A. Governance

Board of Directors (BoD)

The BoD decides all questions pertaining to the corporate business and the administration of corporate property. In the exercise of its corporate powers, all acts of the corporation are done through the BoD, except for cases where the approval of the shareholders is required.10 The BoD exercises these powers upon the majority vote of its members at meetings held to discuss corporate business. The Chairman of the BoD presides over the meeting while the Corporate Secretary records the proceedings. BoD decisions are embodied in so-called Board Resolutions, which are contained in written minutes of all BoD meetings and kept by Corporate Secretary.

It is typical for the latter to issue Secretary’s Certificates or attestations concerning the existence of particular Board Resolutions (such as those authorizing the taking of any corporate action, e.g. , opening of bank accounts, entry into contracts, etc. ). As a rule, all corporate actions must be approved by the BoD and evidenced by a Board Resolution.

The compensation of the Directors may be fixed in the By-Laws. In case no such provision exists, the directors shall not receive any compensation except for reasonable per diems.

Shareholders and their Rights

Shareholders are owners of the shares of stock of the corporation. They are given certain rights that affect the governance of the corporation. Primarily, the shareholders elect the members of the BoD. However shareholders also play a role in decision-making for matters fundamental to the existence of the corporation (such as the amendment of the AOI and BL, the extending or shortening of the corporate term, the increase or decrease of capital stocks, among others).

In addition to such rights, the shareholders also possess an “appraisal right” which allows a dissenting shareholder to demand payment of the fair value of his shares in certain cases where there is a substantial change in the corporation’s nature and capacity to carry out business. The shareholder also has a “pre-emptive right” which generally allows him to subscribe to a subsequent issuance of shares in proportion to their respective shareholdings.

Officers of the Corporation and their Functions

The Corporation Code prescribes at least 3 officers of the corporation namely: 1) the President 2) Treasurer and 3) Corporate Secretary. It also prescribes the specific qualifications for such officers. Additional corporate officers may be created and their duties and qualifications may be provided in the BL.

B. Special Considerations for Startups

Kinds of Shares of Stock: Preferred versus Common

There are many different types of shares in a corporation. The two usual types11 are the common shares and the preferred shares. The preferred shares are those that are given preference in the distribution of the dividends in case of liquidation of the corporation.12 In exchange for such privileges, preferred shares are not given the right to vote for directors—a right available only to holders of common shares.

Financing a Corporation: Debt and Equity Infusion

A corporation raises funds chiefly through a mix of debt and equity financing. Debt financing involves taking out loans, usually from a bank, in order to finance a business. This allows the incorporators to maintain control of the corporation, while at the same time be able to use the loan as an expense that can be a deduction against the company’s tax liability. Moreover, debt financing allows for a capital infusion without having to share any net income of the corporation. The maximum return for the lender is the interest rate set in the debt instrument.

On the other hand, equity financing involves selling shares of the corporation to interested investors. This allows the corporation some breathing room during the start-up stage as no obligations or interest will be due. It also allows the investors to bring their business expertise to the corporation. Equity financing is more attractive to an investor because the maximum loss would be the amount invested while the gain involves a share in the corporation’s future income and the appreciation of the share value as the corporation grows. From the founder’s standpoint, equity financing might be easier to get but it involves losing some control over the management of the business. In that sense, debt financing is attractive but unless the business has income to pay for interest expense, it may not even be an option.

C. SEC Reportorial Requirements

Among the responsibilities of corporations registered with the SEC is the annual submission of the General Information Sheet and Audited Financial Statement. This is a requirement that should be complied with promptly and accurately because late filing and/or non-filing carries with them penalties ranging from fines to revocation of the corporate license.

General Information Sheet (GIS)

The GIS should be certified and sworn to by the Corporate Secretary. It should be filed within 30 days from the date of the annual SH meeting or members’ meeting. If the corporation is not in operation, it should submit an Affidavit of Non-Operation.

Annual Financial Statements (AFS)

If the stock corporation has a paid-up capital of PhP 50,000.00 or more, the AFS shall be audited by an independent certified public accountant registered with the Board of Accountancy. In case the amount of the paid-up capital is less than PhP 50,000.00, the AFS shall at least be certified under oath by the Treasurer of the corporation. It should be submitted within 120 calendar days after the end of each fiscal year, as indicated in the Financial Statements (FS).

In addition to the hard copies of the GIS and AFS, corporations with Gross Sales/Revenue of at least PhP 5 million shall submit a diskette/compact disk (“CD”) containing an electronic file/soft copy of the GIS or the FS template as provided by the SEC. The GIS diskette/CD(s) shall be accompanied by a Certification under oath by the Corporate Secretary, stating that it contains the exact data stated in the hard copies. On the other hand, the diskette/CD for the FS template(s) shall be accompanied by a Certification under oath by the Treasurer that it contains the same basic or material data in the hard copies of the AFS.