Stock corporations and shareholders’ rights

(First part)

The State of Corporations in the Philippines

The Securities and Exchange Commission (SEC) reported that in 2020 there were more than 500,000 active corporations, including both domestic and foreign entities, as well as stock and non-stock corporations.

Since then, this number has grown by approximately 40,000 new corporations per year, based on SEC data.

Why Choose a Corporation?

There are several reasons why some people prefer the corporate entity as a legal vehicle. Some of these include:

1. Limited Liability: Shareholders (or stockholders) are generally only liable for the corporation’s debts up to the amount they invested. Creditors cannot pursue their personal assets.
2. Perpetual Existence: A corporation continues to exist even if its owners or directors change, ensuring stability and continuity.
3. Capital Raising: Corporations can more easily raise capital through various means, such as issuing additional shares, bonds, or other securities.
4. Transferability of Ownership: Shares in a corporation can be easily transferred, allowing for flexible ownership and investment opportunities.
5. Tax Advantages: Corporations often benefit from more tax deductions, credits, and generally lower tax rates compared to other business forms.
6. Separation of Management and Ownership: Shareholders can own a corporation without needing to be involved in day-to-day operations. These operations are managed by a board of directors and executives.
7. Credibility: Due to their formal structure and governance, corporations often appear more credible to investors, customers, and creditors.

Definition of a Corporation

The Revised Corporation Code (RCC) defines a corporation as an artificial being created by operation of law, with the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence.

Corporations are independent legal entities, separate from their owners (shareholders), and are created to engage in business or other activities. Under the RCC, any person, partnership, association, or corporation—either alone or jointly with others but not more than 15 in number—can organize a corporation for any lawful purpose.

READ: Shareholder’s appraisal right & the Trust Fund Doctrine

Starting in February 2019, when the RCC took effect, a single person has been able to form a corporation known as a One Person Corporation.

However, natural persons licensed to practice a profession, and partnerships or associations organized for practicing a profession, are generally prohibited from organizing as corporations—except in cases where special laws apply. An example of such a special law is the Architecture Act of 2004, which explicitly allows architects to form an architectural corporation, provided that licensed architects comprise at least 75% of its shareholders or members.

Shares of Stock and Shareholders

When a person or group forms a corporation, they contribute assets that become the corporation’s capital. A stock corporation has capital stock divided into shares, and it is authorized to distribute dividends or surplus profits to shareholders based on the number of shares they hold. Shareholders (or stockholders) are issued shares corresponding to their contributions to the corporation.

All other corporations are non-stock corporations.

Notably, most corporations in the Philippines are stock corporations.

Board of Directors and Officers

A stock corporation is governed by a board of directors, which exercises corporate powers, oversees business activities, and controls the corporation’s property. This board consists of 1 to 15 members nominated by stockholders. Those nominees who receive the highest number of votes from the shareholders are appointed as board members, serving terms ranging from one to three years.

The board of directors is responsible for appointing corporate officers. The RCC mandates that corporations have three mandatory officers: the President, Treasurer, and Corporate Secretary. Corporations with public interest must also appoint a Compliance Officer.

Majority and Minority Shareholders

Shareholders hold stock representing ownership in the corporation. These shares entitle them to various rights, including voting on corporate decisions, receiving dividends, and claiming a portion of the company’s assets upon liquidation.

A key distinction in corporations is between majority and minority shareholders, primarily based on the level of control they hold. A majority shareholder is one who owns more than 50% of a company’s outstanding shares.

Below is a simple illustration of shareholders’ rights:

(Source: Philippine Stock Exchange (www.pse.com.ph))

In future articles, we will explore some of the rights outlined in this illustration, as well as the specific rights of minority shareholders.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)