SPONSORSHIP SPEECH OF SEN. FRANKLIN M. DRILON
December 13, 2016

Senate Bill No. 1280/ Committee Report No. 22

ACT AMENDING BATAS PAMBANSA BILANG 68 OR THE CORPORATION CODE OF THE PHILIPPINES.

Mr. President, distinguished colleagues, good afternoon.

The Philippines has been hailed as the fastest-rising economy in Asia, even being predicted to outperform China. With reasonable labor costs and an educated workforce, the Philippines should be an attractive investment destination.

But, it is still widely observed that doing business in the country presents many complexities. Although the Philippines improved its ranking, from 103rd to 99th, in the 2017 World Bank's "Ease of Doing Business" survey, we dropped 7 spots from 164th to 171st in the aspect of Starting a Business.

Indeed, investors find it hard to navigate through the startup procedures in the Philippines, without the assistance of experienced counsel. For individuals who do not have the resources to hire lawyers, the task of putting up a corporation is even more daunting.

Mr. President, the Corporation Code of the Philippines was enacted in 1980, or thirty six years ago. If we are to keep up with the rest of the financial world, we need to codify best international corporate practices and address the archaic bottlenecks in the areas of starting a business, and protecting minority investors. We must likewise provide an environment conducive not just to big businesses, but make the corporate vehicle an appealing prospect for startups and entrepreneurs.

It is in this light Mr. President, that I present to this chamber Senate Bill No. 1280 under Committee Report No. 22 or the "Act Amending Batas Pambansa Bilang 68 or the Corporation Code of the Philippines."

The amendments sought to be introduced by the bill may be divided into four (4) main reform clusters: First, policies that would enhance the ease of doing business in the Philippines; Second, rules that prioritize corporate and stockholder protection; Third, provisions that instill corporate and civic responsibility; and Fourth, amendments that will strengthen the country's policy and regulatory corporate framework.

Enhancing the Ease of Doing Business

To contribute to the ease of doing business, the proposed revised corporation code would streamline the process of incorporation - with the name verification process simplified. In addition, the proposed measure will allow companies to perpetually exist. It will permit a single person to form a "one-person corporation". Likewise, stockholder voting may now be through remote communication, or in absentia.

The present name verification system, with the "confusingly similar" standard imposed, is indeed confusing. Hence, a shift to the "distinguishability" test will no doubt allow the full and seamless automation of name registration. For example, under the law today, you cannot register "XYZ Dream Network" because of a previously registered "XYZ Dream Hospital". Under the proposed amendment, you can do so, because one of the key words is different.

A common stumbling block for many investors to incorporate is the requirement for a corporation to have at least five (5) incorporators. This has made declarations of trust and nominee shareholders indispensable to doing business in the country. Investors name individuals as incorporators, with no real interest in the corporation, just to comply with the legal requirement. For local business owners, naming the entire household as incorporators- from cook to driver- is not unusual.

It is for this reason that we seek to introduce the concept of the One Person Corporation in our jurisdiction.

The Philippines is one of the few countries that sets limits on the corporate term. Those who actually go through the arduous task of incorporating, run the risk of having their corporations dissolved simply by forgetting to renew their corporate term.

The proposal for a perpetual corporate term as the default option seeks to address this problem.

Although no one will confess to it, many lawyers do what we call as "paper minutes". The resort to paper minutes is due to the fact that shareholders are required to be present during meetings in person, or by proxy. Likewise, directors are required to be present during meetings in person, or through video/teleconferencing.

The proposed amendments acknowledge the need to adapt to changing times, by allowing the use of alternative modes of communication that are available through technology. Stockholders and directors need not be physically present in meetings. Remote communication can facilitate attendance in meetings, allowing the stockholders to actively participate in discussions and come up with more informed decisions. Votes may, in some instances, be cast in absentia.

On the electronic filing of requirements with the SEC, the Commission has noted that although it has already opened up several satellite offices in Metro Manila and all over the country, compliance with reportorial requirements is not satisfactory. Only 500,000, out of 800,000 registered companies, are reported to be still operating or doing business.[1] With the proposed adoption of an electronic filing system, we hope that the compliance number will improve.

Prioritizing Corporate and Stockholder Protection

The second reform cluster includes provisions on (a) the creation of emergency boards; (b) the revised rules on the right to inspect corporate books; (c) modified quorum requirements; and (d) expanded grounds for disqualification of directors.

The creation and recognition of an emergency board would address the situation where a corporation's board of directors or trustees goes on a perpetual holdover because it cannot muster a quorum. An emergency board can operate for a limited period and purpose, allowing the corporation to continue its daily operations despite vacancies in the board.

It is recognized that some stockholders may not be well versed to interpret the contents of corporate documents. Hence, we propose to allow a representative or counsel to exercise the right to inspect the corporate books on behalf of the stockholder.

We are likewise introducing a more stringent and expanded set of grounds for disqualification of directors towards a more principled corporate decision-making.

Instilling Corporate and Civic Responsibility

In crafting the amendments to the thirty-six year old Code, we want to create corporate entities, which would be effective vehicles for the accumulation of capital, production of goods, and delivery of services. In the words of the sponsor of BP Bilang 68, "corporations are not mere business organizations exclusively intended to serve personal interests, but are social institutions in which all sectors of society have an interest."[2]

The third reform cluster therefore is on the imposition of more stringent Corporate and Civic Responsibility. In the public sector, we have imposed stricter good governance standards when we authored the GOCC Governance Act in the 15th Congress.

Criminals hide behind the separate personality given to corporations. Shareholders have little incentive to be vigilant because the corporation itself is not subject to criminal liability.

In compliance therefore with our obligations under the United Nations Convention Against Corruption, or the UNCAC, to prevent the use of the corporation as a vehicle for committing crimes, we hereby seek to impose corporate criminal liability and penalties for graft and corruption. Aside from having to pay hefty fines, the corporation may also suffer revocation of its registration.

In addition, corporations vested with public interest are now required to have independent directors as part of the Board. Further, the Board of Directors of such corporations shall elect a compliance officer. Educational institutions, banks, insurance, transportation, telecommunication companies, publicly listed companies, among others, are examples of corporations vested with public interest. The SEC, in the interest of the public, may expand the list.

Strengthening the Policy & Regulatory Corporate Framework

The fourth and last reform cluster includes provisions on (a) arbitration of commercial disputes; (b) amendments on dissolution; and (c) the alignment of SEC's powers under the Corporation Code with the Securities Regulation Code.

Presently, the SEC is equipped under the Securities Regulation Code with powers that are proper to an investigative and regulatory agency. It can issue subpoenas, cease and desist orders, and it can cite persons in contempt.

The amendments seek to vest the same power to the SEC over ordinary corporations.

The proposed amendments also provide expanded grounds for dissolution and a more streamlined process for both voluntary and involuntary dissolution.

Finally, a provision on arbitration is included in the proposed amendments, recognizing that methods alternative to litigation can resolve disputes in a more practical and efficient manner.

In general, the proposed amendments promote efficiency and encourage transparency in corporate dealings --from formation to daily operations. These proposed amendments are in line with global best practices. Having them in place will allow the Philippines to compete with other countries as a viable investment destination and business-friendly jurisdiction.

Mr. President, for these reasons, and more, we urge the passage of this important measure.

Thank you.

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[1] Transcript of Committee Hearing dated 26 September 2016, p.22.

[2] Sponsorship Speech of Minister Mendoza, 5 November 1979.