SVP Don Villamayor

January 7, 2004 SEC OPINION NO. 01-04 SVP Don Villamayor Officer-in-Charge Office of the Legal Counsel Development Bank of the Philippines Sen. Gil Puyat Ave.,cor. Makati Avenue Makati City SUBJECT : LGUs as incorporators of stock corporations Using IRA allocations as payment for Subscription S i r : This refers to your letter dated 8 September 2003 wherein you requested opinion on the following: (1) Whether or not Governors of LGUs in their official capacity in representation of their respective provinces can form a corporation under the Corporation Code? and, (2) If in the affirmative, whether or not the LGUs represented by their respective Governors can be subscribers using Internal Revenue Allotments (IRA) which are public funds in payment of their respective subscription? Anent your first query, Section 10 1 of the Corporation Code provides that only natural persons may be incorporators. The only exception so far is when it is otherwise allowed by law as in the case of incorporated cooperatives, which are allowed to be incorporators of rural banks 2 and non-stock corporations. Otherwise, the additional restrictions to incorporators provided for are limited to: (1) their number; (2) legal capacity; and (3) residency. Hence, theoretically , governors of LGUs in their official capacities, being natural persons, of legal age and residents of the Philippines, can form a corporation pursuant to the provisions of the Corporation Code. However, the provisions of the Corporation Code must be reconciled with the provisions of the Local Government Code, which regulate the dealings of these governors of LGUs aspiring to form a corporation in their official capacities, as well as the provisions of Republic Act No. 6713, 3 which provides for the ethical standards for elective and appointed officials in government service. With regard to your second query, payment of pre-incorporation subscription is governed by Section 14 the Corporation Code, which provides in part: "Section 14. Contents of Articles of Incorporation . xxx xxx xxx The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the treasurer elected by the subscribers showing that at least twenty five percent (25%) of the authorized capital stock of the corporation has been subscribed, and at least twenty five (25%) percent of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty five (25%) percent of the said subscription, such paid-up capital being not less than five thousand pesos (P5,000.00)." ( emphasis supplied ) Evidently, the aforequoted provision does not qualify the source of the payment of pre-incorporation subscription. The only restriction stated is that payment shall be in actual cash and/or in property. While the Corporation Code does not prohibit the use of IRA, which partake the nature of public funds, any usage thereof may be subject to limitations of other laws. It becomes imperative, then, to reconcile the provisions of Republic Act No. 6713, specifically on divestment and prohibited acts and transactions with the provisions of the Corporation Code considering that the personalities involved are public officials and the situation depicted is imbued with public trust and confidence. This Commission, however, cannot and will not venture to render an opinion relative to the provisions of both the Local Government Code and Republic Act No. 6713, which is not within the area of its competence and jurisdiction. At best, you can seek further opinion from the Department of the Interior and Local Government, Department of Justice, Department of Budget and Management and the Commission on Audit on the matter. SaETCI Please be advised accordingly. Very truly yours, (SGD.) VERNETTE UMALI-PACO General Counsel Footnotes 1. Section 10. Number and qualifications of incorporation. Any number of natural persons not less than five (5) but not more than fifteen (15),all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. 2. SEC Bulletin January 1972, page 15. 3. An Act Establishing A Code of Conduct and Ethical Standards for Public Officials and Employees, to Uphold the Time-Honored Principle of Public Office Being A Public Trust, Granting Incentives and Rewards for Exemplary Service, Enumerating Prohibited Acts and Transactions and Providing Penalties for Violation Thereof and for Other Purposes.