1.1 Philippine Corporate Formation and Capital Structure

1.1 Philippine Corporate Formation and Capital Structure

Corporate formation and capitalization in the Philippines are governed primarily by Republic Act No. 11232, known as the Revised Corporation Code of the Philippines (RCCP). Enacted on February 20, 2019, the RCCP repealed the four-decade-old Batas Pambansa Blg. 68 (Corporation Code of 1980). The modern code streamlined business formation, enhanced corporate governance, and aligned domestic corporate practice with global regulatory standards under the oversight of the Securities and Exchange Commission (SEC) of the Philippines.

For securities professionals and compliance officers, understanding corporate formation is vital. Equity products traded on the Philippine Stock Exchange (PSE) and fixed-income debt listed on the Philippine Dealing & Exchange Corp. (PDEx) derive their legal characteristics, shareholder protections, and capital boundaries directly from these statutory rules.

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Statutory Foundation: Republic Act No. 11232

The RCCP introduced substantial structural changes to Philippine corporate jurisprudence. Key institutional shifts include:

1. Perpetual Corporate Term

Under the old law (BP 68), corporate existence was capped at a maximum of 50 years per term, requiring periodic charter extensions. Under Section 11 of the RCCP, corporations now have perpetual existence by default unless their Articles of Incorporation provide for a specific fixed term. Corporations incorporated prior to the RCCP automatically acquired perpetual existence unless they formally notified the SEC of their election to retain their specific term.

2. Number and Qualifications of Incorporators

Under BP 68, forming a corporation required between 5 and 15 natural persons, a majority of whom had to be Philippine residents. Under Section 10 of the RCCP:

• 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.
• Incorporators who are natural persons must be of legal age.
• The residency requirement has been eliminated: Incorporators and directors are no longer required to be residents of the Philippines, except where specific laws mandate domestic residency or citizenship (such as foreign ownership limitations under the Foreign Investments Act, RA 7042, and the 1987 Constitution).

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Corporate Formation Documents: Articles of Incorporation and Bylaws

A corporation legally comes into existence only upon the issuance by the SEC of its Certificate of Incorporation under its official seal (Section 18). Registration is processed through the SEC's digital filing portal, the Electronic Simplified Processing of Application for Registration of Company (eSPARC).

Articles of Incorporation (AOI)

The Articles of Incorporation constitute the corporate charter and the contract between the corporation, its shareholders, and the State. Under Sections 13 and 14, the AOI must contain:

1. Corporate Name: Must be distinct and not deceptive, confusingly similar, or contrary to law.
2. Purpose Clause: Distinguishes the primary purpose from secondary purposes. A corporation cannot engage in activities outside its stated purposes without charter amendment.
3. Principal Office: Must identify the specific city, municipality, and province within the Philippines where the principal office is located (general references such as "Metro Manila" are rejected by the SEC).
4. Corporate Term: Stated as perpetual unless a specific duration is elected.
5. Incorporators and Directors: Names, nationalities, and residence addresses of incorporators, and the initial directors (or trustees) who will serve until the first annual election.
6. Capital Stock Structure: The authorized capital stock, number of shares, par value per share (or statement of no-par value), classes of shares, and specific preferences or restrictions.
7. Initial Subscriptions and Payments: Names of subscribers, number of shares subscribed, and amount paid.

Corporate Bylaws

Bylaws provide the internal operating rules of the corporation (Sections 45 and 46). They govern the time, place, and notice requirements for shareholder and board meetings, quorum rules, officer duties, share certificate issuance, and the creation of executive committees. Bylaws may be adopted and filed simultaneously with the AOI, or within thirty (30) days after receiving the Certificate of Incorporation.

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The One Person Corporation (OPC)

One of the most consequential innovations of the RCCP is the creation of the One Person Corporation (OPC) under Chapter III of Title XIII (Sections 115 to 132). The OPC permits single entrepreneurs to obtain limited liability without fabricating nominal incorporators.

Eligibility and Prohibitions

• Eligible Entities: Only a natural person, a trust, or an estate may form an OPC (Section 115).
• Barred Entities: Banks, quasi-banks, trust companies, insurance companies, public and publicly-listed companies, non-chartered government-owned and controlled corporations (GOCCs), and corporations organized for the practice of a profession may not incorporate as an OPC (Section 116).

Governance and Capitalization Rules

• No Minimum Capital: An OPC is not required to have a minimum authorized capital stock, unless provided by special law.
• Sole Director and President: The single stockholder is automatically the sole director and president (Section 121).
• Corporate Officers: The single stockholder cannot be appointed as the Corporate Secretary. If the single stockholder assumes the position of Corporate Treasurer, they must post a surety bond with the SEC (Section 122).
• Nominee and Alternate Nominee: The single stockholder must designate a nominee and an alternate nominee in the AOI who will take over the management of the OPC in the event of the sole stockholder's death or incapacity (Section 124).

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Capital Stock Structure and the Elimination of the 25%-25% Rule

A critical area tested on the Philippine SEC licensing exam is corporate capitalization. Corporate capital is categorized into distinct tiers:

Authorized Capital Stock (ACS)
  └── Subscribed Capital Stock
        ├── Paid-in Capital (Cash / Property Received)
        └── Subscriptions Receivable (Unpaid Capital)

• Authorized Capital Stock (ACS): The maximum amount of capital stock, divided into shares, that a corporation is legally authorized to issue under its AOI.
• Subscribed Capital Stock: The portion of the ACS that prospective investors or existing stockholders have contracted to purchase.
• Outstanding Capital Stock: Total shares issued to stockholders, whether fully paid or not, excluding treasury shares (Section 173).
• Paid-in Capital / Additional Paid-in Capital (APIC): The actual consideration received by the corporation from shareholders. Any amount paid in excess of par value is credited to APIC.

The Major Statutory Reform: Elimination of the Initial 25%-25% Rule

Under the legacy BP 68, incorporation strictly required that at least 25% of the authorized capital stock be subscribed, and at least 25% of that subscription be paid up, with a minimum paid-up capital of ₱5,000.

Under Section 12 of the RCCP, this initial 25%-25% requirement was completely eliminated. Stock corporations are no longer subject to any general minimum authorized capital stock or mandatory upfront subscription percentage, except as required by special laws (such as capital requirements for banks under the Bangko Sentral ng Pilipinas or broker-dealers under SEC rules).

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Par Value vs. No-Par Value Shares

Under Section 6 of the RCCP, shares in a stock corporation may be divided into classes with such designations, preferences, or restrictions as stated in the AOI.

The Strict Legal Rules for No-Par Shares

1. Statutory Floor: Section 6 explicitly states that no-par value shares cannot be issued for a consideration less than ₱5.00 per share.
2. Deemed Fully Paid: No-par shares, once issued for lawful consideration, are deemed fully paid and non-assessable, meaning the holder cannot be assessed for future corporate debts.
3. Entire Consideration Treated as Capital: Unlike par shares where only the par value represents legal capital and the excess can be placed in APIC, the entire consideration received for no-par shares is locked into legal capital and cannot be distributed as dividends.
4. Excluded Industries: The RCCP explicitly prohibits banks, trust companies, insurance and pre-need companies, public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether listed or not, from issuing no-par value shares.

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The Legal Capital Doctrine and the Trust Fund Doctrine

In Philippine corporate law, limited liability protects stockholders from personal liability for corporate debts. Because corporate creditors cannot reach into the personal pockets of shareholders, the law establishes strict doctrines to preserve corporate capital.

Legal Capital Doctrine

Legal capital is the aggregate par value of all issued par-value shares plus the entire consideration received for all issued no-par value shares. Under Philippine law, legal capital forms a permanent statutory cushion that the corporation cannot distribute to stockholders through dividends or share repurchases during its operational lifetime.

The Trust Fund Doctrine

The Trust Fund Doctrine is a foundational principle of Philippine corporate law articulated in landmark jurisprudence (e.g., Halley v. Printwell, Inc., G.R. No. 157549; Boman Environmental Development Corp. v. Court of Appeals, G.R. No. 77860).

Under this doctrine:

• The subscribed capital stock of a corporation constitutes a trust fund for the payment of corporate debts.
• Creditors have the legal right to assume that the capital stock remains intact to satisfy their claims.
• Corporate assets and capital cannot be disbursed, transferred, or returned to shareholders to the prejudice of corporate creditors.
• Any agreement between the corporation and a subscriber releasing the subscriber from their unpaid subscription without equivalent consideration is null and void as against creditors.

Permissible Return of Capital

Under the Trust Fund Doctrine, capital can be legally returned or distributed to stockholders under only three strict statutory circumstances:

1. Formal corporate dissolution and liquidation, after all external corporate debts and creditor liabilities have been paid in full.
2. Formal reduction of authorized capital stock approved by the board, ratified by a two-thirds (2/3) shareholder vote, and explicitly approved by the SEC under Section 37 upon proof that creditor claims are unaffected.
3. Redemption of redeemable shares under Section 8, provided that the redemption leaves the corporation with sufficient assets to cover all remaining debts and liabilities.

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Comparative Summary: BP 68 vs. RA 11232

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Practical Exam Traps and Regulatory Pitfalls

• Trap 1: Believing the 25%-25% Rule is Completely Dead. Test items often ask whether the 25% subscription and 25% paid-up requirement still exists in Philippine law. Remember: It was abolished for initial incorporation under Section 12, but it is strictly required for increases of capital stock under Section 37.
• Trap 2: The OPC Corporate Secretary Prohibition. An exam question may describe an entrepreneur who incorporates an OPC and names himself President, Treasurer, and Corporate Secretary. This violates Section 121 and 122. The sole stockholder may be President and Treasurer (subject to a surety bond), but cannot serve as Corporate Secretary.
• Trap 3: No-Par Value Proceeds as Retained Earnings. Promoters cannot credit any portion of the issue price of no-par shares to Additional Paid-in Capital or Retained Earnings to pay dividends. The entire amount is statutory legal capital.
• Trap 4: Disallowed No-Par Sectors. Candidates frequently forget the list of sectors barred from issuing no-par shares. Always recall: Banks, trust companies, insurance and pre-need companies, public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether listed or not, must issue par-value shares only.