San Juan Africa Gonzales & San Agustin

March 6, 1986 San Juan Africa Gonzales & San Agustin 7th Flr.,Telecoms Plaza Bldg. 316 Senator Gil J. Puyat Ave. Makati, Metro Manila Gentlemen: This relates to your letter, dated February 18, 1986, requesting the opinion of this Commission as to whether Section 44 of the Corporation Code applies retroactively on existing management contracts entered into while the Corporation Law (Act No. 1459) was still in effect. LibLex Quoted hereunder are the provisions of Section 44 of the Corporation Code: "Power to enter into management contract. No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, ...,of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the outstanding capital stock entitled to vote, ... No management contract shall be entered into for a period longer than five years for any one term . The provision of the next preceding paragraph shall not apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreement or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations." Anent the limitation period imposed on management contracts, as may be gleaned from the proceedings of the Batasang Pambansa on the then proposed Corporation Code held on December 5 and 10, 1979 and February 12, 1980, it is the legislative intent of affording the board of directors and stockholders an opportunity to review the situation every five years and decide whether the contract shall be allowed to expire or not. Said limitation period guarantees that management contracts are looked into again by the stockholders every five years so that if on the basis of previous experiences, there have been abuses on the part of managing corporations, the contracts may not be renewed for another term. As aptly stated by M.P. Estelito Mendoza: "...every five years the stockholders would have an opportunity of reviewing the effects, the benefits or the prejudices which would have resulted from the operation of the management contract and on that basis, decide either to renew or to consider the contract terminated." As to the effect of the corporation Code on existing corporations, Section 148 of the Code provides: "Applicability to existing corporations. All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That where any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same ." (emphasis supplied) The above provision must however be understood to be subject to the accrued or vested rights of the corporation, its stockholders as well as third parties, as expressly provided in Section 76 of the Corporation Law which provides in part thus: ". . . . No right or remedy in favor of or accrued against any corporation, its stockholders or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this act or any part or portion thereof." cdll Taking these two provisions together, although a corporation incorporated under Act 1459 (Corporation Law) is now governed by the provisions of the Corporation Code, any rights accrued prior to the effectivity of the Code in favor of such corporation, its stockholders or members must be respected. However, additional requirements imposed by the Code must be complied with within two years from its effectivity. (Campos, Campos, Corporation Code, "Comments, Notes and Selected Cases", 1981 ed., p. 17). Considering the foregoing, and in line with our previous opinions on the application of the transition period clause, our answer to your query is in the affirmative. Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner