Contributed By Romulo Mabanta Buenaventura Sayoc & de los Angeles
The main types of companies that can be formed in the Philippines are stock corporations, non-stock corporations, close corporations, and one-person corporations. These may be public or private companies. A public company is any corporation with a class of equity securities listed on an exchange, or with assets in excess of PHP50 million, approximately USD960,000 at current exchange rates, and has 200 or more holders, each holding at least 100 shares of a class of its equity securities.
As a general rule, there are no other restrictions as to which shareholders can invest in companies. However, foreign ownership is limited to 40% of companies that hold land. Foreign ownership may also be limited, or completely barred, in companies that operate in certain industries.
In 2018, the following sectors were opened to full foreign ownership:
There are currently proposals pending in the Philippine congress that may significantly liberalise these restrictions in certain sectors. The most significant proposal, which has yet to be passed into law, would limit nationality restrictions of infrastructure operators to electrical transmission and distribution and waterworks and sewerage systems. If passed in its current form, those proposals would mean that telecommunications and transportation services would no longer be subject to nationality restrictions.
A private corporation organised under Philippine law commences its corporate existence and juridical personality from the date the Securities and Exchange Commission ('SEC') issues the certificate of incorporation under its official seal and thereupon the incorporators, stockholders/members and their successors constitute a body corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is dissolved before then, in accordance with law.
Philippine companies may issue common or preferred shares. Common shares must always have voting rights. They may or may not have a par value.
Preferred shares can only be issued with a stated par value. The constitutive documents of a corporation may provide that holders of preferred shares may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of the Revised Corporation Code.
The articles of incorporation of a company may deprive holders of preferred shares the right to vote, except with respect to the following fundamental matters:
Common or preferred shares may have additional features. They may be issued as redeemable shares which the company can purchase or take up from their holders as expressly provided for in its articles of incorporation and the stock certificates representing said shares. Such shares may be purchased or taken up by the company upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the company.
Founders’ shares are an additional feature that common and preferred shares may have. These are granted to the founders of a corporation under its articles of incorporation. Founders’ shares may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period and not exceed five years, subject to the approval of the SEC.
There are two main sources of shareholders' rights. The main source is the Revised Corporation Code, which prescribes the powers of corporations, the functions of corporate offices and shareholders’ rights, as well as how these are exercised. The Securities Regulation Code ('SRC') is also a source of shareholders’ rights. The Securities Regulation Code provides for the creation of the SEC and establishes its regulatory authority over corporations in general. Importantly, another document that is relevant to shareholders’ rights in the Philippines is the SEC’s Code of Corporate Governance.
These primarily affect public companies with a parallel set of rules that apply to government owned and controlled corporations. The latest version, which became effective in January 2017, provides a 'comply or explain' framework, giving a corporation flexibility in applying its requirements. Some of the features of these rules include protections for whistleblowers and a nine-year limit on how long a director may be considered independent.
Although only shares specifically entitled to vote (which generally includes all common shares) for the election of directors that can do so, all shareholders have the right to inspect and copy corporate records, the right to dividends and the right to vote on the fundamental matters mentioned in 1.2 Type or Class of Shares. Generally, all shareholders have the right to vote unless such rights are denied in the articles of incorporation. If such rights are varied or modified by agreement, they must be publicly disclosed to be binding on the parties to the agreement. However, in order to bind third parties, the rights must be reflected in the constitutional documents of the corporation, which are publicly available.
All stockholders of a stock corporation in the Philippines enjoy pre-emptive rights to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation, which can be done by amending the articles. Pre-emptive rights do not apply to shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares issued 'in good faith' (meaning not with the intent to dilute shareholders without a legitimate corporate purpose) with the approval of the stockholders representing two-thirds of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
Nevertheless, there are certain rights that cannot be removed by agreement. For instance, the right to vote on the fundamental matters mentioned in 1.2 Type or Class of Shares, cannot be denied to any class of shares. Furthermore, stockholders of the same class of shares cannot be given unequal rights.
Shareholders’ agreements and joint venture agreements are enforceable and customary in the Philippines.
Generally, there are no provisions of law which govern shareholders’ agreements in the Philippines, other than general contract law and general corporate law, except when the corporation is a close corporation. In a close corporation, the shareholders’ agreement must be duly signed and executed by and among all stockholders before the formation and organisation of the said close corporation. However, in order to bind third parties, the provisions of such agreements must be embodied in the constitutional document of the corporation.
Under Philippine corporate law, there are no rights that are only exercisable by shareholders holding a certain percentage of shares in a particular company.
Shareholders of a corporation have the right to inspect and copy corporate records. However, this right is without constraint and its exercise must comply with the following requirements:
This right is given to a stockholder for purposes of self-protection and as an incident of his or her ownership of the corporate property.
General day-to-day decisions are made by the board of directors. However, particularly important issues require the approval of shareholders. These include the election of the directors, declaration of stock dividends and the fundamental matters discussed in question 1.2 Type or Class of Shares.
Regular meetings of stockholders are held annually on a date provided for in the by-laws of the corporation or, if no such date is provided, it shall be held on any date after April as determined by the board of directors or trustees. Special meetings are held according to the schedule in the by-laws or at any time deemed necessary. A stockholder may propose the holding of a special meeting.
The stockholders must be notified of the regular meeting, in writing, at least 21 days before the meeting, unless the by-laws provide for a different period. The stockholders must also be notified of special meetings, in writing, at least one week prior, unless the by-laws provide otherwise. The notice must also include the agenda for the meeting. These notice requirements may be waived by the stockholders expressly or by implication, by being present in the meeting.
A stockholder may vote personally or through a proxy. If the by-laws of the corporation or a majority of the Board of Directors allow, a stockholder may also vote via teleconference, video conference or through other modes of remote communication. The general rule is that a majority of the stockholders entitled to vote shall constitute a quorum to transact business. The by-laws of the corporation may require a greater majority to constitute a quorum.
Shareholders have the right to require that a specific issue be considered, or a resolution be put forward at a regular or a special stockholders’ meeting.
Generally, shareholders only participate in the management of a company by electing their representatives to the Board of Directors. Significantly, all directors must also be shareholders, as the Revised Corporation Code requires each director to own at least one share of the corporation. The shareholders may also agree on their representation in the board in a shareholders’ agreement which specifies the number of directors each shareholder is allowed to nominate to the board with a commitment on the part of the other shareholders to vote in favour of such director.
Generally, all corporate decisions are made by the board of directors. But all stockholders have the right to dissent in any action taken by the Board of Directors. In the following instances, a dissenting stockholder can exercise its appraisal right and demand payment of the fair value of its shares:
Upon payment by the corporation of the agreed price of the shares of the dissenting stockholder, such stockholder shall transfer the shares to the corporation.
When no appraisal rights are available, a stockholder or member may bring an action in the name of a corporation questioning the decision of the board. However, the stockholder must show that it first exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation.
Directors are elected by the shareholders. At all elections of directors, there must be present, either in person or through a representative authorised to act by written proxy, the owners of majority of the outstanding capital stock or, if there is no capital stock, a majority of the members entitled to vote. Stockholders or members may also vote through remote communication or in absentia when this is authorised in the by-laws or by a majority of the board of directors.
In stock corporations, the number of votes allowed for stockholders eligible to vote equates to the number of shares of stock in their name within the timeframe fixed in the by-laws or, where the by-laws are silent, at the time of the election. The stockholder may:
The law provides that the total number of votes cast must not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected.
Delinquent stock holders have no ability to vote. Unless otherwise provided in the articles of incorporation or in the by-laws, members of non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Nominees for directors or trustees receiving the highest number of votes are considered elected.
In the absence of a shareholders’ agreement, a shareholder cannot require that a particular director be appointed to the Board of Directors. A director may be removed by a vote of the stockholders holding or representing at least two thirds of the outstanding capital stock, which shall take place at a regular or special meeting called for such purpose. However, a director may not be removed without cause if such removal will deprive minority stockholders of their right of representation.
Any director of a corporation may be removed from office by a vote of the stockholders holding or representing at least two thirds of the outstanding capital stock, or in a non-stock corporation, by a vote of at least two thirds of the members entitled to vote. Removal may be with or without cause. Such removal needs to take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting.
A special meeting of the stockholders or members for the purpose of removing any director or trustee must be called by the secretary on order of the president, or upon written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or a majority of the members entitled to vote. If there is no secretary, or if the secretary, despite demand, fails or refuses to call the special meeting or to give notice thereof, the stockholder or member of the corporation signing the demand may call for the meeting by directly addressing the stockholders or members. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice.
Unless otherwise provided in the by-laws or agreed upon by the shareholders, the shareholders do not have powers to appoint or remove the company’s auditors.
Philippine companies are required to submit a general information sheet ('GIS') to the SEC annually disclosing, among other things, its shareholders and the percentage of their shareholdings. Recently, the SEC has required ultimate beneficial ownership to be stated in the GIS. Also, shareholders that own at least 5% of a public company are required to file a disclosure of their interests and provide further information when they reach 10% and when the shareholder’s ownership of those shares should increase or decrease.
Shareholders can grant security interests over their shares. They can, for example, pledge their shares. However, such right may be restricted by agreement between the parties.
Shareholders can also freely dispose of their shares as a general rule, however, no shares of stock against which the company holds any unpaid claim shall be transferable in the stock and transfer book of the company. This right may be limited by way of agreement or in the articles of incorporation and by-laws. However, an absolute and perpetual prohibition on the disposal of shares is not permissible.
In the event that a company is declared insolvent, the shareholders only have a right to the assets remaining after all creditors have been paid. Certain classes of shares, however, may be given preference in dissolution.
Directors or officers that have a reason to believe that the proceedings are about to be commenced, or in contemplation of them, can be held liable if they violate the following actions:
Directors or officers that violate these can be held liable by shareholders for up to double the value of the property sold, embezzled or disposed of, or double the amount of the transaction involved (whichever is higher) to be recovered for the benefit of the insolvent corporation and the creditors.
Shareholder approval or insolvency court action is required in order for a corporation to be declared insolvent or liquidated.
There are no provisions in the Revised Corporation Code or in the Securities Regulation Code which explicitly or directly govern or restrict shareholder activism.
The SEC’s Code of Corporate Governance sets out certain rights of minority shareholders and directs boards of directors to respect the following rights of the stockholders.
Shareholders have the right to elect, remove and replace directors and vote on certain corporate acts in accordance with the Corporation Code.
Cumulative voting is required in the election of directors, which tends to facilitate minorities’ representation. Although directors may be removed with or without cause, the Code prohibits removal without cause if it will deny minority shareholders representation in the Board. Removal of directors requires an affirmative vote of two-thirds of the outstanding capital.
All stockholders have pre-emptive rights, unless there is a specific denial of this right in the articles of incorporation or an amendment thereto. They shall have the right to subscribe to the capital stock of the corporation. The articles of incorporation may lay down the specific rights and powers of shareholders with respect to the particular shares they hold, all of which are protected by law so long as they are not in conflict with the Corporation Code.
Power of Inspection.
Philippine law requires corporations to allow shareholders to inspect corporate books and records including minutes of Board meetings and stock registries in accordance with the Corporation Code and to provide them an annual report, including financial statements, without cost or restrictions.
Right to Information.
Shareholders can demand access to periodic reports which disclose personal and professional information about the directors and officers and certain other matters such as their holdings of the shares, dealings with the company, relationships among directors and key officers, and the aggregate compensation of directors and officers. The company disclosures and periodic reports where these are found must be distributed to the shareholders before annual general meetings and in offering documents in case of registration of shares for public offering.
Minority shareholders have the right to propose the holding of a meeting, and the right to propose items in the agenda of the meeting, provided the items are for legitimate business purposes. Minority shareholders should have access to any and all information relating to matters for which the management is accountable for and to those relating to matters for which the management should include such information and, if not included, then the minority shareholders should be able to propose to include such matters in the agenda of stockholders’ meeting, being within the definition of 'legitimate purposes'.
Right to Dividends.
Shareholders have the right to receive dividends subject to the discretion of the Board. However, the Commission may direct the corporation to declare dividends when its retained earnings is in excess of 100% of its paid-in capital stock, except:
Philippine law allows the exercise of the shareholders’ appraisal rights mentioned above.
It is the duty of the directors to promote shareholder rights, remove impediments to the exercise of shareholders rights and allow possibilities to seek redress for violation of their rights. Directors are mandated by the SEC to encourage the exercise of shareholders’ voting rights and the solution of collective action problems through appropriate mechanisms. The SEC also encourages companies to remove excessive costs and other administrative or practical impediments to shareholders participating in meetings and/or voting in person. The SEC has also been encouraging electronic filing and distribution of shareholder information necessary to make informed decisions, subject to legal requirements.
Shareholder activism is uncommon in the Philippines and, despite attempts to organise shareholders, has not yet become an effective force.
The increase of shareholder activism is brought about by the rise of social media and the spread of news and information through digital platforms. As an example, aggrieved minority investors of a certain publicly listed corporation formed a Facebook group of 900 individuals, whose aggregate votes amounted to 25% of the shares of a publicly-listed entity called Calata Corp., enough to give them one seat on the six-man board. The company was eventually de-listed by the Philippine Stock Exchange (PSE) in 2017. The CEO, Joseph Calata, was then banned by the PSE from serving on the board of any PSE listed company, along with other Calata officers.
Activist shareholders may engage in proxy solicitation to increase their voting power. As previously mentioned, social media has provided an avenue for minority stockholders to coordinate block voting strategies.
There have been attempts by funds and other private investors to raise awareness of minority shareholder rights. In certain cases, these minority shareholders have resorted to court action, primarily where their rights to access company information have been frustrated or denied.
The matters minority investors have raised have included greater representation, access to information, dividend declaration, improving corporate governance mechanisms, improving the company’s financial health and demanding the holding of delayed annual stockholders’ meetings.
However, courts in the Philippines are notoriously slow to act and can be unpredictable. Because the costs of lawsuits against well-funded corporations and their controlling shareholders can be high, there is a strong headwind for activist shareholders bringing their grievances forward.
There is no particular industry or sector that is targeted by activist behaviour. The companies most typically targeted are small and have shareholders that are motivated to raise concerns and take action.
Hedge fund and special interest investors have not been a prominent part of the Philippine investor landscape. That may change, but the Philippines is still a comparatively small market, with little liquidity and high friction costs. It is only when shareholder activists are able to gather sufficient resources to meaningfully take action against management and controlling shareholders that there will be increased levels of visible activity in this area.
There is no public information available as to the extent by which public activist demands were met in the last year, whether in full or in part.
Companies usually seek advice of counsel, public relations professionals and the media when confronted with shareholders raising issues. Management is usually experienced at handling public relations issues and regulatory matters in the public sphere. This makes them better prepared to manage and discuss the concerns of minority shareholders, such as company products and services, as well as managing matters of interest to activist shareholders including, among others, representation of minority shareholders and the company’s financial health, at the stockholders’ meeting where the active minority shareholders will likely be present.
As a general rule, Philippine law considers a corporation to have a separate and distinct personality from its shareholders. Shareholders enjoy limited liability, meaning that they are exposed to the corporation’s liability only to the extent of their shareholding.
A shareholder, including a minority shareholder, can file a case for intra-corporate controversies. An intra-corporate controversy arises when it is rooted in the corporation-shareholder relationship or in the enforcement of the parties’ correlative rights and obligations (under the Revised Corporation Code and the internal and intra-corporate regulatory rules of the corporation). See 3.4 Legal Remedies Against Other Shareholders.
A shareholder may file an intra-corporate dispute or a derivative suit against the directors of a corporation. Directors and officers of a corporation are jointly and severally liable for damages suffered by the corporation, its stockholders and other persons resulting from the commission of any of the following:
Under Philippine law, directors and officers are liable as trustees for the corporation and will be held accountable for the profits which otherwise would have accrued when the director attempts to acquire or acquires any interest adverse to the corporation in violation of this obligation.
In terms of self-dealing and conflicts of interest, a contract of the corporation with one or more of its directors or officers is voidable at the option of the corporation, unless all of the following conditions are present:
However, the Revised Corporation Code provides that, if the first two of the above conditions are absent, the contract with the director may be still be ratified by the vote of the stockholders representing at least two thirds of the outstanding capital stock in a meeting called for the purposes, provided that there is full disclosure on the adverse interest of the director involved. See 3.4 Legal Remedies Against Other Shareholders and 3.7 Strategic Factors in Shareholder Litigation.
A shareholder may also file an intra-corporate dispute suit against another shareholder. However, for private corporations (not publicly listed) the articles of incorporation or bylaws can provide for mandatory arbitration which would prevent resorting to the courts to seek remedies against the corporation or other shareholders.
When such an agreement is in place, disputes between the corporation or its stockholders, which arise from the implementation of the articles of incorporation, bylaws or from intra-corporate relations, need to be referred to arbitration, except for any dispute that involves criminal offenses and interests of third parties. When stated in the articles of incorporation or bylaws of a corporation, the arbitration agreement is binding on the corporation, its directors, trustees, officers, and executives or managers.
Under the SRC, auditors may be held liable to shareholders for false or misleading statements of any material fact in a report, such as audited financial statements, if such shareholder relied on such report in purchasing the shares. Furthermore, an auditor who provides a wrongful certification in a report, such as audited financial statements, that is injurious or detrimental to the public, or certifies the corporation’s financial statements despite its incompleteness or inaccuracy, its failure to give a fair and accurate presentation of the corporation’s condition, or despite containing false or misleading statements, may be subject to an administrative fine ranging from PHP40,000 to PHP600,000.
The Revised Corporation Code similarly penalises any independent auditor who, in collusion with the corporation’s directors or representatives, certifies the corporation’s financial statements despite its incompleteness or inaccuracy, its failure to give a fair and accurate presentation of the corporation’s condition, or despite containing false or misleading statements, with a fine ranging from PHP80,000 to PHP500,000. When the statement or report certified is fraudulent or has the effect of causing injury to the general public, the auditor or responsible officer may be liable for a fine ranging from PHP100,000 to PHP600,000. See 3.7 Strategic Factors in Shareholder Litigation.
A stockholder or member may bring an action in the name of a corporation. However, the stockholder must show that:
The Philippine Supreme Court has confirmed stockholders' rights to institute a derivative suit without reference to any express provision of the Corporation Code, or even the Securities Regulation Code. The Supreme Court stated that these laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties, which implies that a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he or she is otherwise without redress.
Major factors shareholders typically consider when seeking to litigate to obtain remedies include the value of the transaction involved and the openness of the adverse party to an amicable settlement. Considering that litigation could take several years to resolve, the value of the transaction involved might not make it worthwhile to pursue litigation. Filing a lawsuit, especially if an injunction pending the litigation is issued by the court, may be effective but it is usually expensive when the person bringing the action has relatively smaller resources than management which possesses the ability to use company resources to defend itself, its directors and its officers.
In 2019, the Revised Corporation Code introduced whistleblower protections and aider and abettor liability, which includes the following: