Revised Corporation Code of the Philippines

Republic Act 11232, or the Act Providing for the Revised Corporation Code of the
Philippines, was signed into law by President Rodrigo R. Duterte on 21 February 2019. It
amends a 38-year-old Corporation Code to improve the ease of doing business in the
Philippines.

Following are some of the notable changes made in the Revised Corporation Code:

1. INCORPORATORS: Removal of the minimum number of incorporators.

2. MINIMUM CAPITAL STOCK: Imposition of a Php1,000,000.00 minimum capital
stock on stock corporations. This effectively increases the minimum paid-up capital
to Php62,500.00
3. CORPORATE TERM: Removal of the fifty (50)-year corporate term. This means that
unless there is a provision in the Articles of Incorporation with regard to the term of
corporate existence, the corporation will exist perpetually unless sooner dissolved.
4. ONE-PERSON CORPORATION: Allowance for a single person – whether natural or
judicial, to organize and put up a corporation. However, this is subject to the
requirement of a minimum capital stock of Php1,000,000.00 to b paid up in a lump
sum at the time of incorporation.
5. CORPORATE OFFICERS: Chief Executive Officer is made the alternative title to
President and Chief Financial Officer is made the alternative title to Treasurer. Also,
the inclusion of Compliance Officer as a mandatory corporate officer on top of the
President/CEO, Treasurer/CFO, and Corporate Secretary.
6. BOARD MEETINGS: Allowance of remote communication methods in attending
board meetings subject to provisions of corporate by-laws.
7. NATIONALITY OF A CORPORATION: Formalization of the test in determining the
nationality of a corporation, i.e. the control test.
8. REMOVAL OF A MEMBER OF THE BOARD OF DIRECTORS OR TRUSTEES:
Empowering the Securities and Exchange Commission (SEC) to remove disqualified
members of the Board of Directors or Trustees.
9. DIGITAL MEANS: The new code introduces provisions that 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.
G20/OECD PRINCIPLES OF 2015
1. Ensuring the basis for an effective corporate governance framework.
-The corporate governance framework should promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate the division of 8 responsibilities among different
supervisory, regulatory and enforcement authorities.
2. The rights of shareholders and key ownership functions.
-The corporate governance framework should protect and facilitate the exercise of shareholders’
rights.
3. The equitable treatment of shareholders.
-The corporate governance framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have the opportunity to obtain
effective redress for violation of their rights.
4. The role of stakeholders in corporate governance.
- The corporate governance framework should recognize the rights of stakeholders established by law
or through mutual agreements and encourage active co-operation between corporations and
stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
5. Disclosure and transparency.
-The corporate governance framework should ensure that timely and accurate disclosure is made on
all material matters regarding the corporation, including the financial 9situation, performance,
ownership, and governance of the company.
6. The responsibilities of the board.
- The corporate governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the board’s accountability to the company and
the shareholders.
Corporate Governance in the Philippines
When the Asian crisis came in 1997, the Philippine government was in an advantageous fiscal
position, the financial system was strong, and the corporate sector had accumulated internal funds from
three years of robust profits. More importantly, the Asian crisis did not catch the corporate sector
investing, and financing it by debt, into a recession. The Asian financial crisis revealed that the Philippine
non-financial corporate sector has been a relatively efficient user of funds of Philippine savers. Looking
at the Philippine corporate governance environment however, four structural issues still need to be
addressed. These issues revolve around ownership structures and control systems, affecting the
country’s corporate governance environment and limiting future economic growth.

1. Most publicly listed companies are not widely held by public investors.

According to Michael Jensen2, ownership is the key element in corporate control and governance.
Of the four central forces that resolve problems regarding the compatibility of corporate decisions and
social good, Jensen notes that two – external control through the capital market and the corporate
internal control system –depend on the degree of shareholding.

Companies that are publicly listed and widely held enable dissatisfied shareholders to exit by selling
their shares. Capital market investors control these companies and discipline management of companies
toward broad, market standards of efficiency. In under-developed capital markets, publicly listed
companies may not be widely held by public investors. In that case, external control is not present. In
the Philippines, public listing rules require public issuance of only 10 to 20 percent of outstanding
shares. Ownership by large shareholders of publicly listed companies limits the trading of those shares.
Public investors could not readily influence the price of shares through their trading activities. The
growth and survival of those companies then depend on the effectiveness of control systems within the
company’s organization. Because large shareholders manage these internal control systems, any
disciplining force generated by such systems is about equal to that coming from self-control.

Degree of ownership defines management control. The Philippine Corporation Code requires
approval of management decisions by a majority vote of the board of directors. Strategic decisions,
because of their major impact on a company, require a two-thirds majority. On average, the largest five
shareholders held sufficient majority ownership to approve operating and strategic management
decisions of companies. Minority shareholders could not achieve majority without the support of one or
more of the five largest shareholders. Well-organized minority shareholders can probably elect only a
member of the board of directors and even then, only with effective use of cumulative voting privileges.
Concentration of ownership at these high levels reveal that publicly listed Philippine companies are not
truly publicly owned. Many companies listed in the Philippine stock exchange have issued only the
minimum number of shares needed to gain public listing. By limiting the ownership shares issued to
public investors, controlling shareholders reduce minority shareholders to passive roles in corporate
governance.

2. Large shareholders that dominate ownership of companies pursue a financing policy characterized
as trading-on-equity, resulting in further dominance by these companies in their industries.

In many Asian countries, large shareholders controlling corporate groups emerged from development
policies of the government and historical circumstances that enabled certain entrepreneur groups to
accumulate capital. When capital markets and legal structures are weak, shareholders deal with the
problem of moral hazard in governance by accumulating controlling ownership shares. The Saldana
study investigated the importance of these shareholder groups and the characteristics of this control
structure. And concluded that the conduct and structure of corporate groups were molded by the
government’s past industrial and infrastructure development policies and the recent emergence of new
industry leaders. There was a high concentration of industry sales in a few leading companies. Large
shareholders owned dominant companies. To leverage their holdings, large shareholders organized their
companies into conglomerate groups. These corporate groups gathered capital and allocated them to an
internal market of affiliates. To ensure a continuing flow of external financing, they acquired active
minority or majority ownership of a large commercial bank. Due to social benefits generated by their
businesses (e.g., employment, tax payment, etc.) their leading shareholders gained influence in society
and government. Large shareholders leveraged this influence by entering industries that have high entry
barriers. Dominant ownership shares and assurance of bank financing for the corporate group were the
means whereby large shareholders achieved control of corporate groups.

Groups of companies in the Philippines operate at varying degrees of effective central control. Some
members of the groups have autonomous operations. They separate operating management from
central control and allow them to raise their own financing without gross guarantees. Other corporate
groups have a central management that makes all major investment and financing decisions for the
group. Philippine corporate groups are characterized by the presence of a large family-based
shareholder group, majority or active minority ownership of affiliate companies, and a CEO who is a
large shareholder. Philippine groups of companies tend to diversify toward industries related to the
flagship company’s business. This strategic direction ensures availability of competent management
within the group and scale economies from central purchasing, logistics and financing.

Corporate governance depends on ownership type and control by corporate groups. Owners with
greater control are more likely to avoid management inefficiencies (that is, the moral hazard problem of
management controlled companies) but may tend to over-borrow, knowing they could pass on any loss
from credit-financed projects to creditors (that is, the moral hazard problem of creditors). Stated
another way, corporate groups can be expected to show good profitability but may have higher leverage
risks.

3. Corporate groups with affiliate banks enjoy advantages in terms of access to financing and
economies of investments and operation in related industries.

Groups of companies commonly include commercial bank and other financial institutions like
insurance and finance companies. Large shareholders either directly owned these banks or controlled
them through companies that they owned. Commercial banks hold the largest share of financial
resources in the country. Past government policies sought to ensure stability in the financial system
through regulations at the expense of growth and competition. Past government policies restricted
entry, set up minimum capital requirements and limited the number of local branches and foreign bank
operations in the Philippines. With the capital markets still underdeveloped, commercial banks came to
control the financial resources of the system and to capture excess profits in the process. Corporate
financing depended on intermediation by commercial banks. Large groups responded by acquiring
significant ownership of commercial banks. Once banks were part of a corporate group, member
companies of the group improved their prospects for accessing loans at favorable interest rates and
terms. BSP (Bangko Sentra ng Pilipinas, the Philippine Central Bank) introduced major reforms to
strengthen the banking system and increase competition. Some of these reforms are the liberalization of
interest rates and foreign exchange in the 1980s, entry of foreign banks in the 1990s, and as a response
to the Asian crisis, increased capital requirements.

BSP’s reforms are probably changing the conduct but not necessarily the structure of banks. Banks’
ownership remains large shareholder and family based. Through common ownership, ties of commercial
banks with corporate groups of companies remain strong. Concentration of ownership in banks weakens
the regulatory capacities of BSP. To accelerate recovery from the crisis, BSP sought to reduce the lending
rates by bringing down Treasury bill rates, the bellwether for lending rates. It did not get the expected
response from banks. Foreign banks increased in number, but not local banks still dominated domestic
credit and deposit markets. By raising capital requirements, BSP wants to strengthen the capital base
and increase the size and stability of banks as a safeguard against future financial crisis. However, capital
build-up demonstrates the advantage of corporate groups in raising capital from their own internal
capital market. Increasing capital shall heighten the concentration of ownership and expand the scope
of own-group lending by these larger banks in the future. Several banks merged after the Asian crisis in a
process that involved divestments by large shareholder group and increased ownership by another.

4. The regulatory framework for corporate governance is inadequate in the context of Philippine
conditions like large shareholder dominated companies, corporate groups, and ownership of banks by
groups of companies.

The Philippine Corporation Code and the main agency enforcing it, the SEC, are patterned after their
U.S. counterparts. SEC requires all securities to be registered with the registry open for inspection to the
public. Corporate stock and transfer books are open for inspection by the company’s stockholders. Basic
rights of shareholders are adequately protected. Shareholders enjoy one-share one- vote rule, with
proxy voting legally allowed and practiced. The Corporation Code requires the annual general
shareholder meeting (AGSM) to confirm decisions of management. A shareholder can voice out his/her
concern during AGSM without any required minimum shareholdings for such privilege. However, since
the minority shareholders could not influence the vote since there is no real discussion of board
decisions during such meetings. Major transactions of the company require approval by two-thirds
majority vote of shareholders. Examples of these transactions are as amendment of the articles, bonded
indebtedness, sale of major corporate assets, investments in other companies and mergers.

Shareholders have preemptive rights under the law, but the right can be denied or waived in a
company’s articles of incorporation. An important concern given the large shareholder groups in the
Philippine corporate sector is the possible conflict of interest on transactions by managers or large
shareholders. There are provisions addressing dealings by the company with directors or officers,
contracts between corporations with interlocking directors and for cases when directors are in
businesses that compete with the company. These explicitly identified cases require approval by the
board of directors. There is no requirement of disclosure to shareholders unless transactions are
presented to them for approval. A special case of conflict of interest is insider trading. The Revised
Securities Act specifically prohibits insider trading and provides for strict liability by presuming violation
of insider trading rules when directors, officers and principal shareholders conduct trades around insider
information dates. Insider trading regulations are important because most publicly listed companies
have a high degree of owner concentration and are thinly traded. However, enforcement has always
been a question. Nobody has been successfully prosecuted for insider trading although SEC and the
media have discussed various possible insider trading cases. The much-celebrated BW scandal in recent
months appears to be the biggest insider trading case being faced by SEC, but that is still far from being
resolved due to the politicking that continues because of it.
 In sum, the legal framework for shareholder rights is generally adequate. However, in practice,
shareholder protection is eroded by the dominance of large shareholders in corporations even for major
decisions involving two-thirds vote. A serious limitation of the legal framework is its inability to protect
minority investors from management dominated by large shareholders in areas involving conflict of
interest and insider trading. There is very little deterrent on management regarding conflict of interest
because at worst, the Corporation Code only requires special approval by two-thirds vote in AGSMs that
can be done due to dominant control by large shareholders. Insider trading regulations has been poorly
enforced in the past although there is hope in the current revision of the law. The board of typical
Philippine large public company is composed of between seven to 11 members representing the largest
shareholders of the company. There is no requirement in law or in practice of representing stakeholders
on boards.

The board of directors is not explicitly mandated by the Corporation Code to consider the interest of
minority shareholders. The Corporation Code prohibits the removal of a director without cause only if
minority shareholders shall lose their representation in the board of directors because of such action.
Interlocking directorates are common and extensive, especially for corporate groups. Directors are
elected during the GM by shareholders. Outside directors are not common and not mandatory. Outside
directors, if present, are brought in by controlling shareholders. Having an “independent” director is not
acceptable for most companies because family members and close associates prefer to discuss business
issues of highly confidential nature within the family.

A stockholder can file a derivative suit against its directors. The SEC is the special body that handles
conflicts involving corporations and their shareholders. Although intended to speed up resolutions of
intro-corporate conflicts, SEC proceedings are known to be costly and take a very long time to resolve. In
effect, enforcing the protection of minority shareholders through the courts is costly and not effective.

The Real Issue: Dynamics of Philippine Corporate Ownership

Again emphasizing the point that these four issues essentially revolve around the ownership structure of
Philippine corporations, it would be important to note that the familial aspect of the culture is the single
greatest factor that has shaped Philippine corporate ownership (and Philippine politics as well)
throughout the country’s history. Sociologist Yasushi Kikuchi (in McCoy, 1999) argues that “Filipinos
define kinship bilaterally,4 thus widening their social networks and narrowing their generational
consciousness. Instead of learning the principle of family loyalty by revering distant male ancestors,
Filipinos act as principals in ever-extending bilateral networks of real and fictive kin.”

Once a stable “kinship network” is formed, such familial coalitions bring some real strengths to the
competition for political office and profitable investments. In his book “An Anarchy of Families: The
Historiography of State and Family in the Philippines,” Alfred McCoy mentions that a kinship network
has a unique capacity to create an informal political team that assigns specialized roles to its members,
thereby maximizing coordination and influence. He cites an example during the postwar Republic, that
when Eugenio Lopez became a leading businessman in Manila, his younger brother Fernando was an
active politician at both the provincial and national levels. Pursuing the state’s economic largesse can
depend upon the success of such teams, or kin based coalitions, in delivering votes to a candidate for
national office (say, senator or president). If elected, the politician will repay the investment many times
over through low-cost government credit, selective enforcement of commercial regulations, or licenses
from state-regulated enterprises such as logging and broadcasting.
 Philippine political parties usually have acted as coalitions of powerful families. As the Marcos era
demonstrated, regimes can become the equivalent of the private property of the ruling family. In the
postwar period leading banks were often extensions of family capital. In his studies of Philippine
banking, political scientist Paul Hutch croft has found that “There is little separation between the
enterprise and the household, and it is often difficult to discern larger ‘segments of capital’ divided along
coherent sectoral lines.” (In McCoy, 1999)

Similarly, the chief of the Securities and Exchange Commission, Rosario Lopez, noted in a July 1992
paper that only eighty corporations among the country’s top 1,000 were publicly listed because most
Filipino companies “are actually glorified family corporations.” Noting that Filipinos seem to prefer
relatives as partners and shareholders, Lopez explained that “There are sociocultural practices that
endanger the situation, particularly the Filipino habit of having [an] extended family concept. In the
Philippine political economy, banks and other major corporations are often synonymous with the history
of a few elite families and their rent-seeking practices.