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14 Basic Financial Accounting & Reporting Corporations: Basic Considerations Learning Objectives: fter 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.
- ldentify and explain the advantages and disadvantages of a corporation.
- Identify and describe the classes of corporations under the Revised Corporation Code of the Philippines.
- ldentify and describe the other classifications of corporations.
- Detail the components of a corporatioon.
- Define independent director.
- Describe the classes of CTO.
- Summarize the essential contents of the articles of incorporation and the by- laws.
- Compare the contents of the AOIl per RCCP and Corporation Code. 12, Determine the minimum capital stock requirement at the time of incorporation.
- Interpret the basic corporate organizational structure.
- List some of the rights of a shareholder. 15 Name the corporate books and records.
- Define a one person corporation and discuss its salient features. 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 .40% of Philippine enterprises or 3,023 out of a total 777,687 firms counted in 2010. The rest-the 99.6% composed of micro-enterprises (making up 91.6%) and small and 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 mi. nbors, nicro- enterprises and SMEs contributing a smaller share to GDP than those of our neigh with the share reaching up to 57% in Indonesia. The same holds for contribution odia, total jobs: Philippine SMEs account for 61%, versus 68% in Singapore, 73% in Cambod: 77% in Thailand, 81% in Laos and 97% in Indonesia. These comparisons show that orasd
scope remains for strengthening the role of SMES In the Philippine economy if tha traditional hurdles in access to finance, technology, raw materials and markets can h vercome. Adapted portions from "Small Business and ASEAN Integration," By Dr. Cielito Hobto 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 ordinaryor 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 " 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 (RCCP), 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. 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, Rules that prioritize corporate and stockholder protection Provisions that instill corporate and civic responsibility; and Amendments that will strengthen the country's policy and regulatory corporare framework.
CLASSES OF CORPORATIONS
Section 3 of the RCCP classified private corporations into:
- Stock corporation. Corporations which have share capital divided into shares and are authorized to distribute to the holders of such shares, dividends or allotments o the surplus profits on the basis of the shares held. 2 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 1o 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). OTHER CLASSIFICATIONS OF CORPORATIONS
- According to number of person s: A. Corporation aggregate. A corporation consisting of more than one corporato B. Corporation sole or a special form of corporation usually associated with the clergy. It is a corporation which consists of only one member or corporator and his successors such as a bishop.
- According to nationality : A. Domestic corporation. A corporation organized under Philippine laws. 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) 3, According to whether for public or private purpose : A. Public corporation. A corporation formed or organized 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 regard 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. B. Open corporation. A corporation where the share is available for subscription or purchase by any person. 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).
- 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. B. Subsidiary corporation. A corporation controlled by another corporation known as a parent corporation. COMPONENTS OF A CORPORATION
- 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). 2 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 (e.g., 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
- 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
- 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 funds from the public, whether publicly listed or not, shall not be permitted to issue no-par value shares of stock (Sec. 6).
- Voting shares. Those issued with the right to vote.
- Non-voting shares. Those issued without the right to vote.
- Ordinary shares. These shares entitle the holder to an equal pro-rata division of profits without any preference.
- Preference shares. These shares entitle the holder to certain advantages or benefits over the holders of ordinary shares.
- Founders' shares may be given certain rights and privileges not enjoyed by the owners of other stocks (Sec. 7).
- 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 corporation, and upon such other terms and conditions stated in the articles of incorporation and the certificate of stock representing the shares (Sec. 8).
- Treasury snares. A stock that has been issued by the corporation as fully pala a later reacquired but not retired.
- Promotion shares. Those issued to promoters as compensation in promoting incorporation of a corporation, or for services rendered in launching or promoting the weltare of the corporation.
- Convertible shares. A stock which is convertible or changeable from one class another class. ARTICLES OF INCORPORATION (AOI) 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:
- The name of the corporation; 2 The specific purpose or purposes for which the corporation is formed;
- 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 eleected perpetual existence;
- 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);
- The names, nationalities and residences of the persons who shall act as
Prescribed Form Per Section 14, unless otherwise prescribed by special law, the articles of incorporation of all 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- stock) corporation under the laws of the Republic of the Philippines and certify the following: First: That the name of said corporation shall be "_____ Inc., Corporation or OPC"; Second: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicafe primary and secondary purposes): Third: That the principal office of the corporation is located in the City/Municipaliy of _______ Province of ______________, Philippines; Fourth: That the corporation shall have perpetual existence or a term of ______________ years from the date of issuance of the certificate of incorporation Fifth: That the names, nationalities, and residence addresses of the incorporato of the corporation are as follows: Name Nationaity 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: Name Nationaity Residence
Seventh: That the authorized capital stock of the corporationn is ___________ PESOS(P _____),divided into shares with the par value of ________PESOS (P __________) per share. (In case all the shares are without par value): That the capita stock of the corporation ___________ is shares without par value. (In case some shares nave par value and some are without par value): That the capifal stock of said corporation consists of ___________ shares, 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 Nationality No. of Shares Subscribed Amount Subscribed Amount Paid (Modify No. 8 if shares are with no par value. In case the corporation is non-stock. Nos. 7 and 8 of the above articles 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 unfil 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 corporafion, all subscriptions, Contributions or donations Paid or given by the subscribers or members, who certifies the information set forth in the eventh and eighth clauses above, and fhaT he paid-up portion of the subscription in ash and/or property for the benefif and credit of fthe corporation has been duly received. Tenth: That the incorporators underfake to change the name of the corporation ediately upon receipt of notice from the Commission that another corporation, partnership or person has acquired a prior right to the use of such name, that the name has been declared not distinguishable from a name already registered or reserved for the use of another corporation, or that it is confrary fo law, public morals, good custom or public 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 citizen to less than the required percentage of capifal stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation, and this restriction shall be indicated in all stock certificates issued by the corporation."
Amount of Subscribed and Paid-In Capital No minimum capital stock required unless required by special law. There is also no minimum subscribed capital and no minimum paid-in capital. At least 25% of the authorized capital stock must be subscribed at least 25% of the subscribed capital must be paid-up. Statement of Subscribed and Paid-In Capital Subscribed and paid-in capital are in the 8th clause of the AOI (Sec. 14 RCCP). In two (2) separate clauses (8th and 9th) of the AOI, (Sec. 15, Corporation Code). Treasurer’r Affidavit A separate treasurer's affidavit is no longer required but the certification of the treasurer is part of the AOI (9th^ Caluse) A separate treasurer's affidavit is required. Undertaking to Change Name No longer required to submit a separate undertaking, see the 10th Clause of the AOI There is a separate undertaking to change the corporate name to be signed by directors. Signatories The incorporators and the treasurer sign the AOl. Only incorporators sign the AOI. 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 noperative for a period of ot least five (5) consecutive years, the SEC may, after due notice and hearing, place the corporation under delinquent status.
A delinquent corporation shall have a period of to (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 Section 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 of notifying the stockholders or members thereof 3 The required quorum in meetings of stockholders or members and the manner of voting therein;
- The modes* by which a stockholder, member, director, or trustee may attend meetings and cast their votes;
- The form for proxies of stockholders and members and the manner of voting them;
- The directors' or trustees' qualifications, duties and responsibilities, the guidelines for 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 thee 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;
- In the 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 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*. *New provisions in the RCCP.
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 president is the only officer required by law to be a directorer The corporate secretar y must be a resident and a citizen of the Philippines. He need the not be a director unless required by the corporate by-laws. It is generally the duty of the 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. 24 of the RCCP to be a resident of the Philippines. If the corporation is vested with public interest, the board shall also electa 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 ocupying 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:
- Right to be issued certificate of stoçk or other evidence of share ownership and to transfer such shares.
- Right to vote via remote communication or in absentia (Note: under BP68, in person or 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 percentage of stock ownership. This right is known as the pre-emptive right. However, this rignt not absolute and may be denied.
- 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.
CORPORATE BOOKS AND RECORDS
Every private corporation, stock or non-stock is required to keep books and records at its principal office of the following:
- Minutes book. It contains the minutes of the meetings of the directors and shareholder 2 Stock and transfer book. It is a record of the names of shareholders, installments paid and unpaid by shareholders and dates of of payment, any transfer of stock and dates thereof, by whom and to whom made.
- Books of accounts. These represent the record of all business transactions. The b0OKs of accounts normally include the journal and the ledger.
- Subscription book. It is a book of printed blank subscription.
- Shareholders' ledger. It is a legder which details the number of shares issued to each shareholder.
- Subscribers' ledger. It is a subsidiary ledger for the subscriptions receivable accounty; it reports the individual subscriptions of the subscribers.
- Stock certificate book. It is a book of printed blank certificates of stock. Section 73 provides that every corporation shall keep and carefully preserve at its principal office all information relating to the corporation including, but not limited to:
- The articles of incorporation and by-laws of the corporation and all their amendments;
- The current ownership structure and voting rights of the corporation, including lists of stockholders or members, group structures, intra-group relations, ownership data, and beneficial ownership;
- The names and addresses of all the members of the board of directors or trustees and the executive officers;
- A record of all business transactions;
- A record of the resolutions of the board of directors or trustees and of the stockholders or members;
- Copies of the latest reportorial requirements submitted to the Commission; and
- The minutes of all meetings of stockholders or members, and of the board of directors or trustees. Section 74 states that a corporation shall furnish a stockholder or member, within ten (10) days from receipt of their written request, its most recent financial statement, in the form and substance of the financial reporting required by the SEC. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified in accordance with the RCCP, and the rules the SEC may prescribe. However, if the total assets or total liabilities of the corporation is less than P600,000, or such other amount as may be determined appropriate by the Department of Finance, the financial Statements may be certified under oath by the treasurer and the president.
stating in such notice the names, residence 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 the corporation's affairs. The articles incorporation shall state the names, addresses and contact details of the nominee and alternative 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 application 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 time, 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).
