Basic Financial Accounting & Reporting Corporations: Basic Considerations Learning Objectives: After studying this chapter, you should be able to: . Trace the development of the general law on corporations. Define corporation. Identify the attributes of a corporation. Identify and explain the advantages and disadvantages of a corporation. Identify and describe the classes of corporations under the Revised Corporation Code of the Philippines. Identify and describe the other classifications of corporations. Detail the components of a corporation. Define independent director. Describe the classes of shares. 10. Summarize the essential contents of the articles of incorporation and the by- laws. 11. Compare the contents of the AO! per RCCP and Corporation Code. 12. Determine the minimum capital stock requirement at the time of incorporation. 13. Interpret the basic corporate organizatiorial structure. 14. List some of the rights of a shareholder. 15. Name the corporate books and records. 16. . Define a one person corpération and discuss its salient features. yaere pene The Pareto principle or the 80-20 rule states that for many events roughly 80% of the effects. come from 20% of the causes. In 1906, Italian economist Vilfredo Pareto __ observed that 80% of the land in Italy was owned by 20% of the population. Quality management pioneer, Dr.. Joseph Juran, working in the US in'the 1930s and 40s recognized a universal principle that he called the "vital few and trivial many." In Dr. Juran's initial work, he identified that,20% of the defects caused 80% of the problems. It can also be stated that 80% of outcomes can be attributed to the top 20% of the players. In the Philippine enterprise sector, the interesting numbers are not 80-20 but. 68-0.40. That is, 68% of our economy's total output can be attributed just to the largest 0.40% of Philippine enterprises or 3,023 out of a total 777,687 firms counted in 2010. The rést—the 99.6% composed of micro-enterprises (making up 91.6%) and small and520 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada medium enterprises or SMEs (comprising 8%|—account for less than a third (32%) of the country’s gross domestic product (GDP). Dr. Habito recently cited figures from a 2008 study that showed Philippine micro: enterprises and SMEs contributing a smaller share to GDP than those of our neighbors, with the share reaching up to 57% in Indonesia. The same holds for contribution to total jobs: Philippine SMEs account for 61%, versus 68% in Singapore, 73% in Cambodia, 77% in Thailand, 81% in Laos and 97% in Indonesia. These comparisons show that great scope remains for strengthening the-role of SMEs in the Philippine economy if the traditional hurdles in access to finance, technology, raw materials and markets can be ‘overcome. Adapted portions from “Small Business and ASEAN Integration,” By Dr. Cielito Habito of Philippine Daily Inquirer, Sept. 30, 2014, One way in which corporations raise new capital is by issuing shares of stock. In the early months of 1992, General Motors Corporation, the major car—Chevrolet, Pontiac, Buick and Cadillac—maker in North America, successfully issued 55 million ordinary shares at US$39.0 per share, raising more than US$2.1 billion. It was the fourth time in two years that G.M. had raised funds by issuing shares. What are some of the possible reasons why G.M. would have chosen a share issue over other ways of raising capital? There are definite advantages to financing with share capital. First, equity financing—the method of obtaining funds by issuing ordinary or preference shares—is less risky than debt financing—issuance of bonds, notes or mortgage, because dividends on ordinary shares are not paid unless declared by the board of directors. In contrast, if the interest on bonds, notes or mortgage payable is not paid, a corporation may be forced into bankruptcy. Second, when a corporation does not declare cash dividends, the cash from profitable operating activities may be invested to finance’ expanded operations. Third, a corporation may need the proceeds from an ordinary share issue to improve the balance between liabilities and shareholders’ equity. It is important for accountants to understand the nature and characteristics of corporations as well as the process of accounting for a share issue and other types of share transactions. Adapted from “Big G.M, Issue Lands and Price Holds Up,” By Susan Antilla of New York Times, May 21, 1992. REVISED CORPORATION CODE Republic Act 11232, otherwise known as the Revised Corporation Code of the Philippines (RCP), was signed into law by President Rodrigo Duterte on Feb. 20, 2019 and became effective Feb. 23, 2019. For over 39 years, the Corporation Code of the Philippines (Corporation Code) or Batas Pambansa Blg. 68, was the law that governed corporations. The Corporation Code took effect on May 1, 1980.Corporations: Basic Considerations | 521 Not all of the provisions of the Corporation Code were amended by the RCCP, but Congress decided to re-enact the unchanged provisions and include new provisions in order to pass a complete Revised Corporation Code of the Philippines. The first general law on corporations in the Philippines, which was practically a codification of the American law on corporations, was the Corporation Law or Act 1459. The Philippine Commission passed this law and it took effect on Apr. 1, 1906. The RCCP aims to introduce the following reforms: * Policies that would enhance the ease of doing business in the Philippines; . ize corporate and stockholder protection; . ns that instill corporate and civic responsibility; and : © Amendments that will strengthen the country’s policy and regulatory corporate framework. . DEFINITION A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Revised Corporation Code of the Philippines, Sec. 2). ATTRIBUTES OF A CORPORATION A corporation is an artificial being with a personality separate and apart from its individual shareholders or members. It is created by operation of law. \t cannot come’into existence by mere agreement of the parties as in the casé of business partnerships. Corporations require special authority or grant from the State, either by a special incorporation law that directly creates the corporation or by means of a general corporation law (i.e., The Revised Corporation Code of the Philippines). It enjoys the right of succession. A corporation. shall have perpetual’ existence unless its articles of incorporation provides otherwise (Sec. 11, RCCP). The death, withdrawal; insolvency or incapacity of the individual'shareholders or members will not dissolve the corporation. The transfer of ownership of shares of stock does not dissolve the corporation. It has the powers, attributes and properties expressly authorized by law or incident to its existence. | The maximum corporate term of 50 years per Sec. 11 of the Corporation Code was deleted in the RCCP.522 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada ADVANTAGES OF A CORPORATION The corporation has the legal capacity to act as a legal entity. Shareholders have limited liability. It has continuity of existence. Shares of stock can be transferred without the consent of the other shareholders, Its management is centralized in the board of directors. Shareholders are not general agents of the business. Greater ability to acquire funds. NOY Rw Np DISADVANTAGES OF A CORPORATION 1. Acorporation is relatively complicated in formation and management. There is a greater degree of government control and supervision. It requires @ relatively high cost of formation and operation. It is subject to heavier taxation than other forms of business organizations. Minority shareholders are subservient to the wishes of the majority. In large corporations, management and control have been separated from Prawn ownership. Transferability of shares permits the uniting of incompatible and conflicting elements in one venture. CLASSES OF CORPORATIONS Section 3 of the RCCP classified private corporations into: 1, Stock corporation. Corporations which have share capital divided into shares and are authorized to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held. Non-stock corporation. A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees or officers. Any profit that a non-stock corporation may obtain as an incident to its operation shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized (Sec. 86). Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers or any combination (Sec. 87).Corporations: Basic Considerations | 523 SS OTHER CLASSIFICATIONS OF CORPORATIONS 1, According to number of persons: A Corporation aggregate. A corporation consisting of more than one corporator. B. Corporation sole or a special form of corporation usually associated with the clergy. It is a cofporation which consists of only one member or corporator and his successors such as a bishop. 2. According to nationality: A. Domestic corporation. A corporation organized under Philippine laws. 1 B Foreign corporation. A corporation formed, organized or-existing under laws other than the Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own country or State (Sec. 140). According to whether for public or private purpose: A. Public corporation. A corporation formed or organizéd for'the government of a portion of the state (e.g., provinces, cities, municipalities and barangays). B. Private corporation. A corporation created for private aim, benefit or purpose. According to whether for charitable purpose or not: A. Ecclesiastical corporation. Those organized for religious purposes. B, Eleemosynary corporation. Those established for public charity. C. Civil corporation. Those established for business or profit. According to their legal right to corporate existence: A. De jure corporation. A corporation existing in fact and in law. It is organized in strict conformity with the law. B. De facto corporation. A corporation existing in fact but not in law. According to degree of public participation with régard to share ownership: A. Close corporation. A corporation whose share ownership is limited to selected persons or members‘of a family not exceeding 20 persons. Open corporation. A corporation where the share is available for subscription or purchase by any person, B. C. Publicly-held corporation. A corporation with a class of equity securities listed on an exchange or with assets in excess of P50,000,000 and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities (SRC Rule 3-1.M, Amended IRR of the Securities Regulations Code (R.A. 8799)).524 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada 7. According to their relation to another corporation: A. Parent or holding corporation. A corporation that is related to another corporation that it has the power to either directly or indirectly elect the majority of the directors of a subsidiary corporation, Subsidiary corporation. A corporation controlled by another corporation known as a parent corporation. COMPONENTS OF A CORPORATION 1. Corporators are those who compose a corporation, whether as stockholders or shareholders in a stock corporation or as members in a nonstock corporation (Sec. 5). Incorporators are those stockholders or members mentioned in the Articles of Incorporation (AOI) as originally forming and composing the corporation and who are signatories to said articles of incorporation (Sec. 5). Section 10 of the RCCP provides that any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes. Natural persons who’are licensed to practice a profession, and partnerships or associations organized for the purpose of practicing.a profession, shall not be allowed to organize as a corporation unless otherwise provided under special laws. Incorporators who are natural persons must be of legal age. Each incorporator of a stock corporation must own or.be a subscriber to at least one (1).share of the capital stock. A corporation with a single stockholder is considered a One Person Corporation (OPC; will be discussed later). Incorporators are no longer confined to natural persons (i.e. human. beings). Artificial beings (eg, a partnership, association or corporation) can be, incorporators. Under the old Corporation Code, the minimum number of incorporators was five. Under the RCCP, one person can form a corporation, the OPC. The'requirement of “not less than five (5) nor more than fifteen (15) trustees” were retained in the case of educational corporations (Sec. 106, arid that “the number of trustees shall be in ‘multiples of five (5)") and religious societies (Sec. 114). Note: All incorporators (if they continue to be shareholders) are corporators of a corporation, but not all corporators are incorporators. An incorporator will always retain his status as such though no longer having an interest in the corporation.ge Corporations: Basic Considerations | 525 ed 3, Shareholders or stockholders are corporators:in a stock corporation (Sec. 5). Shareholders may be natural or juridical persons. Members are corporators of a non-stock corporation (Sec. 5). . Subscribers are persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed, Note: All incorporators are “subscribers but a subscriber need not be an incorporator. Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the corporation and receives consideration therefor. Underwriters are usually investment bankers who have- + agreed, alone or with others, to buy at stated terms an entire ora substantial part of an issue of securities;.or guaranteed the sale of an issue by agreement to buy-from the issuing corporation any unsold portion at a stated pice; or agreed to use his best efforts to market all or part of an issue; or offered for sale shares he has purchased from a controlling stockholder. Independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with the exercise of independent judgment. in carrying out the responsibilities as a director (Sec. 22). The. board ‘of the following corporations vested with public interest shall have independent directors constituting at least 20% of such board: a. Corporations covered by Section-17.2 of Republic Act 8799, "The Securities Regulation Code,” namely those whose securities are registered with the SEC, ~ Corporations listed with an exchange or with assets of at least PSOM and having 200 or more holders of shares, with at least 100 shares of a class of its equity shares; Banks and quasi-banks, non-stock savings and loan, associations (NSSLAS), pawnshops, corporations engaged in money service business, pre-need, trust ahd insurance companies, and other financial intermediaries; and Other corporations engaged in business vested with public interest similar to the above, as may be determined by the Commission, after taking into account relevant factors which are germane to the objective and purpose of requiring the lection of an independent director, such as.the extent of minority ‘ownership, type of financial products or securities issued or offered to investors,526 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada public interest involved in the nature of business operations, and other analogous factors. 9. Additional General Powers per RCCP. Every corporation incorporated under the RCCP is expressly given the power to enter into a partnership, joint venture, or any commercial agreement with natural or juridical persons (Note: under BP68, only to enter into merger or consolidation with other corporations). Also, domestic corporations are allowed to give donations in aid of any political party or candidate or for purposes of partisan political activity (Sec. 35). These were not allowed in the Corporation Code. CLASSES OF SHARES 1. Par value shares. One in which a specific amount is fixed in the articles of incorporation and appearing on the certificate of stock, The par value is the minimum issue price of the shares. Section 6 of the Code states that preference (or preferred) shares of stock may be issued only as par value shares. No-par value shares. One without any value appearing on the face of the certificate of stock. A no-par value share may have a stated value which may be fixed in the articles of incorporation or by the board of directors or the shareholders. Thus, the issue price may vary from time to time as it is usually fixed based on the book value of the corporation’s shares, ' However, the minimum stated value of a no-par value share is five pesos (P5.00) per share. In addition, shares issued without par value are deemed fully paid. Banks, trust, insurance, and preneed companies, public utilities, building and loan . associations, and other corporations authorized to obtain or access finds from the public, whether publicly listed or not, shall not be permitted to issue no-par value shares of stock (Sec. 6). 4. Voting shares. Those issued with the right to vote. . Non-voting shares. Those issued without the right to vote. 6. Ordinary shares. These shares entitle the holder to an equal pro-rata division of profits without any preference. 7. Preference shares. These shares entitle the holder to certain advantages or benefits over the holders of ordinary shares. 8. Founders’ shares may be given certain rights and privileges not enjoyed by the ‘owners of other stocks (Sec. 7). : 9. Redeemable shares may be issued by the ‘corporation when expressly provided in the articles of incorporation. They are shares which may be purchased by)the corporation from the holders of such shares upon the expiration of a fixed: period, regardless of the existence of unrestricted retained earnings in the books of theCorporations: Basic Considerations | 527 eS corporation, and upon such other terms and conditions stated in the articles of incorporation and the certificate of stock representing the shares (Sec. 8). 10. Treasury shares, A stock that has been issued by the corporation as fully paid and later reacquired but not retired. 11. Promotion shares. Those issued to promoters as compensation in promoting the incorporation of a corporation, or for services rendered in launching or promoting the welfare of the corporation. 12. Convertible shares. A stock which is convertible or changeable from one class to ; another class. ARTICLES OF INCORPORATION (AO!) - Contents Section 13 provides that all corporations organized under this Code shall file with the Securities and Exchange Commission (SEC) articles of incorporation in any of the official languages duly signed and acknowledged or authenticated, in such form and manner as may be allowed by the SEC, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is formed; 3. The principal place of business (specific address? must be specified per SEC Memorandum Circular No. 3, Series of 2006) which must be within the Philippines; : 4. The term of existence if the corporation has not elected perpetual existence; 5. The names, nationalities and residences of the incorporators; 6. The number of directors, which shall not be more than fifteen (15) or the number of trustees, which may be more than fifteen (15); 7. The names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are elected and qualified. i 8. If it be a stock corporation: Amount of authorized share capital in pesos, b. Number of shares into which it is divided, ¢. Incase the shares are par value shares: +. the par value of each share, * names, nationalities and residences of the original subscribers, the amount subscribed and paid by each subscriber on his subscription. ? Per SEC Memorandum Circular No. 6, Series of 2016, there is no need to amend the AOI if the corporation will transfer its principal office within the same city or municipality. Only an amended General Information Sheet (Gis) is required to be submitted to the SEC within 15 days from the transfer. If the transfer is to a different city or municipality, then there is a need to amend the AOI.528 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada In case of no par value, the articles need only state such fact, and the number of shares into which said share capital is divided. If it be @ non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed. a 10. Such other matters consistent with law and which the incorporators may deem necessary and convenient. ‘An arbitration agreement may be provided in the articles of incorporation 11. pursuant to Section 181 of the RCCP. 1 The articles of incorporation and applications for amendments thereto may be filed with the Commission in the form of an electronic document, in accordance with the Commission's rules and regulations on electronic filing. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, preneed, insurance and trust companies, non-stock savings and loan associations (NSSLAs), pawnshops, and other financial intermediaries shall be approved by the SEC unless accompanied by a.favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law (Sec. 16). Prescribed Form Per Section 14, unless otherwise prescribed by special law, the articles of incorporation ofall domestic corporations shall comply substantially with the following form: Articles of Incorporation of (Name of Corporation) The undersigned incorporators, all of legal age, have voluntarily agreed to form a (stock)/(non-sfock) corporation under the laws.of the Republic of the Philispines and certify the following: oa Inc., Corporation First: That the name of said corporation shall be *. or OPC"; Second: That the purpose or purposes for which such corpoiation is incorporated re: [If there is more than one purpose, indicate primary and secondary purposes); Third: That the principal office of the corporation is located in the City/Municipality Province of. . Philippines; Q Fourth: That the corporation shall have perpetual existence or a term of years from the date of issuance of the cerfificate of incorporation; th: That the names, nationalities, and residence addresses of the incorporators of the corporation are as follows:Corporations: Basic Considerations | 529 —————— Name Nationality Residence Sixth: That the number of directors or trustees of the corporation shall be and the names, nationalities, and residence addresses of the first directors or trustees of the corporation are as follows: Nome Nationality Residence Seventh: That the authorized capital stock of the corporation is PESOS (P_____). divided into shares with the par value of PESOS (P per share. (In case all the shares are without par valve): That the capital stock of the corporation is shares without por value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of shores, of which —____________ shares have a par value of PESOS (P____} each, and of which. shares are without par value. Eighth: That the number of shares of the authorized capital stock above stated has been subscribed as follows: ‘Name of Subscriber | Nationally | No. of Shares “Amount ‘Amount Paid Subscribed Subscribed (Modify No. 8 if shares are with no par valve. In case the corporation is non-stock, Nos. 7 and 8 of the above arficles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified Persons, stating the names, nationalities, and residence addresses of the contributors or donors and the respective amount given by each.) Ninth: That____has been elected by the subscribers as Treasurer of the Corporation to act as such until after the successor is duly elected and qualified in accordance with the. by-laws, that as Treasurer, authority has been given to receive in the Name and for the benefit of the corporation, all subscriptions, contributions or donations Paid or given by the subscribers or members, who cerfifies the information set forth in the seventh and eighth clauses above, and that the paid-up portion of the subscription in cosh and/or property for the benefit and credit of the corporation has been duly teceived, Tenth: That the incorporators undertake to change the name of the corporatior immediately upon receipt of notice from the Commission that another corporatior Partnership or person has acquired a prior right to the use of such name, that the nan530 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada Poa Nene nieces Se See ae es has been declared not distinguishable from a name already registered or reserved for the use of another corporation, or that its contrary to law, public morals, good customs or pubic policy. Eleventh: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): “No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of capital stock as provided by existing laws shall be allowed or pemitted to be recorded in the proper books of the corporation, and this, restriction shall be indicated in all stock certiicates issued by the corporation.” IN WITNESS WHEREOF. we have hereunto signed these Arficles of Incorporation, this day of ____, 20___ iin the “City/Municipality of 5 Province of__________, Republic of the Philippines. {Names and Signatures of the Incorporators) (Name and Signature of Treasurer) ‘Comparison of the Articles of Incorporation per RCCP and Corporation Code To facilitate comparison of the requirements under the RCCP and the Corporation Code _ as to the contents of the Articles of Incorporation (AOI), a table is prepared as follows: RCCP Corporation Code (RA 11232) (BP 68) Name If the corporation is an OPC, the 0PCis not allowed letters “OPC” is included in the corporate name, Who Con BeAn | Any natural person, partnership, Incorporator corporation, or association Only natural persons ‘Number of ‘One incorporatoris enough. | At least five (5) incorporators Incorporator(s) needed Residence of | Noresidency requirement for . | Amajority of the incorporators Incorporators incorporators. must be residents of the | Philippines. [Term ‘Shall have perpetual term by | default unless the AOI provides Not exceeding 50 years. | otherwise. ‘Number of ‘No minimum number of Directors directors/trustees except for | Minimum number of directors educational corporations and is five (5). _ religious societies. Residence of | — Noresidency requirement for ‘A majority of the directors ___ Directors directors. must be Phil, residents. ‘Corporations: Basic Considerations | 531 ‘No minimum capital stock ‘At least 25% of the authorized Amount of | required unless required by special capital stock must be Subscribed and | law. There isalsono minimum | subscribed and at least 25% of Paid-In Capital subscribed capital and no the subscribed capital must be minimum paid-in capital. paid-up. ‘Statement of | Subscribed and paid-in capital are | In two (2) separate clauses (8th Subscribed and | inthe 8th clause of the AO! (Sec. | and Sth) of the AO, (Sec. 15, Paid-In Capital 14, RCCP). Corporation Code). Treasurer's | Aseparate treasurer's affidavit is_| A separate treasurer's affidavit Affidavit no longer required but the is required. certification of the treasurer is part of the AOI (9th Clause). No longer required to submit a Undertaking to ‘There is a separate undertaking Change Name separate undertaking, seethe | to change the corporate name 10th Clause of the AOI. tobe signed by directors. Signatories ‘The incorporators and the Only incorporators sign the treasurer sign the AOI. AO! REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATE EXISTENCE = Under Section 18, a person or group of persons desiring to incorporate shall submit the intended corporate name to the SEC for verification. If the Commission finds that the name is distinguishable from a name already reserved or registered for the use of another corporation, not protected by law and not contrary to law, rules and regulations, the name shall be reserved in favor of the incorporators. The incorporators shall then submit their articles of incorporation and by-laws to the Commission. If the Commission finds that the submitted documents and information are fully compliant with the RCCP and other relevant laws, rules and regulations, SEC shall issue the certificate of incorporation. The private corporation commences its corporate existence and juridical personality from the date the SEC issues the certificate of incorporation under its official seal. NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION Section 21 states that if a corporation does not formally organize and commence its business within five (5) years (Note: two (2) years in the Corporation Code) from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five-year period. However, if a corporation has commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive yéars, the SEC may, after due notice and hearing, place the corporation under delinquent status.532 _| Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada A delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the SEC shall prescribe. Upon compliance by the corporation, the SEC shall issue an order lifting the delinquent status. Failure to comply with the requirements and resume operations within the period given by the SEC shall cause the revocation of the corporation’s certificate of incorporation. The SEC may also place the corporation under delinquent status in case of failure to submit the reportorial requirements three (3) times, consecutively or intermittently, within a period of five (5) years (Sec. 177). BY-LAWS These are the rules of action adopted by the corporation for its internal government and for the government of its officers, shareholders or members. Under Séction 46, a private corporation may provide in its by-laws for: The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; The time and manner of calling and conducting regular or special meetings and mode* cof notifying the stockholders or members thereof; The required quorum in meetings of stockholders or members and the manner of voting therein; a stockholder, member, director, or trustee may attend meetings 1 4, The modes* by whi and cast their votes; The form for proxies of stockholders and members and the manner of voting them; ies, the guidelines for 6. The directors’ or trustees’ qualifications, duties and responsi setting the compensation* of directors or trustees and officers; and the maximum number of other board representations that an independent director* or trustee may have which shall, in'no case, be more than the number prescribed by the SEC; The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; The manner of election or appointment and the'term of office of all officers other than directors or trustees; £ = 9. The penalties for violation of the bylaws; 10. Inthe case of stock corporations, the manner of issuing stock certificates; and Such other matters as may be necessary for the proper or convenient transaction of its ii. corporate affairs for the promotion of good governance and anti-graft‘and corruption measures*. An arbitration agreement may be provided in the by-laws pursuant to Section 181*. 12. * New provisions in the RCCP.- Corporations: Basic Considerations | 533 NO MINIMUM CAPITAL STOCK Stock corporations shall not be required to have a minimum capital stock, except as otherwise specifically provided by special law (Sec. 12). The minimum paid-in capital of at least P5,000 under Sec. 13 of the Corporation Code of the Philippines was deleted. There is also no minimum subscribed capital and no minimum paid-in capital requirement. “The requirements under. Section 13 of the Corporation Code of the Philippines, which states: “at the time of incorporation, at least 25% of the authorized capital stock as stated in the articles of incorporation must be subscribed and at least 25% of the total subscription must be paid upon subscription,” have been deleted in the RCCP. Note that the 25% subscribed and 25% paid-up rule is still applicable when the corporation increases its capital stock (Sec. 37). “BASIC CORPORATE ORGANIZATIONAL STRUCTURE The ultimate control of the corporation rests with the shareholders. They are the owners of the corporation. The shareholders elect the top governing body of the corporation, the members of the board of directors. The board of directors is responsible for the formulation of the overall policies for the corporation and for the exercise of corporate powers. The board also elects a chairman of the board. Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation's books (Sec. 22). Independent directors (as defined earlier) must be elected by the shareholders present or entitled to vote in absentia during the election of directors (Sec. 22). The election of the professional management team or the administrative officers is entrusted to the board, This team may include the president; executive vice-president; vice-presidents in charge of sales, manufacturing, accounting, finance, administration and other key areas; secretary; treasurer; and controller. These officers implement the policies of the board of directors and actively manage-the day-to-day. affairs of the corporation. Annuaily, a corporation holds the'shareholders’ meeting during which the shareholders elect their directors and make other decisions. Hierarchy of Corporate Structure Shareholders elect the Board of Directors elect the. Officers hire Employeesby Prof. WIN Balada | Section 24 states that the president of a corporation must be a director of the corporation, but he cannot act as president and secretary or as president and treasurer at the same time. The presidents the only officer required by law to be a director. 534 | Bosic Financial Accounting and Reporting 2021 Edi The corporate secretary must be a resident and a citizen of the Philippines. He need not . It is generally the duty of the be a director unless required by the corporate by-laws. secretary to make and keep its records and to make proper entries of the votes, resolutions and proceedings of the shareholders and directors in the management of the corporation. The corporate treasurer is the proper officer entrusted with the authority to receive and keep the money of the corporation and to disburse them as he may be authorized. The treasurer may or may not be a director but is now required per Sec. 24 of the RCCP to be a resident of the Philippines, If the corporation is vested with public interest, the board shall also elect a compliance officer (Sec. 24). There is no prohibition in the law against a shareholder being a director or officer of two or more corporations. The Corporation Code does not prohibit a corporate officer from occupying the same position in another corporation organized for the same purpose. However, such situation may be prohibited by special law, the articles of incorporation or the corporate by-laws. There.is a particular case involving a business tycoon who wanted to become a San Miguel Corporation director although he was already occupying the same post in two corporations directly competing with the food and beverage giant. At that time, San Miguel amended its by-laws to provide for the disqualification of a shareholder from being a director of the corporation if the former already occupies the same position in a competing firm. The Supreme Court later upheld the decision of San Miguel. Thus, a corporation is authorized to prescribe qualifications for its directors (Gokongwei'vs. SEC, 89 SCRA 336). RIGHTS OF A SHAREHOLDER The following are some of the rights of a shareholder: * 41. Right to be issued certificate. of stock or other evidence of share ownership and t0 transfer such shares. Right to vote via remote communication or in absentia (Note: under BP68, in person oF by proxy only) at shareholders’ meetings (Sec. 57). Right to elect and remove directors. Right to adopt, amend or repeal the by-laws, Right to purchase a portion of any new shares issued to maintain the same percentaBe i of stock ownership. This right is known as the pre-e emptive right. However, this right Is 2 = not absolute and may be denied. 6. Right to receive dividends when declared. : Right to inspect corporate books and records, and to receive financial reports of the corporation’s operations. Right to participate in the distribution of corporate assets upon dissolution.ured to keep books and records.at rivate corporation, stock or non-stock, is req rinciPal office of the following: Minutes book: shareholders: stock and transfer book: Tt is a record of the name: ‘and unpaid bY shareholders and dates of paymen hom and to whom made. thereof, byw f accounts. These represent the record of all busines mally include the journal and the ledger. gs of the directors and it contains the minutes of the meetin installments paid 15 of shareholders, k and dates it, any transfer of stoc! .5 transactions. The books 3, Books o! of accounts nor cook. Itis a book of printed blank subscription. 44, Subscription be ails thernumber of share: 5, Shareholders’ shareholder. ledger. It is a ledger which det .5 issued to each ledger, ts a subsidiary ledger for the subscriptions receivable account: It 6. Subscribers’ | reports the individual subscriptions: of the subscribers. inted blank certificates of stock. 7, Stock certificate book, Itis@ book of prit shall keep and carefully preserve at its section 73 provides that every corporation g, but not limited to: principal office all information relating to the corporation includiny 1. The articles of incorporation and by-laws of the corporation and all their amendments; 2. The current ownership structure and voting rights of the corporation, including lists of stockholders or members, BrOUP structures, intra-group relations, ownership data, and beneficial ownership; 3, The names and addresses of all the embers of the board of directors or trustees and the executive officers; . : 4, Arecord of all business transactions; 5. Arecord of the resolutions ofthe board of directors or trustes or members; 7 6. Copies of the latest reportorial requirements submitted to the Commission; and 7. The minutes of all meetings of Stockholders or members, and of the board of directors or trustees. .es and of the stockholders Section 74 states that a corporation shall furnish a stockholder or member, within ten days from receipt of their written request, its most recent financial statement, in Ie form and substance of the financial reporting required by the SEC. At the regular ee of stockholders or. members, the board of directors or trustees shall present to the Bia or members a financial report of the operations of the corporation for accords e ing year, which shall include financial statements, duly signed and certified in er ince with the RCCP, and the rules the SEC may prescribe. However, if the total 2 fe ae of the corporation isMess than P600,000, or such other amount feta letermined appropriate by the Department of Finance, the fi ‘i may be certified under oath by the treasurer and the president nance536 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada ONE PERSON CORPORATION (OPC) The Revised Corporation Code of the Philippines added a new type of corporation, thé One Person Corporation (OPC). OPC is a corporation with a single stockholder, who may be a natural person, a trust or-an estate (Sec. 116). One person may incorporate ‘two or more OPCs. Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-chartered government-owned and -controlled corporations may not incorporate as OPCs. A natural person who Is licensed to exercise a profession may not organize as an OPC fot the purpdse of exercising such profession except as otherwise provided under special laws (Sec. 116). The OPC has a personality separate and distinct from the single stockholder. The sole shareholder's liability is limited to his investment. He has the burden of affirmatively showing that the corporation was adequately financed. Where the single stockholder cannot prove that the property of the OPC is indepéndent of the stockholder’s personal property, the stockholder shall be jointly and severally, liable for the debts and other liabilities of the OPC. The principle of piercing the corporate veil applies with ‘equal force to OPC as with other corporations (Sec. 130). An OPC shall not be required to have a minimum authorized capital stock except as otherwise provided by special law (Sec. 117). If the corporation is an OPC, the letters “OPC” is included, either below or at the end of its corporate name (Sec. 120). The OPC is not required to submit and file corporate by-laws (Sec. 119). But, the OPC is required to file the AOI in accordance with Section 14. It shall likewise substantially contain the following: 1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee, administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties together with the proof of such authority to act on behalf of the trust or estate; and . 2. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation of the authority (Sec. 118). The single stockholder shall be the sole direttor and president of the OPC (Sec. 121). Within fifteen (15) days from the issuance of its certificate of incorporation, the OPC shall appoint a treasurer, corporate secretary, and other officers as it may deem necessary, and notify the SEC thereof within five (5) days from appointment. The single stockholder may not be appointed as the corporate secretary. The single stockholder may be the treasurer. The single stockholder who is likewise the self-appointed treasurer of the corporation, shall give a two-year term bond to the SEC in such a sum as may be required (Sec. 122).Corporations: Basic Considerations | 537 The single stockholder cannot be a corporate secretary in view of its special function under Section 123 (c), “notify.the SEC of the death of the single stockholder within five (5) days from such occurrence and stating in such notice the names, residence addresses and contact details of all known legal heirs.” ‘The single stockholder shall designate a nominee and an alternate nominee who shall, in the event of the single stockholder’s death or incapacity, take the place of the single stockholder as director and shall manage thé corporation's affairs. The articles of incorporation shall state the names, residence addresses and contact details of the nominee and alternate nominee, as well as the extent and limitations of their authority in managing the affairs of the OPC. The written consent of the nominee and alternate nominee shall be attached to the applicationi for incorporation. Such consent may be withdrawn in writing any time before the death or incapacity of the single stockholder (Sec. 124). The single stockholder may, at any tirne, change its nominee and alternate nominee by submitting to the SEC the names of the new nominees and their corresponding written consent. For this purpose, the articles of incorporation need not be amended (Sec. 126). : A One Person Corporation shall maintain a minutes book which'shall contain all actions, decisions, and resolutions taken by the OPC (Sec. 127). Records in Lieu of Meetings. - When action is needed on any matter, it shall be sufficient to prepare a written resolution, signed and dated by the single stockholder, and recorded in the minutes book of the OPC. The date of recording in the minutes book shall be deemed to be the date of the meeting for all purposes under the RCCP (Sec. 128). ‘REVIEW QUESTIONS Pr Define corporation. What are the essential attributes of corporations? Identify five advantages of a corporation. Identify four disadvantages of a corporation. Differentiate a stock from a non-stock corporation. Identify the components.of a corporation and briefly describe each. Identify the kinds of corporation as to nationality and purpose. Differentiate a public from a private corporation. _ What is the purpose of having independent directors in the board? What is an articles of incorporation? State at least seven (7) important provisions included in this instrument. Distinguish par value stock from-no-par value stock. Explain the compositions and functions of the basic corporate organizational structure. 11. What are some of the rights of a shareholder? 12. Define one person corporation. How is it similar and dissimilar with the corporation as discussed in question number 1 above? x pao p> @ BS