Highlights of the Revised Corporation Code: Part II

By: Roderick R.C. Salazar III

[Editor’s note: This is the second of a two-part article on the provisions of the Revised Corp. Code of the Philippines (R. A. 11232).  The first part can be read here.]

Corporate Governance

– introduced as a new concept and recurring theme; also strengthens minority protection; Directors’ and officers’ accountability;

While the term “corporate governance” is not defined in the Revised Corp. Code, it is used significantly and new provisions were added so that corporation can practice good governance and in the process, protect minority stockholders. Directed at corporations vested with public interest such as listed companies, banks, quasi-banks, pawnshops, money service business, preneed, trust and insurance companies, and other financial intermediaries.

SEC Memorandum Circular No. 9, s. 2014 – defined corporate governance as: “the framework of rules, systems and processes in the corporation that governs the performance of the Board of Directors and management of their respective duties and responsibilities to stockholders and other stakeholders which include, among others, customers, employees, suppliers, financiers, government and community in which it operates.”

1. SEC Mandate – The SEC is granted the authority to promote corporate governance and the protection of minority investors through, among others, the issuance of rules and regulations consistent with international best practices – 179
2. Independent Directors – required for corporations vested with public interest – 22
3. Duties of Directors – The directors or trustees elected shall perform their duties as prescribed by law, rules of good corporate governance, and by-laws of the corporation – 23
4. Voting by shareholders through remote communication or in absentia – is now allowed – 23 and Sec. 49.
5. Compliance officer – required for corporations vested with public interest – 24
6. Adds grounds for disqualification of Directors/Trustees/Officers – (a) for violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”; (b) found administratively liable for any offense involving fraud acts; and (c) by a foreign court or equivalent foreign regulatory authority for similar acts, violations or misconduct resulting in conviction by final judgment. 26
7. Total compensation of each director – of corporations vested with public interest are required to be disclosed – 29.
8. Compensation of Directors – Directors are prohibited from participating in the determination of their own per diems or compensation – 29.
9. The rule on self-dealing Directors – is expanded to cover contracts of the corporation with spouses and relatives within the fourth civil degree of consanguinity or affinity of a director of officer – 31; A director who has potential interest in any related party transaction must recuse from voting on the approval of the related party transaction – Sec. 52
10. Higher voting threshold – including the vote of a majority of the independent directors, is required for certain contracts of directors or officers in a corporation vested with public interest – 31 (d)
11. Foreign corporations are not allowed to give donations in aid of any political party or candidate or for purposes of partisan political activity – 35 (i)
12. Reference is made to the required approval of the Philippine Competition Commission for sale or disposition of corporate assets – 39; increase or decrease in capital or incurring or increasing any bonded indebtedness – Sec. 37; or merger or consolidation, of corporations – Sec. 78 – threshold of P5.2B for Party Size and P2.2B for Transaction Size.
13. The bylaws may provide matters – necessary for the promotion of good governance and anti-graft and corruption measures – 46 (k).
14. Expanded Information to be provided by directors/trustees to stockholders at their regular meetings – minutes of stockholders meeting should now include additional information; items in the interest of good corporate governance and the protection of minority stockholders; list of stockholders/members with voting rights; assessment of corporation’s performance; financial report; dividend policy; directors/trustees profiles; directors/trustees attendance report; appraisal and performance reports for the board; compensation report; self-dealing directors and transactions – 49
15. The notice of stockholders’ meeting – is required to be accompanied by: (i) the agenda for the meeting; (ii) a proxy form; (iii) the requirement and procedures to be followed by a stockholder who elects to participate by remote communication or in absentia, if such is allowed; (iv) the requirements and procedure for nomination and election, if the meeting is for election of directors – 50
16. Chairman as Presiding Officer, unless the bylaws provide otherwise – 53 – previously, it was the President that was recognized by the old Corp. Code.
17. Right of Inspection Expanded – 73 – (a) AOI, By-laws and amendments; (b) Current ownership structure and voting rights of the corporation, including lists of stockholders or members, group structures, intra-group relations, ownership data, and beneficial ownership; (c) Names and Addresses of the board of directors or trustees and the executive officers; (d) A record of all business transactions; (e) A record of the board and stockholders resolutions; (f) Copies of the latest reportorial requirements submitted to the SEC; and (g) The minutes of all meetings of stockholders or members, or of the board of directors or trustees – with more details required. The inspecting or reproducing party shall remain bound by confidentiality rules for trade secrets or processes under R.A. No. 8293 – the “Intellectual Property Code of the Philippines”, as amended, R.A. No. 10173 – the “Data Privacy Act of 2012”, R.A. No. 8799, otherwise known as “The Securities Regulation Code”, and the Rules of Court. Right of Inspection is NOT open to a non-stockholder or non-member, or a competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor.
18. Identifies and penalizes new offenses
    • Unauthorized use of corporate name – 159
    • Violation of disqualification provision – 160
    • Violation of duty to maintain records – 161
    • Willful certification of incomplete, inaccurate, false or misleading statements or reports – 161
    • Collusion of an independent auditor – 163
    • Obtaining corporate registration through fraud – Sec. 164
    • Fraudulent conduct of business – Sec. 165
    • Acting as intermediaries for graft and corrupt practices – Sec. 166
    • Engaging intermediaries for graft and corrupt practices – 167
    • Tolerating graft and corrupt practices- 168
19. Retaliation against whistleblowers – 169 – persons who provide truthful information relating to the commission or possible commission of any offense or violation of the Revised Corp. Code – a person who retaliates against a whistleblower by interfering with his livelihood, etc. may be penalized with fine from P100,000 to P1,000,000 – Sec. 169
20. The deposit for issuance of license to a foreign corporation is increased to P 500,000 and in subsequent fiscal years, 2% of the amount by which the licensee’s gross income for that fiscal year exceeds P 10 Million – 143 – from P100,000 and P5 Million
21. Increased fine as a penalty for violation of other provisions of the Revised Corp. to a minimum of P 10,000 to a maximum of P 1,000,000. It was a minimum of P 1,000 and a maximum of P 10,000 under the old Code – 170 and Sec. 144
22. Imprisonment as a penalty was removed. The corporation may be dissolved in a proceedings before the SEC, as part of the penalty.
23. Corporation as Offender – penalty may be imposed upon such corporation and/or upon its directors, stockholders, officers or employees responsible for the violation or indispensable to its commission, at the discretion of the court – 171
24. Anyone who shall aid, abet, counsel, command, induce, or cause any violation of the Revised Corp. Code, or any rule, regulation, or order of the SEC shall be punished with a fine not exceeding that imposed on the principal offenders, at the discretion of the court, after taking into account their participation in the offense – 172
25. A judgment finding that the corporation: (i) was created for committing, concealing or aiding the commission of, or (ii) with the knowledge of its stockholders had committed or aided in the commission of: securities violation, smuggling, tax evasion, money laundering, or graft and corrupt practices; or (iii) repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or illegal acts of its directors, officers, or employees, are grounds for dissolution of the corporation. In such case its assets shall be forfeited in favor of the national government – 138
26. Reportorial Requirements – Annual Submission – now specifically stated – Sec. 177
    1.  Audited Financial Statements
    2. General Information Sheet – new form use is suspended until June 30, 2019
       • if corporation is vested with public interest – need for
       • a director compensation report; and
       • a director appraisal or performance report
       • delinquent status – if reports are not submitted 3 times consecutively or intermittently within a period of 5 years.
       • Confidential information may be redacted

SEC jurisdiction and authority expansion

1. Visitorial powers over all corporations – examine and inspect records, regulate and supervise activities; enforce compliance; and impose sanctions; may revoke certificates of incorporation if a corporation refuses or obstructs the SEC, without justifiable cause.
2. Authority over certain intra-corporate disputes
   • Summary order to hold an election of directors if the election is not held unjustifiably. The SEC may issue orders directing the issuance of a notice stating the time and place of the election, designated presiding officer, and record date or dates for determination of stockholders entitled to vote – 25
   • After notice and hearing, removal of a director elected despite a disqualification – 27
   • Disputes pertaining to a denial of the right of inspection or reproduction of corporate records – 73
   • Motu proprio or upon verified complaint, dissolution of a corporation on grounds provided in Section 138 of the Revised Corp. Code.
   • Alleged violation of the Revised Corporation Code, or of its rule, regulation or order – 154 – subpoena powers – Sec. 155; and contempt powers – Sec. 157 issuance of a permanent cease and desist order, suspension or revocation of the certificate of incorporation; and dissolution of the corporation and forfeiture of its assets – for violations of Revised Corp. Code, rules or regulations, or any of SEC’s orders – Sec. 159
3. Transmittal of evidence to the Department of Justice for preliminary investigation or criminal prosecution and/or initiate criminal prosecution for any violation of the Revised Corp. Code, rule, or regulation – 156
4. SEC Fiscal Autonomy under the Revised Corp. Code. Collected fees, fines and other charges shall form part of its modernization, and will augment its operational expenses – 175.
5. No court below the Court of Appeals shall have jurisdiction to issue a restraining order, preliminary injunction, preliminary mandatory injunction in any case, dispute, or controversy what directly interferes with the exercise of the powers, duties and responsibilities of the SEC that falls exclusively within its jurisdiction – 179.

(Senior Partner Dicky Salazar leads the Corporate and Commercial Law practice group of the Firm and represents foreign and Filipino mining companies involved in all aspects of mining from exploration, project financing, construction, development and processing. Dicky’s existing foreign and domestic mining clients range from operating companies to exploration entities. He can be reached at [email protected].)