker/Dealer (Existing/SRO-Member)

       

      P 30,000,000.00

       

      Securities Broker/Dealer in Proprietary Shares (Non-SRO-Member)

       

      P 5,000,000.00

       

      Special Purpose Vehicle

       

      P 31,250,000.00

       

      Special Purpose Corporation

       

      P 5,000,000.00

       

      Transfer Agent

       

      P 1,000,000.00

        1. Foreign Equity Requirements

       

      There are two test employed in determining compliance with minimum Filipino equity requirements. These are: the Control test and the Grandfather Rule.

       

      The control test provides that shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered of Philippine nationality. This test is straightforward and does not scrutinize further the ownership of the Filipino shareholdings.

       

      On the other hand, the Grandfather Rule determines the actual Filipino ownership and control in a corporation by tracing both the direct and indirect shareholdings in the corporation.

       

      According to the January 2015 Resolution of the Supreme Court in the case of Narra Nickel Mining and Development Corp. vs. Redmont Consolidated Mines Corp. (G.R. No. 195580), “the Grandfather test was originally intended to look into the citizenship of the individuals who ultimately own and control the shares of stock of a corporation for purposes of determining compliance with the constitutional requirement of Filipino ownership”.

       

      The Supreme Court recognized the intention of the framers of the Constitution to apply the Grandfather Rule in cases where there is corporate layering. It likewise noted that corporate layering, while admittedly allowed by the Foreign Investment Act, becomes illegal if used to circumvent the Constitution and other applicable laws.

       

      The Court further discussed that the Grandfather Rule applies only when the 60-40 Filipino-foreign ownership is in doubt or where there is reason to believe that there is non-compliance with the provisions of the Constitution on the nationality restriction.

       

       In its Resolution, the high court clarified that “doubt” does not automatically mean the mere failure of the Filipino ownership to meet the 60% threshold of the corporation’s equity. “Doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.

       

      To demonstrate these signs of doubt, the Court referred to the indicators of a dummy status as identified in a Department of Justice Opinion on the Anti-Dummy Law. These would be where the foreign investors provide practically all the funds and technological support for a joint venture undertaken with their Filipino partners, and where such foreign investors get to manage the company even while being minority stockholders.

       

      The following are the industries with their specific minimum paid up capital requirements:


       

       

      Industry

       

      Minimum Paid Up Capital Requirement

       

      Domestic Corporations with more than 40% foreign equity

                   

       

      Domestic Market Enterprise

       

      US$ 200,000.00

       

      Export Market Enterprise

       

      P 5,000.00

       

      Foreign Branch Office        

       

      Domestic market enterprise

       

      US$ 200,000.00

       

      Export market enterprise

       

      P 5,000.00

       

      Partnership with foreign partner

       

      Domestic market enterprise

       

      US$ 200,000.00

       

      Export market enterprise

       

      P 3,000.00

       

      Foreign Representative Office

       

      US$ 30,000.00

       

      Regional Area Headquarters (RHQ)

       

      US$ 50,000.00

       

      Regional Operating Headquarters (ROHQ)

       

      US$ 200,000.00
       
       
       

    • Incorporators

       
        1. Pre-incorporation Agreement
       
      A Pre-incorporation Agreement, though not a legal requirement for Incorporation, is useful in clarifying the nature of the corporate partnership and protecting the partners’ interests during the transition to a corporate entity. Depending on the parties, it may contain the following:
       
      1.    Name and purpose of the corporation
      2.    Ownership
      3.    Officers and Directors
      4.    Funding
      5.    Right of First Refusal
      6.    Corporate Structure
       
        1. Responsibilities and Obligations of an Incorporator 
      The incorporators shall file with the Securities and Exchange Commission the Articles of Incorporation in any of the official languages and signed by them. They are also tasked with filing the other documentary requirements depending on the purpose for which the corporation is created. 

    • Board of Directors

       
        1. Directors, officers, stockholders, and their related interests (DOSRI) Limit
       
      Section 83 of Republic Act No. 337 or the General Banking Act provides that no director or officer of any banking institution shall, either directly or indirectly, for himself or as the representative or agent of others, borrow any of the deposits of funds of such bank, nor shall he become a guarantor, indorser, or surety for loans from such bank to others, or in any manner be an obligor for moneys borrowed from the bank or loaned by it, except with the written approval of the majority of the directors of the bank, excluding the director concerned. Any such approval shall be entered upon the records of the corporation and a copy of such entry shall be transmitted forthwith to the Superintendent of Banks. The office of any director or officer of a bank who violates the provisions of this section shall immediately become vacant and the director or officer shall be punished by imprisonment of not less than one year nor more than ten years and by a fine of not less than one thousand nor more than ten thousand pesos.
       
      In addition to these conditions, no director of a building and loan association shall engage in any of the operations mentioned in said paragraph except upon the pledge of shares of the association having a total withdrawal value greater than the amount borrowed.
       
      The general policy behind the DOSRI limit is to level the lending field between insiders (namely, directors, officers, stockholders, and their related interests) and the outsiders. The rules require that loans and other credit accommodations to DOSRI are to be in the regular course of business and upon terms not less favorable to the bank than those offered to those outside the DOSRI circle. The aim is to prevent the bank from becoming a captive source of finance of the DOSRI.
       
        1. Anti-Dummy Law
       
      Section 2-A of the Anti-Dummy Law prohibits the employment by any person, corporation, or association of an alien, who shall intervene in the management, operation, administration or control thereof, whether as officer, employee, laborer, when the exercise or enjoyment of the property or of the franchise, privilege, or business engaged in by such person, corporation or association “is expressly reserved by the Constitution or the law to the citizens of the Philippines” or “corporations or associations at least 60%of the capital of which is owned by such citizens.” Hence, the Anti-Dummy Law comes into operation if the corporation concerned is engaged in a wholly or partially nationalized activity.
      A foreigner may be elected as part of the board of directors in proportion to their allowable participation. However, the foreigner cannot be an officer in a corporation engaged in a nationalized or partly nationalized activity within the coverage of Anti-Dummy Law.

       

    • Shareholders

       
        1. Corporate Fiction
       
      A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of limited liability.
       
      b.    Transfer of Shares
       
      For the transfer of shares to be recognized or valid, the following requirements must be complied with:
      1. The certificate of stock must be duly endorsed by the transferor or his legal representative.
       
      2. There must be delivery of the stock certificate.
       
      3. To be valid against third parties, the transfer must be recorded in the books of the corporation.
       
       
      The shares of stock are transferred by:
       
      1. If represented by a certificate, the following must be strictly complied with:
       
      a. Indorsement by the owner and his agent
       
      b. Delivery of the certificate
       
      c. To be valid to third parties, the transfer must be recorded in the books of the corporation.
       
       
       
      2. If not represented by a certificate (such as when the certificate has not yet been issued or where for some reason is not in the possession of the stockholder).
       
      a. By means of deed of assignment: and
       
      b. Such is duly recorded in the books of the corporation.
       
       

    • Resident Agent

       Purpose for having a resident agent
       
      In order to secure a license to do business in the Philippines, a foreign corporation is required to designate a resident agent on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation. The resident agent must be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines. In case the resident agent is an individual, he must be of good moral character and of sound financial standing.
       
      If the foreign corporation licensed to do business in the Philippines changes its resident agent, it must submit with the SEC a duly authenticated copy of the board resolution or certification from the duly authorized officer of the corporation formally revoking the appointment as resident agent, together with a duly authenticated written power of attorney designating a new person as resident agent. In case of a change of address, it is the duty of the resident agent to immediately notify the SEC in writing of the new address.