SEC Legal Opinions Digest
IF THE REGISTRATION OF THE SHARES TO BE OFFERED IS NOT NECESSARY IN THE PUBLIC INTEREST & FOR THE PROTECTION OF THE INVESTORS, THE PROPOSED TRANSACTION MAY BE EXEMPTED FROM THE REGISTRATION REQUIREMENT UNDER THE SRC
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-43
DECEMBER 12, 2024
Total Energies Global Services Philippines, Inc. (TGSPI) is seeking an opinion on the mandatory compliance requirements under Republic Act (R.A.) No. 8799 or the Securities Regulation Code (SRC), pertaining to stock options and shares of stocks issued by a publicly listed non-resident foreign corporation in France. As represented, employees of the different TotalEnergies companies around the world, including TGSPI employees (Filipinos), will be issued shares of stocks for free as well as stock options as an additional benefit to qualified TGSPI executives/employees to be issued by TotalEnergies SE (TTE), a publicly listed entity in France, as part of the Group's centennial celebration. In reply, the Commission, applying Subsection 8.1 of the SRC, corporations intending to offer for sale or distribution securities within the Philippines are bound by the registration requirements imposed by the SRC, subject to the exceptions provided under Section 9 and Subsection 10.1 thereof, regardless of the citizenship or residency of the issuer. However, the Commission previously opined that if the offering or distribution of securities does not fall in any of the exempt transactions provided in Subsection 10.1 of the SRC, an issuer may instead request for an exemption from the Commission, pursuant to Subsection 10.2 of the SRC, by providing the required justifications that the requirements of registration under the SRC are not necessary for the public interest or for the protection of the investors. Hence, the Commission affirmed that while there is no registration requirement under Sections 8 and 12 of the SRC, there has to be compliance with the requirements and conditions for stock options. On the issue of absence of monetary investment of consideration for the issuance of the shares to the employees, the same negates the element of sale or distribution of securities to the public as the shares shall be issued for free in the form of a centennial celebration bonus. Given this, shares issued by TTE, intended to be distributed to the employees of TGSPl for free, are not subject to any compliance or registration requirements
ANTI-DUMMY LAW DOES NOT BAR NON-EXECUTIVE CHAIRMANSHIP FOR FOREIGNERS
FOREIGNERS CAN SERVE AS NON-EXECUTIVE CHAIRMAN IN PARTIALLY NATIONALIZED FIRMS
SEC CONFIRMS LEGALITY OF NON-EXECUTIVE ROLES FOR FOREIGNERS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-34
NOVEMBER 6, 2024
V Construction Corporation (VCC), a domestic corporation engaged in such activities, appointed an Indian national as Chairman. Under the corporation's by-laws, the Chairman's role was non-executive and limited to presiding overboard meetings, with the President holding executive authority. It sought the SEC's opinion on two issues: (1) whether the Anti-Dummy Law disqualifies a foreigner from being Chairman in this context; and (2) whether SEC-OGC Opinion No. 16-12 (2016) supersedes the earlier SEC Opinion issued on May 15, 1985, which allowed foreigners to serve as non-executive Chairmen. In reply, the SEC has simplified the issue of whether a foreigner could serve as Chairman of a domestic corporation engaged in a partially nationalized economic activity without violating the Anti-Dummy Law (Section 2-A, Commonwealth Act No. 108). Accordingly, a foreigner is not disqualified from serving as Chairman in a partially nationalized corporation, provided the position does not involve executive functions. The Anti-Dummy Law aims to prevent foreign participation in the management, operation, administration, or control of nationalized or partially nationalized businesses unless expressly allowed, such as in technical roles. However, it does not prohibit foreigners from holding non-executive roles like presiding over board meetings. The SEC clarified that SEC-OGC Opinion No. 16-12 does not invalidate the 1985 Opinion. The 2016 Opinion applies only to cases where a foreigner simultaneously acts as President and Chairman, performing executive functions. The 1985 Opinion remains valid for instances where the Chairman's role is limited to non-executive functions. In light of this, appointing a foreigner as Chairman in a partially nationalized corporation is permissible under the Anti-Dummy Law if the role is purely non-executive. This interpretation aligns with the law’s intent to prevent foreign dominance in executive or managerial positions while allowing proportional participation of foreign nationals in corporate boards.
ANTI DUMMY LAW APPLIES ONLY TO CORPORATIONS ENGAGED IN NATIONALIZED OR PARTLY NATIONALIZED ACTIVITIES
MICRO-FINANCE IS NOT CONSIDERED A NATIONALIZED ACTIVITY
FOREIGNERS MAY BE ELECTED TO THE BOARD IF THE CORPORATION IS NOT ENGAGED IN RESTRICTED ACTIVITIES
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-33
NOVEMBER 5, 2024
A Micro-Finance Non-Governmental Organization (MFI) is seeking an opinion regarding three governance matters: (1) applicability of the Anti-Dummy Law to MFI (2) eligibility of foreign nationals to serve as trustees or officers; and (3) permissibility of transferring funds to an international affiliate for legitimate purposes. As represented, MFI, a non-stock, non-profit organization, aims to provide microfinance services to small entrepreneurs and alleviate poverty as per R.A. 8425 or the “Social Reform and Poverty Alleviation Act." While locally incorporated and fully Filipino-owned, MFI is affiliated with an international organization. Its Articles of Incorporation (AOI) include provisions for acquiring and utilizing real and personal properties, although it does not own land. On the applicability of the Anti-Dummy Law, it argued that it is not engaged in nationalized or partly nationalized activities, as its primary purpose is microfinance, not land acquisition or other restricted activities. On the inclusion of foreigners in governance, it inquired if foreign nationals could serve as trustees or officers, considering its non-nationalized operations. Lastly, it sought clarification on whether it could transfer funds to its international affiliate under the Revised Corporation Code (RCCP). In reply, the Commission opined that the Anti Dummy Law applies only to corporations engaged in nationalized or partly nationalized activities. MFI’s primary purpose of microfinance is not considered a nationalized activity. While its AOI includes powers to acquire real property, they are incidental and not the corporation's main business. Since MFI does not own land, the Anti Dummy Law does not apply. On the second inquiry, foreigners may be elected to the MFI’s Board of Trustees or appointed officers since the organization is not engaged in restricted activities. On investment issues, Section 41 of the RCCP allows corporate funds to be invested or transferred for legitimate purposes. Approval from the Board will suffice if the purpose aligns with the MFI’s primary objectives. If the purpose is outside the primary purpose, ratification by two-thirds (2/3) of members is required.
CORPORATE GOVERNANCE PRINCIPLES MANDATE COVERED COMPANIES TO ELECT INDEPENDENT DIRECTORS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-31
NOVEMBER 5, 2024
Asia Pacific Medical Center-IloIlo, Inc. (APMC-II) is requesting an opinion on whether it can be exempted from holding a special stockholder's meeting to fill the Board of Directors (BOD) vacancy and instead fill it by a majority vote of the BOD, given the extraneous circumstance of the COVID-19 pandemic. Additionally, it sought clarification if it could wait until its next Annual Stockholders' Meeting in April to fill the vacancy for an independent director if the exemption was not possible. In reply, Section 22 of the Revised Corporation Code (RCC) states that corporations vested with the public interest and whose securities are registered with the Commission must have independent directors elected by the shareholders. Thus, the lacking one (1) independent director in the BOD must be elected by the shareholders in a meeting called for that purpose since APMC-II is a registered issuer of securities. As to the second (2nd) query, it is already settled that having an independent director is a fundamental principle of Corporate Governance, which has become a standard best practice in the corporate sector and has been taken into law. Therefore, Section 22 of the RCC and the Commission's Corporate Governance Rules require covered companies to have a specific number of independent directors. Failure to comply may result in administrative sanctions.
CORPORATION IS LIMITED TO ACTIVITIES EXPLICITLY STATED IN ITS PRIMARY PURPOSE IN ITS ARTICLES OF INCORPORATION OR THOSE REASONABLY NECESSARY FOR ACHIEVING THAT PURPOSES
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-29
OCTOBER 9, 2024
ALCL Philippines is seeking an opinion about its purpose clause in the Articles of Incorporation of ALPS, its proposed PEZA-registered subsidiary, specifically, whether ALPS could engage in specific activities such as subcontracting services to third parties (e.g., IFF, DFF agents, and trucking providers), acting as an importer or intermediary for goods, and sub-leasing warehousing spaces. These questions were raised to ensure that its activities would align with its primary and secondary purposes as stated in its Articles of Incorporation. In reply, a corporation is limited to activities explicitly stated in its primary purpose or those reasonably necessary for achieving that purpose. Any activity falling outside the scope of the purpose clause would require either an amendment to the Articles of Incorporation or additional regulatory approvals citing the Foreign Investments Act and the Philippine Economic Zone (PEZA) Law vis-à-vis nationality restrictions for foreign investments. Furthermore, the SEC highlighted the necessity of consulting other regulatory agencies, such as the National Economic and Development Authority (NEDA) and the Land Transportation Franchising and Regulatory Board (LTFRB), for activities involving logistics services that could fall under the definition of public utility. The guidance underscores the critical role of a clearly defined purpose clause in setting the boundaries for corporate activities.
FOREIGNERS IN THE BOARD OF OFFSHORE COLLECTIVE INVESTMENT SCHEMES ARE NOT ALLOWED UNDER ANTI DUMMY LAW & FOREIGN INVESTMENT NEGATIVE LIST
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-28
OCTOBER 9, 2024
J Co. is seeking an opinion on whether foreign nationals will be allowed to have representation in the Boards of Directors of such funds, considering that foreign stockholders will wholly or partially own such funds, and the units of participation in those funds will be exclusively offered offshore. In reply, citing Section 15 of the Investment Companies Act (ICA), no person shall serve as a director of a registered Investment Company unless he is a Filipino citizen. However, Section 15 of the ICA is superseded by Section 2-A of the Anti-Dummy Law, which classifies corporations with foreign equity restrictions of 40% or less as nationalized or partly nationalized. Although the Anti-Dummy Law does not establish foreign equity limits, it ensures adherence to them. In relation, J Co. claims the 12th Regular Foreign Investments Negative List (FINL) specifies activities subject to foreign ownership restrictions, either mandated by the Constitution or laws and based on considerations of security, health, and the protection of Small and Medium-Sized Entities (SMEs). Implied repeal occurs only when laws conflict irreconcilably, or the latter lawfully replaces the earlier one. The FINL, being an issuance and not a law, addresses foreign equity restrictions, distinct from Section 15 of the ICA. As they cover different subjects, there is no irreconcilable conflict or intent for substitution. Although, Section 2-A of the Anti-Dummy Law and Section 15 of the ICA can be harmonized. The Anti-Dummy Law restricts board composition in corporations subject to foreign equity limits without specific board rules, complementing such laws and the FINL. Meanwhile, Section 15 of the ICA applies to all investment companies, regardless of foreign equity restrictions, as it explicitly governs board composition. Accordingly, foreign nationals will not be allowed to have representation in the Board of Directors of funds constituted as investment companies notwithstanding the representation that foreign stockholders will wholly or partially own such funds, and the units of participation in those funds will be exclusively offered outside of the Philippine territory.
FOREIGN CORPORATION CAN ORGANIZE SUBORDINATE OFFICES & APPOINT OFFICERS AS PERMITTED BY ITS BY-LAWS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-25
SEPTEMBER 19, 2024
N Co. is seeking an opinion on whether it can modify the organizational structure of its representative office by creating additional subordinate offices and appointing subordinate officers as permitted by its Bylaws. Likewise, it is seeking clarification on whether the creation of the “Assistant Secretary” position is permissible under the Revised Corporation Code (RCC). Finally, it is seeking clarification whether nationality and residency requirements are imposed on the representative office. In reply, Section 146 of the Revised Corporation Code (RCC) states that a foreign corporation doing business in the Philippines must follow the same laws as domestic corporations of the same class, except for laws regarding their creation, organization, dissolution, and internal relations among stockholders, members, or officers. In essence, while foreign corporations must follow many local laws, they retain certain rights and privileges related to their organizational structure and internal governance, adhering to their home country's regulations. Since modification of the organizational structure of its representative office is permitted by its Bylaws, RCC grants the liberty to organize and manage the corporation in accordance with business exigencies. Further, RCC recognizes N Co.’s power to validly create the office of an “Assistant Secretary” and that there is no prohibition on the creation of officer positions for its representative office. Section 24 of the RCC allows foreign corporations to organize and elect other officers provided in the bylaws. Regarding the third query, the imposition of such falls within N Co.’s prerogative, as no nationality or residency requirements for subordinate officers are outlined in its By-laws.
APPLICABILITY OF THE 19-LENDER RULE TO LENDING TRANSACTIONS INVOLVING 19 OR FEWER LENDERS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-24
SEPTEMBER 11, 2024
TF Co. is seeking an opinion on whether its lending activities would be exempt from registration under the Securities Regulation Code (SRC) if it engages in lending transactions involving 19 or fewer lenders. In reply, the SEC referred to the “19-Lender Rule” under the SRC, which exempts a company from the registration requirement if its lending activities involve 19 or fewer lenders and do not constitute a public offering. The exemption is valid as long as there is no advertisement or public solicitation of the lending activities. TF Co. can continue its lending operations without registration, provided the total number of lenders does not exceed 19 and there is no public solicitation.
REPRESENTATIVE OFFICE OF A FOREIGN COMPANY IS ALLOWED TO DEAL DIRECTLY TO ITS PARENT COMPANY’S CLIENTS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-22
SEPTEMBER 10, 2024
R Co. is seeking an opinion on whether a representative office in the Philippines is allowed to deal directly with its parent company’s clients outside the Philippines. In reply, Sec. 1(q) of the Implementing Rules and Regulation (IRR) of Republic Act (R.A.) No. 7042 or the Foreign Investment Act (FIA), as amended, states that a representative office deals directly with the parent company’s clients, but does not earn income from the host country, and is entirely funded by the head office. Its functions include, but are not limited to, sharing information, promoting the company’s products, and ensuring product quality. Therefore, a representative office of a foreign corporation is an extension and does not have legal identity separate from its parent company. Thus, it is allowed to deal directly with its parent company’s clients within and outside the Philippines if its activities relate to information dissemination, promotion, and quality control of its parent company’s products. Moreover, the office should be fully subsidized by its head office and does not derive income in the Philippines.
NON-STOCK, NON-PROFIT CORPORATION CAN ENGAGE TO PROFITABLE BUSINESS ACTIVITIES THAT ARE INCIDENTAL TO ITS PURPOSE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-21
AUGUST 16, 2024
W Foundation is seeking an opinion on whether a non-stock, non-profit organization, can establish a Business Process Outsourcing (“BPO”) service or contact/call center that will serve its affiliates in other countries, without amending its Article of Incorporation (AOI). In reply, Section 86 of the Revised Corporation Code (RCC) provides that a non-stock corporation is one where income cannot be distributed as dividends to members, trustees, or officers. Any profits obtained incidental to its operation must be used to further the organization's purpose. Sec. 13 of the RCC also states that the purposes of which must be indicated in the AOI. As a rule, non-stock, non-profit corporations, are not empowered to venture profitable business activities, unless those activities are incidental and reasonably necessary to carry out their purpose. As a result, the purpose clause provision in a non-stock corporation's AOI will play a significant role in evaluating whether it is permitted to engage in profit-generating business activities. If the business activity is not incidental, necessary, or essential, it cannot be undertaken by a non-stock corporation. To recall, W Foundation is a Christian social development organization that not only provides humanitarian help during calamities but is also authorized to promote growth and dissemination of knowledge on Christian transformational development. As stated in the AOI, the corporation intends to conduct activities that raise awareness of poverty concerns and provide opportunities to be involved in the Foundation's mission in the Philippines and other countries. Therefore, the establishment of a BPO service may act as a streamlined unit within a business to manage client issues. Since W Foundation is a member of this international community with common goals, any assistance provided by W Foundation is essential and practically in pursuit of the organization's mission and purposes. Thus, a non-stock, non-profit organization can establish a BPO service, without amending its AOI for as long as the rendering of contact or call center services is reasonable and not primarily for profit making and is limited to its affiliates. Also, any profit derived therefrom is not distributable to its members but is used for furtherance of corporate services.
MICROFINANCE IS NEITHER A NATIONALIZED NOR A PARTLY NATIONALIZED INDUSTRY WHICH WOULD WARRANT THE APPLICATION OF THE ANTI-DUMMY LAW
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-18
JUNE 25, 2024
C Co., a Microfinance NGO, is seeking an opinion on the applicability of Commonwealth Act (C.A.) No. 108, as amended, or the Anti-Dummy Law to its present set-up. As represented, Co. Co. is a Non-Stock and Non-Profit Microfinance and Non-Government Organization (NGO) registered with the Securities and Exchange Commission (SEC) and engaged in microfinance activities. It has one (1) alien member in its nine (9)-seat Board of Trustees and four (4) aliens as members in its General Assembly. At present, no alien is sitting as its officer. Further, it does not own land in the Philippines. In reply, for the Anti-Dummy Law to apply, the corporation must be engaged in a nationalized or partly nationalized activity. A list of activities which are deemed “nationalized” or “partly nationalized” is provided under the 12th Foreign Investment Negative List (FINL). Citing SEC-OGC Opinion No. 14-05, the Commission opined that foreigners can be elected as directors in proportion to their participation or share in the capital corporation engaged in activities that are reserved to Filipinos but are prohibited from being elected as officers of a corporation, such as the President, Vice-President, Treasurer and Secretary. On the subject of Microfinance NGOs, these organizations are defined as Nonstock, nonprofit organizations duly registered with the SEC, with the primary purpose of implementing a microenterprise development strategy and providing microfinance programs, products, and services. Microfinance is neither a nationalized nor a partly nationalized industry which would warrant the application of the Anti-Dummy Law, as it is not expressly reserved by the law or by the 12th FINL as one of the activities with foreign equity restrictions. SEC highlighted that the Articles of Incorporation of C Co. involves the ownership of real property which is one of the activities reserved by law to Philippine nationals. To determine if a corporation is nationalized or partly nationalized, the corporation’s purpose clause must be examined because it confers, as well as limits, the powers which a corporation may exercise, and the character of a corporation is usually determined by the objects of its formation and the nature of its business. The primary purpose of the corporation, as stated in its AOI, is the first business to be undertaken by the corporation. Hence the primary purpose determines its classification. Outside of the primary purpose, the secondary purpose might determine a corporation's classification on the condition that the corporation is actually engaged in the business stated therein. SEC then concluded that as long as “C Co. does not own land in the Philippines,” the Anti-Dummy Law does not apply as it is a Microfinance NGO which is not a nationalized or partly nationalized activity. However, in the event that it owns land, the Anti-Dummy Law would apply to it, i.e., aliens cannot be appointed or elected as corporate officers.
RIGHT TO INSPECT CORPORATE BOOKS & RECORDS IS SUBJECT TO LIMITATIONS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-14
MAY 21, 2024
Mr. C is requesting on behalf of F Co. an opinion on the inspection of corporate books and records. Mr. K, one of the shareholders of F Co., demanded the inspection of all the corporate records and documents of the corporation. Stated in the letter, that the request made by Mr. K, was so extensive that it covers areas that are not allowed to be disclosed pursuant to relevant laws such as the Intellectual Property Code of the Philippines, as amended, and the Data Privacy Act of 2012. The needed clarification is whether the documents requested by Mr. K are covered by the right to inspection. In reply, Section 73 of the Revised Corporation Code (RCC) provides the right of a stockholder, member, director or trustee (or their duly authorized representative) to inspect and/or reproduce corporate books and records. Subject to limitations, the RCC recognizes the defense available to a director, trustee, or officer for refusing to allow a shareholder or member to exercise the right to inspect or reproduce corporate records, namely, when; the person demanding to examine has improperly used any information secured through any prior examination of the records or minutes of such corporation or for any other corporation; the one requesting to inspect was not acting in good faith or for a legitimate purpose in making his demand; or the requesting party is a competitor, director, officer, controlling shareholder or otherwise represents the interests of a competitor. Lastly, SEC Memorandum Circular No. 25, Series of 2020 provides that any stockholder who abuses his right to inspect shall be penalized under the RCC, without prejudice to the provisions of Republic Act No. 8293, otherwise known as the “Intellectual Property Code of the Philippines”, as amended, and Republic Act No. 10173, otherwise known as the “Data Privacy Act of 2012.”
STOCKHOLDERS OR MEMBERS MAY ALSO VOTE THROUGH REMOTE COMMUNICATION OR IN ABSENTIA WHEN SO AUTHORIZED IN THE BY-LAWS OR BY A MAJORITY OF THE BOARD OF DIRECTORS
VOTING BY REMOTE COMMUNICATION IS ONLY APPLICABLE FOR A PARTICULAR MEETING STATED IN THE RESOLUTION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-12
MAY 8, 2024
The issue raised is whether the Philippine Society of Mechanical Engineers Inc. (PSME) can conduct the election of its National Board of Directors via online on the sole basis of a duly passed Board Resolution authorizing voting via remote communication when its By-Laws only provide for the manual voting system. In reply, the SEC confirmed that both the conduct of the meeting and election of the Board of Directors may be done through remote communication upon the issuance of a Board Resolution authorizing the same, subject to the condition that such Resolution shall only be applicable for that meeting/election and that internal procedure, or controls are adopted for the conduct of the same. However, as emphasized in the earlier SEC-OGC Opinion No. 09-21, the SEC still highly encourages corporations to amend their By-Laws, if attendance and voting via remote communication are not yet specifically provided therein, to allow corporations to be more adaptive to technological changes, and more importantly, to ensure that the right of stockholders/members to participate in meetings and to vote on matters presented therein are recognized and protected.
AMENDING BY-LAWS IS HIGHLY ENCOURAGED, IF ATTENDANCE & VOTING VIA REMOTE COMMUNICATION ARE NOT YET SPECIFICALLY PROVIDED
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-11
APRIL 26, 2024
P Co. is seeking an opinion on the following: (1) Whether it can conduct its annual meeting via remote communication and allow voting in absentia notwithstanding the silence of its By-Laws on the matter and without having to amend its By-Laws, provided that the approval of at least majority of the Board of Directors is obtained; and (2) whether it can only conduct a membership meeting via remote communication and allow voting in absentia for the sole purpose of approving the amendment to its By-Laws to allow remote communication and voting in absentia under Section 16 of the Revised Corporation Code. In reply, when the By-Laws expressly provide or allow meeting and/or voting via remote communication or in absentia, the same can be done without limitations. On the other hand, when the By-Laws do not have a provision that allows voting through remote communication, the members may still validly vote through remote communication based on a Resolution issued by the majority of the Board of Trustees of P Co. authorizing such mode of voting. However, it should be noted that, in this case, voting through remote communication is only applicable for the meeting stated in the said Resolution, as clarified by Section 12 of SEC Memorandum Circular No. 6 Series of 2020. For the second query, Section 16 is merely a Transitory Provision and does not in any way prohibit or restrict the tackling of other agenda in meetings conducted during normal times. Corporations desiring to adopt meetings via remote communication should have already adopted internal guidelines for remote communications or should have already amended their By-Laws for remote communications. Otherwise, they must make such amendment or adoption following the existing procedure/manner in their By-Laws.
PERPETUAL TERM OF OFFICERS OF A RELIGIOUS ORGANIZATION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-10
APRIL 25, 2024
M Church of God International (M Church) is requesting an opinion on whether its Articles of Incorporation (AOI) or By-Laws may be amended to indicate a perpetual term of its key elders as officers. Specifically, M Church wishes to clarify whether or not they can amend their by-laws or their AOI, to indicate that its key elders can maintain and hold their position/office permanently during their lifetime. In reply, the policy of the Commission to not allow perpetual term is well justified by Section 24 of the Revised Corporation Code (RCC), which provides that immediately after their election, the directors of a corporation must formally organize and elect: (a) a president, who must be a director; (b) a treasurer, who must be a resident; (c) a secretary, who must be a citizen and resident of the Philippines; and (d) other officers as may be provided in the by-laws. If the corporation is vested with public interest, the board shall also elect a compliance officer. The same person may hold two (2) or more positions concurrently, except that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in this Code. In determining the qualifications of the corporate officers, reference must be made to the pertinent provisions of the law, and the corporation’s By Laws. However, while the term of trustees of non-stock corporations may vary under the By-Laws, a provision therein which provides for a lifetime or unlimited term of the board of trustees is not allowable. Indefinite period of officers and other key personnel are generally invalid because they bind the hands of future board of directors. This is precisely to avoid possible abuse of persons in power. A lifetime term of office absolutely deprives other members of the corporation of the opportunity to become officers of the corporation. The relationship existing between the corporation and its board of trustees, and the duly authorized corporate officers, is that of principal-agent, which is fiduciary in character, and essentially revocable; hence, corporate officers serve at the pleasure of the Board. Since the corporate officers are elected by the trustees, it necessarily follows that the officers cannot have a perpetual or lifetime term while the trustees serve for a limited period as this deprives the succeeding board of its power to elect new officers of the corporation.
MERE INVESTMENT IN STOCK OWNERSHIP IN A DOMESTIC CORPORATION DOES NOT FALL WITHIN THE COVERAGE OF THE TERM “DOING BUSINESS” FOR PURPOSES OF LICENSING OF FOREIGN CORPORATIONS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-09
APRIL 24, 2024
L Co. is seeking a clarification on whether its undertaking constitutes doing business in the Philippines and as such is required to obtain a license from the Commission. As represented, L. Co. is a foreign corporation registered under the laws of the British Virgin Islands. Other than its passive investment to two (2) domestic corporations where it holds 40% and 33.24%, it does not maintain office and employees in the Philippines, and no activities or products or services offered in the Philippines. However, it entered into service agreements with its investee company to provide support, maintenance, and development services performed entirely outside the Philippines. In reply, the SEC referred to the Foreign Investments Act (FIA) of 1991, as amended, and its implementing Rules and Regulations, which provides that mere investment in the form of stock ownership or subscription in a domestic corporation does not fall within the coverage of the term “doing business” for purposes of licensing of foreign corporations. The SEC further stated that there is no general rule or governing principle as to what constitutes “doing” or “transacting” business. Each case must be judged in the light of its own peculiar environmental circumstances. However, the attendant circumstances such as the place of the perfection and consummation of the contract, place of performance, income derived, and the element of continuity should be considered following the tests under the law and jurisprudence. Further, under the “Twin Characterization Test” which has since become the hallmark of what constitutes doing business in the Philippines, what is determinative of doing business is not really the number or quantity of the transactions, but more importantly, the intention of an entity to continue the body of its business in the country. The number and quantity of transactions are merely evidence of such intention citing the Substance and Continuity Tests. Under these conditions, SEC opined that L Co. is not doing business in the Philippines and is not required to secure a License from the Commission as long as, the investments are through stock ownership or subscription; the support, maintenance, and development is all performed outside of the Philippines; the service agreement is an isolated transaction; and there is no intention to continue the body of its business in the country.
THE CORPORATION CEASES TO EXIST UPON EXPIRATION OF ITS CHARTER, NEVERTHELESS IT MAY CONTINUE AS A CORPORATE BODY FOR THREE (3) YEARS FOR WINDING UP & LIQUIDATION PURPOSES
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-08
APRIL 18, 2024
M Hotel is requesting an opinion on issues related to the liquidation and winding up of its affairs, despite its charter expiring almost eight (8) years ago. In reply, the SEC clarifies that the corporation may continue as a body corporate for three (3) years from the effective date of its dissolution for the purpose of prosecuting and defending suits by or against the corporation to enable it to settle and close affairs, disposing of, conveying its property, and distributing assets. Upon the expiration of the corporate term, it ceases to exist, except insofar as its liquidation or winding down of its business affairs and the settlement of the claim of its creditors is concerned. In the event of absence of a trustee or receiver is selected after the three (3) year period, the Board of Directors, as the controlling body of the corporation, assumes the role of trustees for the liquidation process. The conveyance to the trustee of the corporate assets for the purpose of liquidation must be made within three (3) years from the effective date of dissolution.
AMENDMENT OF PRIMARY PURPOSE TO INCLUDE ACTIVITIES THAT ARE SEPARATE & DISTINCT FROM ITS MAIN BUSINESS ACTIVITY IS NOT ALLOWED WITHOUT THE REQUISITE AMENDMENT
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-05
APRIL 2, 2024
LGEPH, Inc. is seeking an opinion on whether LGEPH and its subsidiaries can engage in BPO operations and administrative activities, despite being wholesalers, distributors, and retailers. Also, whether LGEPH can amend its primary purpose to include these activities to collaborate with other LGE subsidiaries. In reply, the Commission referred to Section 35 of the Revised Corporation Code of the Philippines (RCCP) which states that a corporation's powers are limited to what is explicitly stated in its charter or statutes. Express powers are those listed in the Revised Corporation Code of the Philippines and the corporation's Articles of Incorporation (AOI). Implied powers are necessary to fulfill the corporation's purposes, while incidental powers are those necessary for its existence. However, implied powers must be reasonably necessary for carrying out express powers. If a business activity is not expressly or impliedly allowed in the charter, the corporation cannot engage in it. Given this, LGEPH may not engage in BPO operations as the same is neither part of its express nor its implied powers. Nonetheless, amending the Articles of Incorporation to add new activities is allowed, but changing the primary purpose to include activities unrelated to the main business is prohibited. The primary purpose must be singular, while secondary purposes can be multiple. Any purposes not related to the primary one should be categorized as secondary. Hence, if LGEPH intends to add BPO operations to its business activities, LGEPH should amend its Secondary Purposes to include BPO operations and/or administrative activities of a BPO company, so it could legally engage in such activity pursuant to its certificate of registration with the Commission.
SRC REGISTRATION REQUIREMENT IS NOT NECESSARY IN THE ABSENCE OF AN INVESTMENT OF MONEY OF TIMESHARE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-04
MARCH 26, 2024
M Ownership Resorts, Inc (MORI) is requesting an opinion on whether the requirement of registration of securities under the Securities Regulation Code (SRC) is applicable to the distribution of the MVCD-EP Documents to the MVC Timeshare owners who are Philippine residents. In reply, the Commission referred to Section 3.1.20 of the IRR of the SRC, which outlines securities as encompassing investment contracts, certificates of interest or participation in profit-sharing agreements, certificates of deposit for future subscriptions, and proprietary or nonproprietary membership certificates in corporations. In addition, securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. SRC registration is not needed to distribute MVCD-EP documents to existing MVC Timeshare owners in the Philippines, as they do not invest monetarily. Without such investment, it does not qualify as an investment contract per the Commission's view. Furthermore, the MVCD-EP is not publicly sold or offered. It is a complimentary upgrade exclusively for existing MVC Timeshare owners. Consequently, the mandate for registering securities under the SRC does not apply.
TO AVAIL OF THE EXEMPTION ON THE BASIS OF RECIPROCITY, ONE MUST PROVIDE COMPETENT EVIDENCE THAT SUCH SECURITIES ARE EXEMPT FROM REGISTRATION WITH THE FOREIGN COUNTRY
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-03
MARCH 26, 2024
Hongkong and Shanghai Banking Corporation (HSBC) Philippines is seeking an opinion on exempt securities under Section 9.1(B) of the Securities Regulation Code (SRC), specifically on whether a determination that Philippine government-issued or guaranteed bonds are traded in the main exchange/s of another country already meets the reciprocity principle under the SRC. As represented, there are two (2) requirements for foreign bonds to be accessed even by non-qualified buyers without prior registration, diplomatic relations and based on reciprocity. In reply, the SEC answered this negatively. As clarified, if a party seeks to avail of the exemption based on reciprocity, in addition to the proof that there are Philippine government-issued or guaranteed bonds traded in the main exchange/s of another country, that party should also provide competent evidence, such as laws, statutes, rules and regulations, that such securities are exempt from registration with the foreign country. Further, the party invoking it must present a copy and comply with Sections 24 and 25 of Rule 132 of the Revised Rules of Evidence (RRE) to provide such competent evidence of said exemption, citing the case of Board of Medicine et. al. v. Yasuyuki Ota. Further, the SEC outlines the process of establishing reciprocity which includes: (1) Official Publication or Certified True Copy; (2) Apostille Convention; and (3) Translation into English or Filipino.
40% FOREIGN EQUITY LIMITATION DOES NOT APPLY TO SHORT-TERM HIGH-LEVEL SKILLS DEVELOPMENT THAT DO NOT FORM PART OF THE FORMAL EDUCATION SYSTEM
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 24-01
JANUARY 2, 2024
A Japanese Foreign Corporation (JFC) is requesting an opinion on whether Executive Order (E.O.) No. 175 (12th Foreign Investment Negative List-FINL) applies to its proposed educational institution offering non-degree certification courses. Specifically, JFC wants to know if it qualifies under the category of "short-term high-level skills development" in the FINL, allowing 99% ownership. Referring to a Technical Education and Skills Development Authority (TESDA) Memorandum, if a corporation wishes to engage in the business of providing technical vocational education or training programs, it follows that being an educational institution, it must comply with the 60%-40% Filipino-Foreign equity requirement, subject to limitation and exceptions prescribed by law. However, with the recent passage of the 12th FINL, the determination of whether the TESDA Memorandum is still consistent with the definition of “short-term high-level skills development that do not form part of the formal education system” under the 12th FINL rests with TESDA and not with the SEC. As a matter of policy, the SEC shall refrain from rendering opinion on queries that involve interpretation of administrative rules and issuances of other government agencies. Thus, if the proposed corporation falls within the ambit of the exception stated in the 12th FINL, then, “the ownership, management, and operations of the proposed corporation can be undertaken or 99% owned by JFC since in this case, no nationality restriction would apply. Otherwise, JFC cannot.
CORPORATION THAT WAS INCORPORATED PRIOR TO THE EFFECTIVITY OF RCC & WHICH CONTINUE TO EXIST, SHALL HAVE PERPETUAL EXISTENCE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-17
DECEMBER 31, 2023
A Co. is seeking an opinion on whether its corporate term for corporations incorporated under the Old Corporation Law is already automatically extended to perpetuity upon the passage of the Revised Corporation Code (RCC), and whether an amendment of the Articles of Incorporation (AOI) is optional. In reply, the Commission referred to Section 2 of SEC Memorandum Circular (MC) No. 22, Series of 2020, which provides that the corporate term of a corporation with a Certificate of Incorporation issued prior to the effectivity of the RCC and which continues to exist, shall be deemed perpetual upon the effectivity of the RCC, without any action on the part of the corporation. The corporation, subject to the payment of filing fees, may amend Article Four (4) to reflect its perpetual corporate term in its Articles of Incorporation (AOI), by a vote of the majority of its Board of Directors or Trustees and by a vote of its stockholders representing a majority of its outstanding capital stock including the non-voting shares, or a majority of the members, in case of a non-stock corporation. Consequently, the corporate term is deemed perpetual by virtue of the passage of RCC even if no amendment of the AOI is made. However, it may opt to amend its AOI to reflect its perpetual corporate term in accordance with Section 2 of MC No. 22, Series of 2020.
PARTLY NATIONALIZED CORPORATION CAN NOT ELECT A FOREIGN INVESTOR AS CHAIRMAN OF THE BOARD
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-16
NOVEMBER 24, 2023
M Co. is seeking an opinion on whether C Shipping, Inc. can permit a foreign investor to be elected as its Chairman of the Board. Also, it is seeking clarification on the extent of participation allowed for a foreign investor serving as a Board member, specifically in the exercise of and protection of its interests in the Company. In reply, the Commission referred to the Commonwealth Act No. 108, or the “Anti-Dummy Law.” C Shipping, Inc., as a private recruitment and manning agency, shall comply with the foreign equity restrictions under the Constitution and the 12th Foreign Investment Negative List (12th FINL). These provide that the company adheres to a 25% foreign equity restriction in its shareholdings, limiting foreign investor participation on the Board of Directors. Consequently, the Company cannot appoint any foreign individual to intervene in its management, operation, administration, or control. In activities partly nationalized, foreign nationals may sit on the board in proportion to their allowable membership citing SEC Opinion No. 07-07. In the same vein, an alien national may assume the post of the Chairman of the Board whose act shall be limited to that of a Presiding Officer during board meetings. On the extent of participation allowed for a foreign investor serving as a Board Member, the authority to manage a corporation is typically vested in the Board. Board members, whether foreign or not, are allowed to exercise corporate powers granted under the Revised Corporation Code (RCC) through their membership.
FOREIGN CORPORATION LICENSED TO DO BUSINESS IN THE PHILIPPINES MAY MERGE WITH A DOMESTIC CORPORATION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-15
OCTOBER 19, 2023
M Global Shared Services, Inc. (“M Global”) is seeking an opinion on whether its planned merger with M Tribe Commercial BM Ltd. (“M Tribe”), a foreign company based in Bermuda, is allowed under Philippine Law. In reply, the Commission referred to Section 104B of the Bermuda Companies Act which allows the merger of a company registered under the laws of Bermuda with a Corporation registered in a foreign jurisdiction with the latter entity as the surviving company. Citing Section 75 of the Revised Corporation Code (RCC), two (2) or more corporations may merge into a single corporation which shall be one of the constituent corporations. Additionally, Section 149 of the RCC provides that foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation if permitted under Philippine laws and by incorporation laws. Provided, however, that if the absorbed corporation is a foreign corporation doing business in the Philippines, the latter shall at the same time file a Petition for Withdrawal of its License. In relation thereto, Section 153 of the RCC provides the requirements for the Petition for Withdrawal of the License of foreign corporations, as follows: (1) all claims that have accrued in the Philippines which have been paid, compromised, or settled; (2) all taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions, have been paid, and (3) the Petition for Withdrawal of License has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines.
THE IMPOSITION OF THE IAET, AS REPEALED, IS SEPARATE & DISTINCT FROM THE PROHIBITION TO RETAIN PROFITS UNDER RCCP
THERE MUST BE A CLEAR SHOWING THAT THE INTENT IN ENACTING THE NEW LAW WAS TO ABROGATE THE OLD ONE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-14
OCTOBER 2, 2023
R. Co. is requesting an opinion on the following: (1) whether the repeal of Section 29 of the National Internal Revenue Code (NIRC) has an effect on SEC Memorandum Circular (MC) No. 11, Series of 2008 or the guidelines for the determination of retained earnings available for dividend declaration; and (2) whether the SEC still imposes fines and other penalties on corporations retaining surplus profits in excess of 100% of their paid in capital stock. In reply, the Commission cited the case of Antonio Mecano vs. Commission on Audit, which the court laid down the rule on implied repeal and provides that where a statute of a later date clearly reveals an intention on the part of the legislature to abrogate a prior act on the subject, that intention must be given effect. Otherwise, at least, as a rule, the later act is to be construed as a continuation of, and not a substitute for, the first act and will continue so far as the two acts are the same from the time of the first enactment. In this case, the imposition of Improperly Accumulated Earnings Tax (IAET), which was deleted under the “Corporate Recovery and Tax Incentives for Enterprises Act" or "CREATE Law" is distinct and separate from the prohibition to retain profits under Section 42 of the Revised Corporation Code of the Philippines (RCCP). Therefore, the repeal of Section 29 of the NIRC has no effect on the prohibition under SEC MC No. 22 of 2008 because the latter is not based on the NIRC. As to the 2nd query, considering Section 42 of the RCCP and by, extension, SEC MC No. 11 of 2008 are not yet repealed, the SEC is in the affirmative and may still impose penalties for violation of the foregoing subject to due notice and hearing as provided in Section 158 of the RCCP.
LENDING ACTIVITY SHOULD SECURE A SECONDARY LICENSE TO OPERATE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-08
MAY 9, 2023
G Co. is requesting an opinion on whether the intended business activity using the online platform called “Earned Wage Access (EWA)” constitutes a lending activity that requires obtaining a Certificate of Authority to Operate as a Lending Company. In reply, the Commission referred to Article 1933 of the Civil Code of the Philippines and the Supreme Court case of Santiago vs. Spouses, G.R. No. 228356, dated March 9, 2020, which provides that by the contract of loan, one of the parties delivers to another money upon the condition that the same amount of the same kind and quality shall be paid. The elements of a loan are: (1) one of the parties (creditor) delivers money or another consumable thing to another; (2) a person who receives the money or consumable thing (debtor) acquires ownership thereof; and (3) the debtor is bound to pay to the creditor an equal amount of the same kind and quality. Similarly, Section 7 of Republic Act (RA) No. 9474 or the Lending Company Regulation Act of 2007 (LCRA) recognizes that a lending company, as a creditor, may grant loans in such amounts and reasonable interest rates and charges as may be agreed upon between the lending company and the debtor. Consequently, the elements of business activity fall within the definition of a loan under the Civil Code of the Philippines. Moreover, the financial service limited only to those employees registered does not exempt or remove the activity from the lending or granting loans. Hence, usage of EWA requires a secondary license from the Commission.
OFFERING OF MEDICAL VALUE CARDS TO HOSPITAL DOES NOT REQUIRE A SECONDARY LICENSE
MEDICAL VALUE CARDS DO NOT FALL UNDER SECURITIES UNDER THE SECURITIES REGULATION CODE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-07
MAY 9, 2023
Dr. V is requesting an opinion on whether the hospital’s marketing strategy of offering medical value cards would require a secondary license from the Commission. In reply, the Commission referred to Section 3.1 of the Securities Regulation Code (SRC) which provides that securities are shares, participation, or interest in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character which includes investment contracts, certificates of interest or participation in a profit-sharing agreement, certificate of deposit for a future subscription. Citing the Supreme Court case of Roberto Yupangco and Regina De Ocampo vs. OJ Development and Trading Corporation, et. al., G.R. No. 242074, November 10, 2021, the "Howey Test" is employed to determine whether an agreement is an investment contract. However, one of the key elements of an investment contract is the expectation of profits which is absent under the disclosed features of the card as the same would only give a lifetime discount to the cardholders in board and lodging, laboratories, medical procedures, and dental services. Moreover, the offering of medical value cards does not fall under the other types of securities, hence, it does not require a secondary license from the Commission.
LONE LIVING STOCKHOLDER & DIRECTOR MAY LAWFULLY ACT AS ITS TRUSTEE-IN-LIQUIDATION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-06
MARCH 27, 2023
Y Co. is requesting an opinion on the following: (1) may its lone living stockholder and director lawfully act as its trustee-in-liquidation to undertake the company's liquidation process; and (2) if the said director can lawfully act as its trustee-in-liquidation, can he execute a Special Power of Attorney (SPA) delegating his authority to chosen representatives of the heirs of the deceased directors and stockholders of Y Co. In reply, the Commission referred to Section 139 of the Revised Corporation Code of the Philippines (RCCP) which states that a corporation whose corporate existence expires, may continue as a body corporate for a limited period of three (3) years from the effective date of its dissolution, but only for the following purposes: (a) prosecuting and defending suits by or against it and enabling it to settle and close its affairs; (b) disposing of and conveying its property; and (c) distributing its assets. After the lapse of three (3) years, the corporation loses its limited corporate personality. Citing the previous legal opinion rendered in SEC-OGC Opinion No. 10-06, its lone living stockholder and director may lawfully act as its trustee-in-liquidation to undertake the company's liquidation process. However, as to the 2nd query, the Commission refrains from rendering an opinion that is outside of its authority to provide since its jurisdiction does not extend to corporate liquidation.
PUBLIC SERVICE ACT, AS AMENDED, NOW ALLOWS FREIGHT FORWARDING LIBERALIZED PERCENTAGE OF FOREIGN OWNERSHIP
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 23-03
FEBRUARY 23, 2023
X Co. is requesting an opinion regarding the implications of the Republic Act (RA) No. 11659 which amended Commonwealth Act No. 146 or the Public Service Act, as amended, on a freight forwarding/logistics company engaged in domestic operations. In reply, before R.A. No. 11659, a freight forwarder is an operator of a public utility which the Constitution requires that at least 60% of the shareholdings must be owned by citizens of the Philippines. With the passage of R.A. No. 11659, the definition of public utility is now limited to the six (6) public services which are operated, managed, or controlled for public use, namely: (1) distribution of electricity; (2) transmission of electricity; (3) petroleum and petroleum products pipeline transmission systems; (4) water pipeline distribution systems and wastewater pipeline systems; (5) seaports; and (6) public utility vehicles (PUVs). Thus, a freight forwarding company is not specifically a public utility, but may be considered as a PUV, if its activities include carrying and/or transporting domestic cargoes from the place of receipt to the place of destination for a fee, to the public. In this case, the 40% foreign equity restriction over public utilities shall apply. If the freight forwarding company includes in its operation yellow-plated trucks-for-hire, then the 40% foreign equity restriction for public utilities applies as well. As long as the corporation is not a public utility, both in paper and in actual operations, X Co. will be allowed to have 100% foreign ownership. It is worth noting, however, that the Implementing Rules and Regulations (IRR) of R.A. No. 11659 is yet to be issued.
PREFERRED SHARES CANNOT BE CONVERTED INTO COMMON SHARES IN THE ABSENCE OF EXPRESS PROVISION IN THE ARTICLES OF INCORPORATION
CORPORATION MAY RECLASSIFY ITS SHARES PROVIDED THAT THEY HAVE CONVERTIBILITY FEATURE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-17
NOVEMBER 23, 2022
P Co. is requesting an opinion on the following: (1) whether foreign-held common shares can be reclassified into redeemable shares; (2) whether foreign-held preferred shares can be redeemed in cash regardless of the existence of unrestricted retained earnings; (3) after the redemption, whether preferred shares can be reclassified into common shares. In reply, the Commission referred to Section 6 of the Republic Act (RA) No. 11232 or the Revised Corporation Code of the Philippines (RCCP), which states that stock corporations are authorized to divide shares into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges, or restrictions as may be stated in the AOI. The conversion of shares can only be effected if the shares have a convertibility feature expressly provided for in the AOI. Therefore, a corporation may reclassify its shares through an amendment of the AOI, provided that the shares have a convertibility feature expressly provided in the AOI and are subject to approval by the Commission. This authority of a corporation to reclassify its shares includes the creation of redeemable shares subject to compliance with the requirements under the RCCP and the 1982 SEC Rules Governing Redeemable and Treasury Shares. On redemption of shares, Section 40 of the RCCP is instructive on the matter. Accordingly, P Co. may redeem its redeemable shares, regardless of the existence of unrestricted retained earnings, provided that it has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock. Lastly, on the effect of redemption, to enable P Co. to reissue the same, an amendment to the AOI must be made specifically to provide that after redemption, the redeemed shares shall be reissued as common shares, subject to other requirements imposed by the Commission.
CONDOMINIUM CORPORATION UNIT OWNERS’ REPRESENTATIVE MAY BE ELECTED AS TRUSTEE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-15
OCTOBER 19, 2022
A Co., a non-stock non-profit condominium corporation, is requesting clarifications regarding the election of representatives of corporate unit owners as trustees and officers. Specifically, it is requesting confirmation whether (1) the juridical/corporate unit owners and/or members are allowed to be elected in the Board of Trustees; and (2) a juridical or corporate unit owner and/or members’ representative, as Trustee, be elected as a corporate officer. In reply, generally, directors or trustees must either be elected from among the shareholders of a stock corporation or from the general membership of the corporation in case of a non-stock corporation. An exception to this rule is when the stockholder/member is a corporate unit-owner/member of a condominium corporation. Here, the Amended By-Laws of A Co. authorizes the appointment of a representative to be elected as a director or trustee. Thus, while a corporate unit owner cannot itself be elected as a trustee of the condominium corporation because it is not a natural person, and cannot attend board meetings, its representative duly designated and recognized may do so. As to the 2nd query, Section 24 of the Revised Corporation Code (RCC) provides the minimum qualifications of corporate officers. The By-Laws may, however, include other qualifications/disqualifications of an officer. Based on the RCC, aside from the President, other corporate officers, such as the Secretary and Treasurer, of the corporation need not be directors or trustees, absent any qualification in the By-Laws that states otherwise. Accordingly, a representative of a corporate unit owner who was elected as a trustee of the condominium corporation may become the President thereof.
NON-STOCK, NON-PROFIT CORPORATION CANNOT BE CONVERTED TO STOCK CORPORATION WITHOUT LIQUIDATING ITS ASSETS
AMENDMENT OF ARTICLES OF INCORPORATION OF A NON-STOCK NON-PROFIT IS NOT SUFFICIENT TO CONVERT IT TO A STOCK CORPORATION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-14
OCTOBER 7, 2022
P Co. is requesting an opinion on the following: (1) whether a non-stock, non-profit corporation may be converted into a stock corporation without liquidating its assets; (2) whether a non-stock, non-profit corporation may be converted into a stock corporation after it liquidates its assets; and (3) whether an undertaking in the Corporate By-laws indicating that the corporation is accountable for the obligations acquired while it was still a non-stock corporation sufficient if the corporation does not liquidate its assets. In reply, the Commission referred to Section 86 of the Revised Corporation Code of the Philippines (RCCP), which provides that a nonstock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers. Relative to the 1st and 3rd query, a non-stock corporation may not be “converted” into a stock corporation without liquidating its assets nor is an undertaking in the Corporate By-laws indicating that the corporation is accountable for the obligations acquired while it was still a non-stock corporation sufficient. In the previous opinion citing Section 87 of the Corporation Code, it was clarified that a non-stock corporation cannot be converted into a stock corporation by mere amendment of the articles of incorporation. As to the 2nd query, the former members of the non-stock educational corporation may incorporate and organize the educational institution as a stock corporation after liquidating its assets in accordance with the provisions of the RCCP.
APIC FALLS WITHIN THE PURVIEW OF THE TRUST FUND DOCTRINE
REVERSE STOCK SPLIT AMPLIFIED
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-13
SEPTEMBER 30, 2022
C. Co. is requesting an opinion on the proposed actions in returning its capital to its parent company registered in the British Virgin Islands. As represented, C Co. suffered continued losses from 1999 to 2008. To partially wipe out the existing deficit, it was agreed that the advances of the parent company be converted into Additional Paid-in Capital (APIC) as part of the equity restructuring. C Co. intends to return the same provided it can do so legally and without violating the Trust Fund Doctrine. In particular, C. Co. seeks legal opinion on the following: (1) whether the nullification of APIC and its subsequent conversion into subscribed capital will violate the Trust Fund Doctrine; (2) under what circumstances/conditions APIC may be applied to an increase in par value of C. Co. Philippines' shares without violating the Trust Fund Doctrine; (3) whether it is permitted to execute a reverse stock split to cover the deficit in the amount of subscribed capital following the increase in par value; and (4) whether the increase in Authorized Capital Stock as a result of the reverse stock split would be considered "original issuance” of stocks, thus, subject to documentary stamp taxes. In reply, when a corporate “Trust Fund” will be used for purposes other than to pay for the stockholder's additional subscription to the capital stock, it will effectively result in the unauthorized distribution of the corporate Trust Fund, thereby violating the Trust Fund Doctrine. Citing the Supreme Court decisions in Enano-Bote vs. Alvarez, G.R. No. 223572, November 10, 2020, Philippine Trust Company vs. Rivera, G.R. No. 19761, January 29, 1923, and NTC vs. CA, G.R. No. 127937, July 28, 1999, subsequently infused APIC, as a premium, forms part of the capital of a corporation and, therefore, falls within the purview of the Trust Fund Doctrine. In the NTC case, it is clear that "until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle." The corporate creditors, therefore, should have the first claim on the trust fund of the corporation, and the stockholders have no rights to it until all the creditors are satisfied. Thus, a corporation may not nullify its APIC and subsequently convert it into subscribed capital, as the same violates the Trust Fund Doctrine. On a stock split, in the absence of some features not associated with the typical stock split, the receipt of shares as a result of a split does not result in taxable income to either the stockholder or the corporation. As described in the Philippine Accounting Standards (PAS) 33, a share split refers to issuing ordinary shares to existing shareholders for no additional consideration. Therefore, the number of ordinary shares outstanding is increased without an increase in resources. A reverse split or consolidation of ordinary shares, on the other hand, reduces the number of ordinary shares without a corresponding reduction in resources. As such, a reverse stock split will not create an APIC because the amount of the subscribed and paid-up capital will remain the same, considering that this will merely be a decrease in the number of shares but with a proportionate increase in par value. Hence, undergoing a reverse stock split will not result in the decrease of deficit. On the last query, since there will be no changes in the balance of the Share Capital/Capital Stock after a reverse stock split, an increase or decrease in the capital would not be possible as it simply increases the par value and decreases the number of shares proportionately. Hence, a reverse stock split will not result in an increase in ACS.
CAPITAL SUBSCRIBED CAN BE MORE THAN THE PAR VALUE OF THE SHARES
PAID-UP CAPITAL IS THE PORTION OF THE AUTHORIZED CAPITAL STOCK (ACS) ACTUALLY SUBSCRIBED & PAID
PAID-UP CAPITAL CAN EXCEED THE ACS FIXED IN AOI
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-12
SEPTEMBER 27, 2022
F Co. is requesting an opinion on whether it is allowed to issue shares of stock at a premium to Mr. S without increasing the Authorized Capital Stock (ACS), and whether it is permitted to have paid-up capital more than its ACS. As represented, Mr. S, an Indonesian national who is a holder of a Special Investor’s Resident Visa (SIRV) issued by the Board of Investments (BOI), invested Php 3,750,000 in F Co., by subscribing 5,000 common shares, with a par value of Php 100 per share, for a subscription price of Php 750 for each share. However, upon BOI’s validation of investment of Mr. S in F Co. relative to his application for an indefinite SIRV, the BOI found it irregular for F Co. to have a paid-up capital of Php 13,250,000, which is more than its ACS of Php 10,000,000. In rendering an opinion, a company may be allowed to issue shares of stock at a premium as there is no law, rule, or regulation that prohibits the same. Citing the Supreme Court case of Salido vs. Aramaywan Metals Development Corporation, G.R. No. 233857, 18 March 2021, capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. On whether F Co. may be allowed to have paid-up capital that is more than its ACS, the SEC has confirmed that this is possible as the term “paid-up capital” covers any amount paid for the issuance of shares, including the excess or premium paid over the par value of such shares.
NO NEED TO AMEND THE LICENSE TO TRANSACT BUSINESS IF THE ACTIVITY IS INCIDENTAL
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-11
AUGUST 19, 2022
M Co. is requesting confirmation on whether its Manila Branch may lend money to companies within M Co. Group without amending the Manila Branch’s SEC License to Transact Business. In reply, corporations are artificial entities granted legal personalities upon their creation by their incorporators in accordance with the law. As such, corporate acts that are outside those express definitions under the law or Articles of Incorporation or those committed outside the object for which a corporation is created are ultra vires, except when acts are necessary and incidental to carry out the corporation’s purposes conferred by the corporation’s articles of incorporation. However, the following requisites must concur: (a) the act is lawful and not otherwise prohibited; (b) the act is done to serve corporate ends; and (c) the act is reasonably tributary to the promotion of those ends, in a substantial and not a remote and fanciful sense. Based on the foregoing, the Manila Branch may lend a part of its corporate funds to members of the M Co. Group without amending its License since the said act is incidental to the express powers granted to the Manila Branch under its License to Transact Business. However, the lending activity to be undertaken by the Manila Branch should be strictly limited to the members of the M Co. Group and should not be pursued as a regular and separate business activity.
INCOME-GENERATING REAL ESTATE, WITHIN THE PURLANCE OF REAL ESTATE INVESTMENT TRUST (REIT), MEANS REAL PROPERTY WHICH IS HELD TO GENERATE A REGULAR STREAM OF INCOME
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-10
AUGUST 15, 2022
P Co. is requesting an opinion on various matters involving a Real Estate Investment Trust (REIT) company. Currently, the types of income that P Co. generates from the operation of the memorial parks are (a) the sale of the burial lots; (b) the sale of double interment right; (c) collection of periodic maintenance assessment charges; and (d) rentals from the use of the memorial park facilities. P Co. is requesting confirmation on the following: (1) that the term “income-generating real estate” excludes income from (a) to (d) enumerated above; and (2) P Co. can lease or convey to a REIT company its real properties used in the operation of its memorial parks business. In reply, the sale of the burial lots and double interment rights, which are the primary sources of income for the memorial parks, are dispositions of real property assets, thus, there would be no generation of recurring income for the REIT selling such real property assets. These properties may not be considered part of the income-generating real estate assets of a REIT. Meanwhile, the collection of periodic maintenance assessment charges and rentals from the use of the memorial park facilities may fall under the definition of income-generating real estate as these may generate a regular stream of income. As to the 2nd query, P Co. may lease or convey its real property assets used in the operation of its memorial parks business to REIT company, provided that REIT company must ensure that at least 75% of its deposited property must be invested in, or consists of, income-generating real estate.
A FOREIGNER MAY BE ELECTED AS A DIRECTOR & PRESIDENT OF A HOLDING & ENERGY COMPANY
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-09
JUNE 28, 2022
P Co. is requesting an opinion on the following: (1) whether a foreigner may be elected as a Director and President of N Co., a new holding company owned and controlled by Philippine nationals; and (2) whether N Co. may elect a foreigner as a Director of each of its subsidiaries, which shall engage in power generation from renewable energy sources, a partially nationalized activity, and shall own land. In reply, Section 46 of the Revised Corporation Code provides no citizenship requirement for directors. However, this is subject to the allowable participation of foreigners in the Board of Directors and/or management of a nationalized corporation based on the proportionate share of its capital. Given that the N Co.’s paid-in capital will not be less than US$ 200,000, a foreigner may be elected as a Director and President of the holding company since the nationality restriction on domestic market enterprises does not apply. On the 2nd query, foreigners may be elected as directors in the subsidiary companies engaged in a partly nationalized activity, provided that the number of foreign directors shall not exceed the allowable proportion of foreign participation in the corporation’s capital (e.g., 40%). The basis for determining the representation of foreign stockholders in the Board of Directors of corporations engaged in partly nationalized activities would be the actual share of foreign stockholders in the capital of the corporation, whose share should not exceed the foreign equity limitation.
THE PURPOSE CLAUSE MAY BE STRETCHED TO COVER NEW & UNEXPECTED SITUATIONS IMPLIEDLY BUT IN THOSE CASES, IT CAN NOT, A PROPER AMENDMENT THEREOF WOULD BE NECESSARY
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-08
MAY 30, 2022
K Machinery is seeking an opinion on whether it may engage in the proposed after-sales support services without the need to amend its License to Transact Business. In rendering the opinion, SEC cited the provisions of Section 148 of the Revised Corporation Code, which provides that a foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name or desires to pursue other or additional purposes in the Philippines. However, in the case of K Machinery, SEC has opined that K Machinery’s License covers the proposed after-sales support services as the selling of components and spare parts is part of the services offered to the customers after a sale of machinery is made. After-sale support services are necessary to and implied from the nature of the activity that K Machinery is engaged in (i.e., wholesale of hydraulic excavator, crane and its attachments, and parts).
CORPORATIONS MAY ELECT NON-RESIDENTS OF THE PHILIPPINES ON THE BOARD OF DIRECTORS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-07
MAY 26, 2022
D Co. is seeking an opinion on whether corporations may now be allowed to elect non-resident directors consistent with the provisions of the Revised Corporation Code even if their bylaws still reflect the old and repealed provisions under the Corporation Code. In rendering the opinion, the Commission cited the provisions of Section 23 of the Old Corporation Code, which provides that a majority of the directors or trustees of all corporations must be residents of the Philippines. On the other hand, Section 22 of the Revised Corporation Code (RCC) provides for the qualifications and terms of the board of directors or trustees of a corporation, which does not include the residency requirement. However, Section 46 (f) of the RCC allows private corporations to provide in their bylaws the directors' qualifications, such as residency requirements. Thus, if a corporation provides in its bylaws the requirement that the majority of its directors must be residents of the Philippines, then it may do so. Moreover, Amended Bylaws shall only be effective upon the issuance by the Commission of a certification that the same is in accordance with the RCC and other relevant laws.
A DISSOLVED CORPORATION SHALL REMAIN AS A BODY CORPORATE FOR 3 YEARS FOR THE PURPOSE OF LIQUIDATION & DISPOSITION
RCC’s 3-YEAR PERIOD PROVISION SHOULD NOT BE CONSTRUED TO PREVENT A CORPORATION FROM LIQUIDATION, WHICH WOULD COMPLETE THE PROCESS OF DISSOLVING A CORPORATION
SEC HAS NO JURISDICTION OVER THE LIQUIDATION OF A CORPORATION; HENCE ITS JURISDICTION SHALL PERTAIN TO RTC
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-06
MAY 10, 2022
N Co. is seeking an opinion on various issues on the liquidation of its lone asset after the Commission revoked its corporate charter due to its failure to comply with reportorial requirements. As represented, N Co. does not have any creditors, its lone asset is a parcel of land, and only six (6) of its nine (9) directors are alive. In reply, the SEC cited Section 139 of the Revised Corporation Code (RCC), which gives a dissolved corporation three (3) years after the effective date of dissolution to continue as a body corporate for liquidation, disposition, and distribution of its assets. In the previous opinion citing Section 122 of the old Corporation Code, it was clarified that the 3-year period in the provision should not be construed to prevent a corporation from pursuing activities such as liquidation and disposition, which would complete the process of dissolving the corporation. Hence, N Co. may still liquidate and dispose of its lone asset despite the lapse of more than three (3) years since the revocation of its corporate charter. However, in this case, the SEC is constrained in answering other queries regarding liquidation. The SEC emphasized that they may have jurisdiction to order a corporation’s dissolution, but it does not extend to the liquidation of a corporation; thus, jurisdiction over the liquidation now pertains to the appropriate Regional Trial Courts.
A CORPORATION MAY ASSUME A TRADE NAME OTHER THAN ITS LEGAL/CORPORATE NAME
TRADE NAME MAY BE USED INDEPENDENTLY WITHOUT THE CORPORATE NAME
CORPORATE NAME & TRADE NAME MAY BE USED INTERCHANGEABLY UNLESS MANDATED & RESTRICTED BY REGULATORY AGENCIES
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 22-04
MARCH 29, 2022
RS Co., a religious organization, is seeking confirmation whether the trade name is different from and did not amend the registered corporate name of the religious society. In reply, Item No. 4 of SEC Memorandum Circular (MC) No. 13, Series of 2019 emphasized that a business or trade name that is different from the corporate or partnership name shall be indicated in the Articles of the Corporation/Partnership and a company may have more than one trade name. Thus, it was opined in SEC-OGC Opinion No. 11-39 that a corporation may still use the corporate name in all its regular business transactions as long as it remains the corporation's official name. Likewise, trade names can be used independently without the registered corporation name; hence, the trade name and corporation name may be used interchangeably in the conduct of the business unless a regulatory agency mandated, limited, and restricted the use of the trade name or corporate name.
A CORPORATION HAS BOTH EXPRESS & IMPLIED OR INCIDENTAL POWERS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-11
NOVEMBER 3, 2021
T Co., a car financing company, is seeking confirmation whether it may provide assistance to its clients in the transfer of ownership of the vehicle and/or cancellation of mortgages thereon before the Land Transportation Office (LTO) upon settlement of the latter’s loan/rental obligations even without amending its Articles of Incorporation. In rendering the opinion, the SEC opined that financing companies, pursuant to the Financing Company Act of 1998, are allowed to engage in and/or perform such other services or activities as may be granted by the Commission, or which may be incidental to its activities as a corporation. Considering that T Co.’s primary purpose mainly involves financing of vehicles, the intended service of transferring ownership of and/or the cancellation of the mortgage over the vehicles of its clients who have availed of its financial services, is incidental to its primary purpose as the same is reasonably necessary for it to comply with its obligations under its financial service contracts (i.e. ensure the proper and expeditious transfer of title of the vehicle from T Co. to its clients once the latter’s financial obligations have been fully settled.)
NO CORPORATION SHALL REDEEM, REPURCHASE, OR REACQUIRE ITS OWN SHARES, UNLESS IT HAS AN ADEQUATE AMOUNT OF UNRESTRICTED RETAINED EARNINGS TO SUPPORT THE COST OF THE SAID SHARES
REDEMPTION MAY NOT BE MADE IF CORPORATION IS INSOLVENT OR IF SUCH REDEMPTION WILL CAUSE INSOLVENCY OR INABILITY OF THE CORPORATION TO MEET ITS DEBTS AS THEY MATURE
ONCE SILENT REDEEMABLE PREFERRED SHARES ARE REDEEMED, THE SAME SHALL BE CONSIDERED RETIRED & MAY NO LONGER BE RE-ISSUED
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-10
SEPTEMBER 21, 2021
M Co. is seeking an opinion regarding the redemption of preferred shares, retirement thereof, and the subsequent decrease of the capital stock. In rendering opinion, SEC cited Section 40 of the Revised Corporation Code (RCC), which requires that the corporation should have unrestricted retained earnings to cover the shares to be purchased; accordingly, there is an exception provided in Section 5 of the same Code: Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings, provided that after such redemption, the corporation has sufficient assets to cover its debts and liabilities inclusive of capital stock. On raising of funds for the purpose of redeeming preferred shares, such decision requires the exercise of the business judgment/discretion of the management. Following the redemption is the retirement: its amended Articles of Incorporation is silent on the ‘reissuable’ nature of its redeemable preferred shares; thus, once redeemed, the same shall be considered retired and may no longer be reissued. To eliminate treasury shares, M Co. must file an Application for Decrease of Authorized Capital Stock with SEC and comply with all the requirements set forth in Section 37 of the RCC which states that no decrease of authorized capital stock shall be approved by the Commission if it is prejudicial to the rights of corporate creditors. To substantiate the decrease in authorized capital stock after retirement, Audited Interim Financial Statements (FS) can provide a reasonable basis for obtaining a high level of assurance that they are not materially misstated.
THE STOCKHOLDERS OR MEMBERS MAY ALSO VOTE THROUGH REMOTE COMMUNICATION OR IN ABSENTIA WHEN SO AUTHORIZED IN THE BYLAWS OR BY A MAJORITY OF THE BOD/BOT
A STOCKHOLDER OR MEMBER WHO PARTICIPATES, THROUGH REMOTE COMMUNICATION OR IN ABSENTIA, SHALL BE DEEMED PRESENT FOR THE PURPOSES OF A QUORUM
EVERY MEMBER OF A NON-STOCK CORPORATION HAS A RIGHT TO BE PRESENT & TO VOTE IN ALL CORPORATE MEETINGS
VOTING THROUGH REMOTE COMMUNICATION IS ONLY APPLICABLE FOR THE PARTICULAR MEETING STATED IN THE RESOLUTION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-09
JUNE 22, 2021
CC Co., a non-stock condominium corporation, is seeking confirmation on the validity of the participation, quorum, and voting in an Annual Meeting conducted via remote communication and/or in absentia. As represented, its Bylaws contain no provision that recognizes and/or allows remote communication as a valid means of conducting an Annual Members’ Meeting. Hence, the impression that the same could be invalid pursuant to the legal requirements under Section 88 of the Revised Corporation Code (RCC). In reply, SEC Memorandum Circular (MC) No. 6, Series of 2020 clarifies that the attendance and voting in meetings via remote communication is generally allowed when so provided in the Bylaws or authorized by a Board Resolution of the Board of Directors. While Section 57 of the RCC on the manner of voting and permission of Proxies states “or by majority of the Board of Directors”, and a reading of the provision as a whole suggests that the same is applicable to both stock and non-stock corporations. Hence, even in the absence of a provision in the Bylaws of CC Co. which allows the practice of voting through remote communication, the conduct of the same may still be valid by virtue of a resolution issued by a majority of the Board of Trustees. However, it should be noted that the Resolution shall only be for that purpose and for the particular meeting stated in the said Resolution.
RCC DOES NOT IMPOSE RESTRICTIONS ON THE NATIONALITY OF THE MEMBERS OF THE BOD
PARTICIPATION OF FOREIGNERS IN THE GOVERNING BODY OF A PUBLIC UTILITY IS LIMITED TO THEIR PROPORTIONATE SHARE IN CAPITAL
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-08
MAY 17, 2021
P Co., the parent of T Co., is seeking an opinion regarding the appointment of a foreign director in a corporation engaged in the operation of a public utility. As represented, T Co., after several acquisitions, will be acquiring 51% voting shares in a public utility corporation. With this, T Co. intends to nominate Mr. L, an American, as a member of the Board of Directors (BOD). In reply, the Revised Corporation Code (RCC) provides for the qualifications, disqualifications, and the manner of electing a member of the BOD. Such, however, does not mention any restriction on the nationality of the person to be elected as a member of the BOD. Although the RCC does not impose any restriction on the nationality of the members of the BOD, the same shall still be subject to the additional qualifications of a director as may be imposed in the By-Laws and the requirements under the 1987 Constitution, special laws such as the Commonwealth Act No. 108 or the Anti-Dummy Law, and/or special rules implemented by the regulatory authority of the industry. In relation, Section 11 of the 1987 Constitution and Section 2-A of the Anti-Dummy Law provides that the participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in the capital. In addition, Section 11 of the 1987 Constitution also provides that all the executive and managing officers of a public utility corporation must be citizens of the Philippines. In this regard, the Commission opined that foreigners can be elected as directors in proportion to their allowable participation or share in the capital of corporations engaged in activities that are reserved for Filipinos, but are prohibited from being elected as officers of a corporation, such as the President, Vice President, Treasurer and Secretary.
THE OWNER OF ASSETS THAT WILL BE USED FOR DISSEMINATION IS NOT ENGAGED IN ADVERTISING & MASS MEDIA ACTIVITIES
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-07
MAY 10, 2021
M Co. is seeking an opinion on whether its proposed new business of offering space in moving vehicles (Assets) for the purpose of advertising products and services constitutes M Co. and the owner of the assets as engaged in advertising and mass media activities. In reply, Republic Act No. 7394 or “The Consumer Act of the Philippines” defined advertising as the business of conceptualizing, presenting, or making available to the public, through any form of mass media, facts, data, or information about the attributes, features, quality, or availability of consumer products, services or credit; while mass media refers to any means or methods used to convey advertising messages to the public such as television, radio, magazines, cinema, billboards, posters, streamers, handbills, leaflets, mails and the like. Considering that M Co. will offer a complete package of marketing services as well as offer or lease spaces in moving vehicles or assets, M Co. is engaged in advertising and mass media activities within the purview of the Constitutional limitations. Since M Co. is a domestic corporation wholly owned by Filipino citizens, it is legally allowed to engage in advertising and mass media activities. On the other hand, by procuring ownership over the space in the Asset where the external structures will be installed, it is M Co. that sells the advertising space within the external structure to its client and not the third-party logistics company that retains ownership over the Asset(s). Thus, the owner of the Assets is not engaged in advertising and mass media activities by offering the spaces in its Assets to M Co.
THE SALE OF SERVICES IS NOT CONSIDERED RETAIL TRADE UNDER RTLA
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-06
MAY 10, 2021
W Co., a foreign corporation engaged in providing water filtration services, is seeking legal opinion on the applicability of the Retail Trade Liberalization Act of 2000 (RTLA) to its proposed investment in the Philippines with 100% foreign ownership. W Co. mainly provides water filtration services employing its own patented filtration system to offices, businesses, and households of its customers and will charge a monthly subscription or service fee in consideration of the initial and subsequent services it will provide. In addition, ownership over machinery and equipment installed in relation to the provision of services shall remain with the company, and the same shall be returned upon termination of the subscription. In reply, RTLA provides that a sale transaction shall be considered “retail” if the following elements are present: (1) the seller should be habitually engaged in selling; (2) the sale must be direct to the general public; and (3) the object of sale is limited to merchandise, commodities, or goods for consumption. Further, in a previous opinion issued by the Department of Justice, a person who renders services for hire or pay or who leases services is not engaged in the retail business because he does not sell goods to the general public. Based on the foregoing, the Commission opined that since W Co. is merely a service enterprise providing water filtration services, it is not considered engaged in retail trade under RTLA.
THE SALE OF CAPITAL STOCKS EXCLUSIVELY TO EXISTING STOCKHOLDERS PURSUANT TO AN INCREASE IN AUTHORIZED CAPITAL STOCK IS NOT REQUIRED TO BE REGISTERED WITH THE SEC PROVIDED THAT NO EXPENSE IS INCURRED IN CONNECTION TO SUCH SALE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-05
MAY 7, 2021
A stockholder of a corporation engaged in the operation of a hospital and medical center is seeking an opinion on whether the additional shares of stock that may be issued as a consequence of the increase in the authorized capital stock of the corporation, which is subject to the stockholder’s pre-emptive rights, need to be registered. In reply, the Commission elucidated that, generally, securities shall not be sold or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the Commission. However, the Securities Regulation Code (SRC) provides for exemptions accorded to selected classes of securities where the registration requirement is not made applicable. Sections 10 (e) and (i) of the SRC provide for the exemption from the registration requirement for the sale of unissued shares to stockholders exclusively and the sale from the increase in the authorized capital stock of the corporation, respectively. However, for such sale to be exempt from the registration requirement pursuant to Sections 10(e) and (i) of the SRC, the issuing corporation must not have incurred or must not incur expenses in connection to the sale of shares of stock. The corporation or any person claiming such exemption has the burden of proof of showing that it is entitled to the exemption should the SEC challenge the same. Further, it must be noted that while there is an available exemption for the Issuer, the same shall not be granted or allowed if the same is resorted to as part of a scheme to evade compliance with the registration requirements.
LOWER QUORUM FOR CONDOMINIUM CORPORATION
CONDOMINIUM CORPORATION CAN SET 30% MEMBERS IN GOOD STANDING & OWNER OF UNIT TO CONSTITUTE QUORUM
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-04
MARCH 30, 2021
T Co., a non-stock non-profit condominium corporation, is requesting a legal opinion on whether its By-Laws can provide and require a quorum for a members’ meeting the presence of members in good standing representing at least 30% of the number of units entitled to be represented and vote. Article VI, Section 5 of the By-Laws of T Co. provides that the presence of members in good standing representing at least a majority of the relevant number of units entitled to be represented and vote at the meeting shall constitute a quorum. T Co. intends to amend the quorum provision of its By-Laws to at least 30% of the relevant number of units entitled to be represented and vote at the meeting. In reply, Section 52 of the Corporation Code [now Section 51 of the Revised Corporation Code] states that any corporation, whether stock or non-stock, is authorized to provide in its By-Laws a specific number of stockholders or members necessary to constitute a quorum for the transaction of corporate business, except in those instances where the Corporation Code or applicable special law explicitly prescribes the proportion of stockholders or members necessary to resolve or carry out a particular corporate proposal. Given the wording of the proposed amendment to Section 5 of the By-Laws of T Co., the SEC opined in the affirmative.
A COMPANY CAN VALIDLY REPORT IN ITS GIS CHANGES IN NOMINEE SHAREHOLDERS PURSUANT TO A VALIDLY EXECUTED DEED OF TRUST & ASSIGNMENT
ELECTION OR APPOINTMENT OF A NEW DIRECTOR NEEDS TO BE REPORTED TO THE COMMISSION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-03
FEBRUARY 18, 2021
S Co. is seeking clarification on (1) whether a company with nominee shareholders can register in its Stock and Transfer Book and General Information Sheet (GIS) the changes in nominee shareholders pursuant to an existing Deed of Trust and Assignment without the need of an actual sale; and (2) whether there is a need to declare/report to the Commission, through the company’s GIS, the new nominee director. In reply, for the purpose of complying with the statutory minimum number of stockholders/directors, the owner may transfer one (1) qualifying share to each nominee stockholder to qualify them to become members of the Board without giving them the beneficial ownership of the shares. In such a case, the transferee should be described in the Deed of Assignment, corporate books, and certificate of stock merely as a qualifying shareholder or nominee of the transferor. As to the second query, within thirty (30) days after the election of the directors, trustees, and officers of the corporation, the Secretary or any other officer of the corporation, shall submit to the Commission, the names, nationalities, shareholdings, and residence addresses of the directors, trustees, and officers elected. Thus, the election or appointment of a new director is a circumstance of S Co’s governance structure that needs to be reported to the Commission through its GIS as it involves a material change in the Board’s composition.
CORPORATION THAT OPERATES AS COMMERCIAL RADIO & TELEVISION BROADCASTING STATION IS A MASS MEDIA ENTITY, THUS, SHOULD BE 100% FILIPINO-OWNED
OPERATIONS OF RADIO & TELEVISION BROADCASTING, THOUGH CONSIDERED PUBLIC SERVICE & MAY FALL UNDER THE DEFINITION OF PUBLIC UTILITY, IS A MASS MEDIA ENTITY
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-02
FEBRUARY 16, 2021
R Co. is seeking an opinion on whether Radio and Television Broadcasting Services is a public utility or a mass media entity. Section 11, Article XVI of the 1987 Constitution provides that the ownership and management of mass media shall be limited to citizens of the Philippines or to corporations, cooperatives, or associations wholly owned and managed by such citizens. The term “mass media” refers to any medium of communication designed to reach the masses and that tends to set the standards, ideals, and aims of the masses. It is clear that a corporation that operates as a commercial radio and television broadcasting station is a mass media entity. Although the operation and maintenance of radio and television broadcasting stations can be considered “public service,” and even assuming that the services of such company may fall under the definition of a “public utility,” the same is still considered mass media entities, for which the Constitution provides a stricter rule (i.e., must be 100% Filipino-owned). The citizenship requirement is intended to prevent the use of such facility by foreigners to influence public opinion to the detriment of the best interests of the nation.
VACANCIES IN TRUSTEE MAY BE FILLED UP BY THE REMAINING MEMBERS IF THEY CONSTITUTE A QUORUM; OTHERWISE, FILLING UP SHALL BE ADDRESSED IN A REGULAR OR SPECIAL MEETING
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 21-01
JANUARY 21, 2021
P Condominium Corporation is seeking an opinion on how it may fill-up the vacancies in its Board of Trustees because of the resignation of three (3) out of five (5) members. Also, it is seeking an opinion on whether the two (2) remaining members of the Board have the power and authority to appoint other members to replace those who have resigned. In rendering an opinion, the Commission referred to Section 28 of the Revised Corporation Code and the previous legal opinion rendered in SEC-OGC Opinion No. 13-06, which provides that the remaining members of the board may fill up the vacancy if such vacancies resulted from reasons other than the removal of the trustees or expiration of the term; and that the remaining trustees still constitute a quorum. Otherwise, the vacancies must be filled by other members at a regular or special meeting called for such purpose. In the case of P Condominium Corporation, the remaining members of the Board of Trustees cannot fill up the vacancies since the remaining members of the board do not constitute a quorum. Hence, the vacancies shall be filled-up through a regular or special meeting of the general membership of P Condominium Corporation.
FINANCE CORPORATIONS MAY ENGAGE IN CREDIT CARD ACTIVITIES AS PART OF INVESTING ACTIVITY WITHOUT THE NEED OF STOCKHOLDERS’ RATIFICATION
INVESTING OF CORPORATE FUNDS OF FINANCE COMPANY AS PART OF THE PRIMARY & SECONDARY PURPOSE UNDER THE REVISED CORPORATION CODE (RCC)
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 20-03
NOVEMBER 23, 2020
H Co. is seeking a legal opinion on whether it may engage in credit card activities as part of investing corporate funds for a similar purpose in relation to Section 41 of the Revised Corporation Code (RCC) without the need of the stockholders’ ratification. In reply, the SEC opined that where the investment by a corporation is reasonably necessary to accomplish its primary purpose, as stated in its Articles of Incorporation, the mere approval of the Board of Directors or Trustees is necessary. To shed light, Republic Act (R.A.) No. 10870, otherwise known as the “Philippine Credit Card Industry Regulation Law,” defines a credit card as any card or other credit device intended for the purpose of obtaining money, property, or services on credit. A perusal of records showed that the grant or extension of loan/credit through the issuance or use of credit cards is reasonably necessary for furtherance of the primary purpose of H Co. Thus, the ratification by the stockholders of the said act is no longer required.
PERPETUAL CORPORATE TERM UNDER RCC
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 20-02
NOVEMBER 3, 2020
S Co. is seeking an opinion on whether the corporate term in its Articles of Incorporation is deemed amended to the effect that it now has a perpetual existence pursuant to the Revised Corporation Code (RCC), without performing any positive act. In reply, Section 11 of the RCC provides that a corporation with Certificate of Incorporation issued prior to the effectivity of the RCC 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. Furthermore, Section 2(a) of SEC Memorandum Circular No. 22 Series of 2020 provides that the corporate term of a corporation with Certificate of Incorporation issued prior to the effectivity of the RCC and which continue to exist shall be deemed perpetual upon the effectivity of the RCC, without any action on the part of the corporation. Thus, the Articles of Incorporation of all corporations, which satisfies the requirements under Section 11 of the RCC and MC 22 Series of 2020, are deemed amended to the effect that their corporate term is now perpetual. A positive act on the part of corporations is only required if they intend to limit their corporate term to a certain period.
ESCROW SHARES ARE NOT ENTITLED TO STOCKHOLDERS RIGHTS UNTIL THE CONDITION TO RELEASE SHARES ARE MET
GRATUITOUS ABANDONMENT OF PAYMENT OF DEBT TO PREJUDICE CREDITORS & STOCKHOLDERS MAY CONSTITUTE ULTRA VIRES ACT
CORPORATE DEBT IS PRIORITY IN THE DISTRIBUTION OF PROCEEDS FROM LIQUIDATED ASSETS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-60
DECEMBER 20, 2019
Facts
1. A non-profit domestic corporation entered into a Development Agreement with its affiliated company, the Developer, to carry out its purpose.
2. The agreement provides that the Developer will assign its rights to purchase additional property to the corporation in exchange for 11,250 shares, which shall be issued based on the project completion; 5,000 shares will be retained until the project is fully completed and turned over.
3. However, as declared, only two (2) out of five (5) destinations were completed in 2003 resulting in the completion of the entire project to be no longer feasible.
4. The dissolution of the corporation was then considered. However, in a special Shareholder’s Meeting held in 2014 for the dissolution, the existence of a quorum was questioned by the members present, specifically, the Developer’s use of 3,615 shares to constitute a quorum and allow the Developer to vote on the issue of the corporation’s dissolution.
Issues Raised Before the SEC
1. Validity and inclusion of the shares of stock acquired through a Development Agreement which were previously under an Escrow Agreement for the purpose of determining a quorum.
2. Propriety of stockholder’s waiver of participation in the distribution of assets of a corporation undergoing liquidation.
3. Stockholder’s entitlement to properties after liquidation vis-à-vis existing claimants who were granted favorable decisions from regular courts.
SEC Legal Opinions
1. Holders of escrow shares are not entitled to rights pertaining to stockholder until the conditions set forth for the release of such shares are fully met. Thus, the Developer’s use of the subject shares and its validity for the purpose of determining a quorum depends on whether the conditions set forth in the agreement were met. Subscription and issuance of shares out of unauthorized capital stock are subject to pre-emptive rights, though such rights are not expressly provided in the Revised Corporation Code (RCC).
2. Under the Trust Fund Doctrine, subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. Thus, a corporation is not authorized to condone debts/receivables. Gratuitous abandonment of the payment of a debt, if done to the prejudice of the creditors and stockholders, may constitute an ultra-vires act.
3. Section 139 of the RCC which governs corporate liquidation provides that a corporation is empowered to convey all its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. There can be no distribution of assets among stockholders without first paying corporate debts pursuant to the Trust Fund Doctrine. When the assets of the corporation are insufficient to pay all the claims, the order in the application of assets must be: (1) creditors, if the corporation is insolvent; (2) stockholders, members, directors, or officers of the corporation who are also its creditors; and (3) stockholders or members.
NO RESIDENCY REQUIREMENT FOR INCORPORATORS, ONLY FOR TREASURER & CORPORATE SECRETARY
TRAVEL AGENCY NOT FALLING UNDER LISTS A & B OF 11TH FOREIGN INVESTMENT NEGATIVE LIST MAY APPOINT OR ELECT AN ALIEN PRESIDENT OR TREASURER
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-59
DECEMBER 13, 2019
A travel agency is seeking legal opinion on a number of queries, to wit:
a. Whether incorporators of a corporation engaged in a travel and tour business, which is not engaged in any nationalized business or activity, with 40% foreign equity and 60% Filipino equity, are required to comply with the residency requirement under the Revised Corporation Code (RCC)
Incorporators need not comply with any residency requirement; only the Treasurer and the Corporate Secretary are required to be residents of the Philippines. Thus, incorporators of a corporation need not be residents of the Philippines pursuant to Section 10 of the Revised Corporation Code (RCC).
b. Whether foreign nationals can occupy the position of President/Treasurer in the aforesaid travel and tour business
The applicable corporate nationality requirement for a travel and tour business in the Philippines must first be determined by ascertaining whether said business is included in the Eleventh Regular Foreign Investment Negative List (FINL-11), which is composed of Lists A and B. A travel and tour business is not one of the investment areas included in List A, but it may be covered in List B depending on whether it is an export or domestic enterprise, which would depend on its output being exported. It was not disclosed whether the travel and tour business would export 60% or more of its output for it to be considered as an export enterprise; or if it would export less than 60% for it to be considered a domestic corporation. Assuming that the intended travel and tour business is an export enterprise, the foreign clients can own up to 100%. On the other hand, assuming that it is a domestic enterprise, and taking into account that it intends to have a paid-up capital amounting to $200,000, it may also be 100% foreign owned. If it does not fall in Lists A and B, it is not engaged in a nationalized business; hence, it may appoint or elect an alien President or Treasurer, provided that the President shall be Director and the Treasurer shall be resident of the Philippines. However, a foreign national cannot not serve as President and Treasurer of a corporation at the same time.
c. Whether foreign nationals can occupy the position of President/Treasurer in the aforesaid travel and tour in a corporation engaged in retail trade
For corporations engaged in retail trade, allowable foreign participation is dependent on the minimum paid-up capital of the corporation. If the corporation engaged in retail trade business has a minimum paid-up capital of $2,500,000 or its peso equivalent, it would not be considered nationalized business or activity; hence, a foreign national may occupy the positions of President or Treasurer.
VOTING VIA REMOTE COMMUNICATION OR IN ABSENTIA IS NOT SELF-EXECUTORY AS IT REQUIRES SEC TO ISSUE RULES & REGULATIONS
STOCKHOLDER SHALL NOT BE DEPRIVED OF HIS INHERENT RIGHT TO VOTE WITHOUT HIS CONSENT; RIGHT MAY ONLY BE WAIVED UPON HIS INITIATIVE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-56
NOVEMBER 28, 2019
A condominium corporation is seeking an opinion on alternative remedies to reach the required quorum for the purpose of electing new members of the Board of Trustees since no quorum was reached because the majority of the unit owners are living abroad. The Corporation proposed two (2) alternatives it may avail to reach the required quorum, specifically: by voting in absentia; or by waiving the member’s right to vote after three (3) failed attempts of reaching out or if no answer was received. On the first proposed alternative, the SEC pointed out that the Revised Corporation Code (RCC) now allows voting via remote communication or in absentia if it is allowed in the corporation’s By-Laws. However, said provision is not self-executory as it requires the SEC to issue rules and regulations for the same, which to date the SEC has not yet issued guidelines on the matter. On the other hand, the second alternative is a restriction of the member’s inherent right to vote. In this connection, the SEC previously opined that it is through the right to vote that a stockholder participates in the management of the corporation which he cannot be deprived of without his consent. This means that it may only be waived upon the stockholder’s/member’s initiative. By virtue of Section 25 of the RCC, members of the condominium corporation may file a Petition to Conduct an Election before the SEC. After finding that the non-holding of the election was unjustified, the SEC may order the corporation to hold an election, as well as orders directing the issuance of a notice stating the time and place of the election and other related matters. In addition, the attendees of the election ordered by the SEC who are entitled to vote shall constitute a quorum, regardless of the required number stated in the Articles of Incorporation or By-Laws of the corporation.
PRE-NEED PLANS ARE CONSIDERED SECURITIES
“NON-TRADITIONAL SECURITIES” ARE THOSE SECURITIES WHICH ARE NOT SPECIFICALLY MENTIONED IN THE ENUMERATION OF SECURITIES UNDER SECTION 3.1 OF THE SECURITIES REGULATIONS CODE (SRC)
SEC DOES NOT PRESCRIBE ATTRIBUTES OF A SECURITY FOR IT TO BE A TRUSTWORTHY ASSET
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-54
NOVEMBER 25, 2019
A Pre-Need Company is seeking opinion on the following: (1) whether prior to the promulgation of the Pre-Need Code, the SEC considered pre-need plans as securities; (2) the attributes of securities the SEC considers as important to fulfill the function as investment vehicles and trustworthy assets; and (3) the considerations of the SEC as “non-traditional” securities and whether the pre-need plans are considered as such. In rendering the opinion, the SEC confirmed that before the passage of the Securities Regulations Code (SRC) and the Pre-Need Code, the law governing the pre-need plans was the Revised Securities Act (RSA) of 1982. Under Section 2(a) of the RSA, pre-need plans were specifically identified as securities. The pre-need plans, as securities, are further confirmed by Section 3.9 of the SRC. Thus, as defined and discussed in Section 3.9, it could only mean that it is treated as one of the securities being regulated by the SRC. For clarification, “non-traditional securities” are defined as those securities which are not specifically mentioned in the enumeration of securities under Section 3.1 of the SRC, but nonetheless are contracts or arrangements. However, they may be called, if they call for a person to invest, entrust, or give his money to another person and is led to expect profits from such primarily from the efforts of others. The SEC does not prescribe, through a rule or circular, the attributes of a security for it to be considered a Trustworthy Asset.
CONDOMINIUM SHALL BE CONVEYED ONLY TO CORPORATIONS WHERE 60% OF ITS CAPITAL STOCK BELONGS TO FILIPINO
FOREIGN REAL ESTATE HOLDING COMPANY MAY OR MAY BE ALLOWED TO HOLD CONDOMINIUM SUBJECT TO 60%-40% OWNERSHIP TRESHOLD
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-53
NOVEMBER 22, 2019
A holding company is requesting an opinion on whether a foreign real estate holding company can legally own and hold a condominium unit. In rendering the opinion, the Commission cited Sections 2 and 5 of Republic Act (RA) No. 4726, as amended, otherwise known as “The Condominium Act” which provide that a condominium is an interest in real property consisting of separate interest in a unit in an undivided interest in common in the land on which it is located. The title to the common areas, including the land, or the appurtenant interests in such areas, maybe held by a corporation specially formed for the purpose in which the holders of separate interest shall automatically be members or shareholders in proportion to the appurtenant interest of their respective units in the common areas. While Section 5 of the Act clearly provides that where the common areas are owned by unit-owners as co-owners, a condominium unit shall be conveyed only to corporations where 60% of its capital stock belongs to Filipino citizens. If the common areas in the condominium project are owned by owners of different units as co-owners thereof, then the holding company is prohibited from owning a condominium unit considering that more than 40% of its capital stock is owned by a foreign national. On the other hand, if the land upon which the project is to be built is owned by a condominium corporation, then the holding company may legally own a condominium unit if it will not result with the holding company owning more than 40% of the capital stock of the condominium corporation.
ONLY 40% ALLOWABLE FOREIGN EQUITY IN FREIGHT FORWARDING AS PUBLIC UTILITY SHALL BE ALLOWED
INTERNATIONAL FREIGHT FORWARDERS ARE ALLOWED 100% FOREIGN EQUITY
FOREIGNERS ARE RESTRICTED AS CORPORATE OFFICERS IN CORPORATIONS WITH FOREIGN OWNERSHIP RESTRICTIONS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-52
NOVEMBER 18, 2019
Mr. P is seeking legal opinion on the following: (1) allowable percentage of foreign equity in cargo and freight forwarding activities and the legal consequence if it exceeds the allowed percentage; (2) whether a foreign entity, not registered with SEC, is allowed to subscribe a share to a domestic corporation; (3) whether there are restrictions of the SEC for cargo and freight forwarding companies. In rendering the opinion, a freight forwarder is considered an operator of a public utility and, therefore, covered by 40% foreign ownership restriction under Article XII of the 1987 Constitution. The said constitutional prohibition has been carried over in List A, Item 15 of the Executive Order No. 65, Series of 2018, otherwise known as the “11th Regular Foreign Investment Negative List.” In previous opinions, the SEC has opined that “utility firms such as international freight forwarders engaged exclusively in international commerce are beyond the constitutional prohibition limiting foreign ownership to 40% of the capital of a corporation.” Thus, corporations engaged in purely international cargo and freight forwarding activities may be wholly owned (100%) by foreigners. Should the corporation violate the foreign equity restrictions, the SEC may suspend or revoke its certificate of registration pursuant to the SEC Reorganization Act. Foreign corporations and entities not registered with the SEC may subscribe to the share of domestic corporations. However, in case said subscription shall cause the investee-domestic corporation’s total foreign equity to exceed 40%, Sections 5 and 6 of Foreign Investment Act of 1991 apply. Under the provision of Anti Dummy Law, foreigners are restricted from being appointed as corporate officers in corporations with foreign ownership restrictions or those engaged in wholly and partly nationalized activities, including cargo and freight forwarding activities, except for technical personnel authorized by the Department of Justice (DOJ).
IT IS POSSIBLE FOR AN EDUCATIONAL INSTITUTION TO BE A STOCK & NON-PROFIT ENTITY
PROBATIVE VALUE OF THE STOCK & TRANSFER BOOK
REQUISITES BEFORE AN HEIR OF A DECEASED STOCKHOLDER CAN SIT AS A MEMBER OF THE BOD
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-51
OCTOBER 11, 2019
An educational institution is seeking legal opinion on various queries, to wit:
a. Whether it is a stock and profit corporation, and if the stockholders may request for the declaration of dividends since it has exorbitant retained earnings over the years.
The SEC referred to paragraphs 7 and 9 of the Amended Articles of Incorporation (AOI) which provide that it is a stock but non-profit corporation. At the time of the institution’s incorporation in 1954, Philippine laws allowed educational institutions to incorporate as stock, but non-profit corporations as evinced by the passage of the Republic Act (R.A.) No. 6055 in 1969.
b. What is the extent of its purpose in light of the provisions of the Revised Corporation Code (RCC)?
A corporation has only such powers as are expressly granted in its charter or in the statutes under which it is created or such powers as are necessary for the purpose of carrying out its express power. Considering the institution’s 2004 Amended AOI is essentially a mere restatement of Section 35 of the RCC, the same is deemed automatically granted by law upon incorporation.
c. What is the relief regarding the external auditor’s adverse opinions on the Audited Financial Statements for several years?
As a matter of policy and pursuant to SEC Memorandum Circular (MC) No. 15-2003, the SEC shall refrain from rendering an opinion on queries involving justiciable issues that are litigated or maybe eventually litigated in the future, or that could only be clarified and determined in a proper proceeding. These are matters which involve the substantive and contractual rights of private parties who would, in all probability, contest the same in court if the opinion turns out to be adverse to their interest.
d. Whether a stockholder can sell his share without offering to other stockholders in the absence of the right of first refusal in the institution’s AOI and By-Laws?
Yes.
e. What are the procedures for transferring common/voting stock and when is it legal?
Section 62 RCC provides that shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner, his attorney-in-fact, or any other person legally authorized to make the transfer. However, no transfer shall be valid except between the parties, until the transfer is recorded in the books of the corporation. While it is usual to effect the transfer of shares by endorsement on the certificate, a conveyance may be made by an assignment or sale in a separate instrument in lieu of the endorsement of the certificate, unless the By-Laws expressly provide that the transfer shall be made exclusively in the manner authorized by the statute.
f. Whether an heir of a deceased stockholder can sit as a member of the BOD?
Yes, provided he owns at least one (1) share of stock of the corporation under his name, which must be duly registered in the Stock and Transfer Book (STB) of the corporation, and provided he has all the other qualifications and none of the disqualifications as may be provided in the AOI or the By-Laws.
g. Whether SEC can do an independent audit of the institution, especially on its STB?
No. The only function of the SEC with respect to STBs is the registration of the same.
h. Whether the General Information Sheet (GIS) is more legal document than STB, and the basis in identifying a true stockholder in case the Corporate Secretary is unable to produce STB?
STB is the quintessential record of all stockholders and their corresponding stockholdings in the corporation. Only if the said STB is lost or destroyed should the corporation resort to gathering extrinsic evidence or parol evidence of stock ownership following the general rules on the presentation of secondary evidence.
SUBSCRIPTION RECEIVABLE CANNOT BE CONDONED AS IT VIOLATES THE TRUST FUND DOCTRINE
DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION CONTRACTS PROVIDES THAT THE SUBSCRIPTION IS ONE, ENTIRE, INDIVISIBLE & WHOLE CONTRACT THAT CANNOT BE DIVIDED INTO PORTIONS
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-50
OCTOBER 11, 2019
A holding company is seeking clarification whether it can condone subscription receivables due from shareholders and whether it can consider the portion paid by partially paid shareholders as full payment for the corresponding number of shares and cancel the subscription as to the rest. In reply, the very principle of the Trust Fund Doctrine provides that no part of the subscribed capital may be returned or released to the stockholder. In reference to the previous opinion, the Additional Paid-in Capital (APIC) already forms part of equity emanating from the Subscription Agreement wherein it constitutes a fund to which creditors have a right to look for satisfaction of their claims. Upon the acceptance of a stock subscription by a corporation, the subscription becomes a binding contract to which the subscriber cannot withdraw and neither does the corporation have the power to release the latter from its subscription. The issuance of the certificate of stock, on the other hand, is governed by specific rules found under Section 63 of the Revised Corporation Code (RCC), which provides that no certificate of stock shall be issued to a subscriber until the full amount of his subscription, together with interest and expenses, if any is due, has been paid. The foregoing provision sets forth the Doctrine of Indivisibility of Subscription Contracts, which provides that the subscription is one, entire, indivisible, and whole contract that cannot be divided into portions. Consequently, the holding company cannot issue certificates of stock for the portion that is paid and cancel the remaining unpaid portion as this violates the Doctrine of Indivisibility of Subscription Contracts and the Trust Fund Doctrine.
SEC HAS THE POWER TO ORDER THAT AN ELECTION BE HELD
MEMBERSHIP IN HOMEOWNERS' ASSOCIATION IS OPTIONAL
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-49
OCTOBER 9, 2019
A Condominium Corporation is seeking clarification regarding its view that the operations and management of the corporation are similar to that of a homeowners’ association. Specifically, the subject wanted to clarify whether the SEC can compel the attendance of its members for purposes of holding the election of officers, and whether it should register with the Housing and Land Use Regulatory Board (HLURB) in compliance with the Republic Act (R.A.) No. 9904, otherwise known as “The Magna Carta for Homeowners and Homeowners’ Association.” In reply, when there is a non-holding of an election, Section 25 of the Revised Corporation Code (RCC) will apply, which states that the SEC shall have the power to issue orders as may be appropriate, including orders directing the issuance of a notice stating the time and place of the election, designate a presiding officer, and the record date or dates for the determination of stockholders or members entitled to vote. On HLURB registration, a condominium corporation is especially formed for the purpose of holding title to the common areas, including the land in which the holders of a separate interest shall automatically be members. On the other hand, a homeowners’ association is formed to protect and promote the mutual interest of the buyers and residents, and to assist in their community development, but membership in the association is optional. Homeowner’s association is, thus, different from a condominium corporation.
UNDER THE OLD CORPORATION LAW-ACT NO. 1459-A PRECURSOR OF 1980 OLD CORPORATION LAW, NO MAXIMUM CORPORATE TERM OF EXISTENCE WAS PRESCRIBED FOR EDUCATIONAL INSTITUTION
CORPORATION WHOSE TERM HAS EXPIRED, MAY, AT ANY TIME, APPLY FOR REVIVAL OF ITS CORPORATE EXISTENCE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-48
OCTOBER 7, 2019
The subject University was incorporated in 1968 and its Articles of Incorporation (AOI) provides that its term of existence is fifty (50) years from the date of incorporation. It is now seeking clarification on whether the educational institution incorporated prior to the effectivity of the Revised Corporation Code (RCC) is deemed to exist for fifty (50) years reckoned from the date of the effectivity of the Old Corporation Code on May 1, 1980. In reply, the SEC referred to several opinions issued in the past stating that under the Old Corporation Law, no maximum corporate term of existence was prescribed for educational institution, thus, in cases where the AOI does not specify a term, the corporate term of such institution is deemed perpetual. However, in the case of the subject University, its corporate term was expressly limited to fifty (50) years from 1968, which will be the reckoning date instead of May 1, 1980. Therefore, if the University failed to extend its term on or before 2018, it is deemed dissolved. Nonetheless, the RCC provides the remedy of revival of corporate existence, at any time, if the corporate term has expired.
CORPORATE TERM IS AUTOMATICALLY DEEMED PERPETUAL EVEN WITHOUT ANY POSITIVE ACTION ON THE PART OF THE CORPORATION
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-47
SEPTEMBER 5, 2019
A company engaged in conducting surveys is seeking clarification from the SEC on whether its term has already been amended to perpetual existence with the enactment of the Revised Corporation Code (RCC). In reply, Section 11 of the RCC provides that a corporation with a Certificate of Incorporation issued prior to the effectivity of the Code, and which continues to exist, shall have perpetual existence, unless the corporation elected otherwise. Likewise, the corporate term will be automatically deemed perpetual even without any positive action on the part of corporation.
SALE OF PRESCRIPTION LENSES & FRAMES, AS AN INCIDENT OF PRACTICE OF OPTOMETRY, IS NOT RETAIL TRADE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-46
OCTOBER 7, 2019
A company engaged in the establishment and operation of optical clinics and managed by professionally registered optometrists is seeking clarification if it is engaged in retail trade. It performs eye check-ups and recommends appropriate prescription lenses and eyeglasses to its patients. Considering that the sale of lenses and frames is made only after the prescription of an attending optometrist and specific only to a particular patient, the same are not readily available for sale to the general public. Hence, one of the elements of retail is absent. Thus, sale of prescription lenses and eyeglasses frames is not within the scope of the Retail Trade Liberalization Act of 2000.
LENDING COMPANY REGISTRATION ACT DOES NOT DISTINGUISH AS TO WHOM OR FOR WHAT PURPOSE THE LENDING COMPANIES SHOULD OFFER SERVICES TO CONSTITUTE FINANCING ACTIVITY
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-45
OCTOBER 7, 2019
A service company is requesting confirmation that the financial assistance extended to its clients will not constitute lending. As part of its business model, it installs Mobility-Cloud Connecting System (MCCS) in tricycles and four-wheeled units that provide a real-time vehicle information management system. It also provides usage and other software applications to enhance driving convenience and safety. As part of its Corporate Social Responsibility, users of MCCS, particularly tricycle drivers and other low-income drivers, can request for financial assistance from the company to help answer their needs in case of a medical emergency or for educational assistance as alternative sources of credit. The same is not offered to the general public. The financial assistance does not exceed Php 50,000 per year with an interest of 1.5% per month to defray administrative expenses. In rendering the opinion, the SEC cited the Lending Company Registration Act which provides for the definition of lending activity. The fact that the financial assistance programs are, in reality, loans subject to 1.5% interest per month falls within the concept of lending activity. Limiting the grant to those who availed the services of the company does not exempt or remove the activity from the ambit of the term lending or granting of loans. The law does not distinguish as to whom or for what purpose the lending companies should offer their services. Consequently, it cannot undertake such activity under its current registration.
CATERING BUSINESS CONSTITUTES RETAIL TRADE
SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 19-44
OCTOBER 4, 2019
An event caterer is seeking clarification on whether its business model which offers service packages such as preparation, logistics, rental, delivery and set-up of tables, chairs, and cutleries, including the delivery of food and beverages, should be considered retail activities covered under the Retail Trade Liberalization Act (RTLA). In rendering the opinion, the SEC opined that event organizer is not solely considered a retailer under RTLA. Organizing an event involves a contract of services and not a sale. However, tailored-made catering business to particular customers constitutes retail trade as it lacks the element of “exclusivity” and customers are no less than the “general public.” In the catering business, every consumer celebrating an event is a potential customer. Therefore, an event organizer like the company providing food is an event caterer considered under the RTLA. In addition, the Company’s opening a customer lounge selling merchandise constitutes retail trade activity as it is habitually selling commodities or goods for consumption direct to the general public.