Legal Updates

The law primarily governing private corporations in the Philippines is the Revised Corporation Code, which took effect on 20 February 2019 under Republic Act No. 11232. This current iteration of the law substantially amended the Corporation Code under Batas Pambansa Blg. 68, which was the law in effect since 1980. From 1980 up to 2019, the Corporation Code did not undergo any amendment or revision. As a result, during a long period of 39 years, private corporations in the Philippines were subject to numerous stringent incorporation and regulatory requirements. Antiquated regulations and the hesitance to rely on technological tools contributed to the Philippines’ inefficient “doing business” regime and processes. 

Republic Act No. 11232 was therefore widely considered landmark legislation with the primary goal of removing entry barriers to the Philippine market. The passage of the Revised Corporation Code just one year before the 2020 shut-down caused by the Covid 19 pandemic was timely and significant as some of the substantial changes in law were technology-driven. 

The most important of these changes was the shift to electronic filing and monitoring systems. The law allowed the Securities and Exchange Commission (SEC) to shift from manual filing of incorporation applications and submission of other regulatory requirements to online or digital filing. Now, we enjoy the convenience of the SEC eSPARC, SEC eSPAY, and SEC eFAST, all online tools for submission of applications and payment of fees. These online tools help in the efficient setting up of private corporations as well as easier compliance with regulatory requirements. 

In addition, the Revised Corporation Code also formally allowed the holding of board meetings via remote communication. More importantly, the Revised Corporation Code now allows the holding of stockholders meetings remotely and even gave the stockholders the ability to vote in absentia. Prior to the amendments, stockholders could only meet and vote in person. These provisions of the Revised Corporation Code paved the way for private corporations to function as normally as possible during the pandemic lock-downs as they were able to hold important board and stockholders meeting remotely through available technological too. Even notice of meetings may now be sent through electronic mail, foregoing the strict requirement of snail mail or personal delivery.

Other significant changes brought about by the Revised Corporation Code pertain to the much reduced incorporation requirements. Now, there is no longer any minimum number of incorporators required to establish a corporation. Any number of natural person, partnership, association or corporation, not exceeding fifteen (15) in number, may, singly or jointly, form a private corporation. The Revised Corporation Code even allows the creation of One Person Corporations composed of a single stockholder who should be a natural person. The old Corporation Code required at least five incorporators and they should all be natural persons.

The Revised Corporation Code also removed the minimum capital stock requirement for stock corporations, unless required by other special laws. This allows small to medium-sized enterprises (MSME) more flexibility when it comes to their initial capitalization. It must be noted though that for foreign corporations to engage in domestic market enterprise (i.e., the provision of goods and services to the domestic market with not more than 40% being exported), it must have a minimum paid-in capital of US$200,000. For foreign MSMEs, this minimum paid-in capital requirement is reduced to US$100,000 subject to certain requirements.

With respect to its term of existence, a private corporation now exists perpetually unless it chooses to provide for an expiration date. This benefit was given retroactive effect for private corporations already in existence prior to the enactment of the Revised Corporation Code. Even corporations whose terms have already expired may now revive its corporate existence through a formal application with the SEC.  This development is significant because under the old Corporation Code once a corporation’s term expired it was obliged to wind down its business and liquidate its assets. The effect was disastrous to corporations that had no intention to liquidate but merely overlooked their term expiration.

Despite all of these significant changes, the basic definition of a corporation remains unchanging. In the Philippines, a corporation has always been defined as “an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence”. From this definition can be derived the four attributes of a corporation.

The first attribute of a corporation is that it is an artificial being. As such, corporations have juridical personalities separate and distinct from its stockholders, members, directors, trustees, officers and agents. This attribute provides the basis for the “veil of corporate fiction”. This veil can only be pierced or lifted, and the state can look at the aggregate of persons comprising a corporation, when the corporate entity is used to further the ends of injustice, or as a mere alter ego or business conduit. Without bad faith or fraud, the separate personality of a corporation must be upheld, which means that the stockholders, members, directors, trustees, officers and agents of a corporation cannot be held liable for the obligations of the corporation, and vice versa.

The second attribute of a corporation is that it is created by operation of law. Unlike its Spanish era predecessor, the Sociedad Anominas, which did not require state registration, modern day corporations can only derive its existence upon the consent of the State. The State acts through its regulatory agency, the SEC. In short, a corporation must undergo the incorporation process set forth by the SEC and should be issued a certificate of incorporation before it can validly act as corporate entity.

The third attribute of a corporation is that is has the right of succession. A corporation’s right to exist will not be affected by any change in the circumstance of its members or stockholders.  Shares of stock in a stock corporation is generally freely transferable unless subjected to certain reasonable transfer restrictions.

The final attribute of a corporation is that it has express powers authorized by law or incidental to its existence. Outside its express or incidental powers, a corporation’s act would be ultra vires and may result in defective transactions.

Philippine private corporations may organize as either stock or non-stock corporations. Stock corporations must have capital stock divided into par or no-par shares and must be authorized to distribute dividends to its shareholders. The main purpose of a stock corporation is to make profit for its stockholders. On the other hand, non-stock corporations are corporations where no part of its income is distributable as dividends and which may be formed for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service or similar purposes.

Finally, foreign corporations, or those formed, organized or existing under any law other than the Philippines and whose laws allow Filipino citizens to do business in their country, may also do business in the Philippines, , except businesses or undertaking reserved to Philippine nationals. Interested foreign corporations may apply for a license to do business in the Philippines from the SEC.

The term “doing business” includes “soliciting orders, service contracts, opening of offices, xxx, appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country totaling 180 days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act xxx that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain, or of the purpose and object of the business organization.” However, mere investment as a shareholder in a  domestic corporation and/or the exercise of rights of such investor (eg, appointment of a nominee director or officer or appointment of representative or distributor which transacts business in its own name and for its own account) are not deemed “doing business”.

If a foreign corporation does business in the Philippines without a license, it shall not be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency in the Philippines but it may be sued or proceeded against on any valid cause of action recognized under Phlippine laws. 

This article is only for informational and educational purposes.  It is not intended as a legal advice or opinion.