Re: Board of Directors or Trustees of a Corporation; Residency Requirement

May 26, 2022 SEC-OGC OPINION NO. 22-07 RE: BOARD OF DIRECTORS OR TRUSTEES OF A CORPORATION; RESIDENCY REQUIREMENT Law Offices of Disini Buted Disini 2/F Philippine Social Science Center, Commonwealth Ave., Diliman, Quezon City, 1101, Metro Manila, Philippines Attention: Atty. Rowena S. Disini Dear Atty. Disini, This refers to your letter 1 requesting for an opinion on the applicability of Section 22 of the Revised Corporation Code ("RCC"), 2 and its effect on existing provisions in the bylaws of your corporate clients, particularly the requirement that majority of the members of the board of directors must be residents of the Philippines. In your letter, you stated that the corporations were formed and incorporated under the old Corporation Code. 3 In order to comply with the requirements of Section 23 4 thereof, the corporations indicated in their bylaws that a majority of their directors must be residents of the Philippines. This residency requirement was subsequently removed under Section 22 of the RCC which took effect on 23 February 2019. Thus, you would like to seek an opinion on the following issues: 1. Whether or not the corporations may now be allowed to elect directors, all of whom are non-residents of the Philippines, consistent with the provisions of the RCC even if their bylaws still reflect the old and repealed provision under the Corporation Code; and 2. Alternatively, should amendment of the bylaws be required, whether or not they may already elect directors who are not Philippine residents pending the approval of their applications for amendment of their bylaws by the Commission. As to your first query , we answer in the negative. Section 23 of the old Corporation Code provides that "a majority of the directors or trustees of all corporations must be residents of the Philippines. On the other hand, Section 22 of the RCC provides for the qualifications and term of the board of directors or trustees of a corporation which does not anymore include the residency requirement. However, Section 46 (f) of the RCC allows private corporations to provide in their bylaws the directors' qualifications such as residency requirement. Thus, if a corporation provides in its bylaws the requirement that majority of its directors must be residents of the Philippines, then, it may do so. Such corporation may not elect directors, all of whom are non-residents of the Philippines, if its bylaws still requires that the majority of the elected directors must be residents of the Philippines. In Forest Hills Golf and Country Club, Inc. vs. Gardpro, Inc. , the Supreme Court held: "In that sense, the by-laws were the private "statutes" by which Forest Hills was regulated, and would function. The charter and the by-laws were thus the fundamental documents governing the conduct of Forest Hills' corporate affairs; they established norms of procedure for exercising rights, and reflected the purposes and intentions of the incorporators. Until repealed, the by-laws were a continuing rule for the government of Forest Hills and its officers, the proper function being to regulate the transaction of the incidental business of Forest Hills . The bylaws constituted a binding contract as between Forest Hills and its members, and as between the members themselves. Every stockholder governed by the by-laws was entitled to access them. The by-laws were self-imposed private laws binding on all members, directors and officers of Forest Hills. The prevailing rule is that the provisions of the articles of incorporation and the by-laws must be strictly complied with and applied to the letter." 5 (Emphasis and underscoring supplied) From the foregoing, corporations with bylaws containing the residency requirement which desire to remove such requirement must amend their bylaws to formalize such choice pursuant to Section 46 (f) of the RCC, the provisions of Section 22 notwithstanding. As to your second query , Section 47 of the RCC provides that the amended bylaws shall only be effective upon the issuance by the Commission of a certification that the same is in accordance with the RCC and other relevant laws. If the corporation decides to amend its bylaws to remove the requirement that the majority of its directors must be residents of the Philippines, such amendment will only take effect upon the Commission's issuance of the Certificate of Filing of Amended Bylaws. 6 Prior to such issuance, the corporation is still required to make sure that the majority of its elected directors are residents of the Philippines. Hence, the stockholders of the aforementioned corporation may elect directors who are not Philippine residents, pending the approval of its application for amendment of its bylaws by the Commission as long as majority of the directors are residents of the Philippines. It shall be understood that the foregoing opinion is rendered solely on the basis of the facts, circumstances and documents disclosed/submitted, and should be considered relevant solely to the particular issue raised therein. It shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances. 7 If upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void. Please be guided accordingly. Very truly yours, (SGD.) ROMUALD C. PADILLA General Counsel Footnotes 1. Dated 2 December 2020. 2. Republic Act No. 11232, Revised Corporation Code of the Philippines, 20 February 2019. 3. Batas Pambansa Blg. 68, Corporation Code of the Philippines, May 1, 1980. 4. Ibid. "SECTION 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. " 5. Forest Hills Golf and Country Club, Inc. vs. Gardpro, Inc. , G.R. No. 164686, October 22, 2014. 6. " Section 48. Amendments to by-laws . The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code ." (Emphasis supplied) 7. SEC Memorandum Circular 2003-15, No. 7.