The Corporate
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Willem J L Calkoen
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i
Acknowledgements
Plesner Law Firm
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ii
contents
Editor's Preface
��������������������������������������������������������������������������������������������������vii
Willem J L Calkoen
Chapter 1
Australia�������������������������������������������������������������������������������1
John Williamson-Noble and Tim Gordon
Chapter 2
Belgium��������������������������������������������������������������������������������12
Elke Janssens and Virginie Ciers
Chapter 3
Canada���������������������������������������������������������������������������������36
Andrew MacDougall, Robert Yalden and Elizabeth Walker
Chapter 4
Denmark������������������������������������������������������������������������������48
Jacob Christensen and Nicholas William Boe Stenderup
Chapter 5
France����������������������������������������������������������������������������������61
Didier Martin
Chapter 6
Germany������������������������������������������������������������������������������75
Carsten van de Sande
Chapter 7
Greece����������������������������������������������������������������������������������90
Evy C Kyttari and Sofia Kizantidi
Chapter 8
Hong Kong����������������������������������������������������������������������100
Lai Voon Keat and Victor Lee
Chapter 9
Hungary����������������������������������������������������������������������������120
Ildikó Varga and Viktória Szilágyi
iii
Contents
Chapter 10
Ireland������������������������������������������������������������������������������131
Paul White
Chapter 11
Italy�������������������������������������������������������������������������������������145
Gregorio Gitti, Diego Riva, Camilla Ferrari and Luca Bernini
Chapter 12
Japan������������������������������������������������������������������������������������158
Tatsuya Tanigawa and Hiroki Moriyama
Chapter 13
Luxembourg��������������������������������������������������������������������170
Margaretha Wilkenhuysen and Louisa Silcox
Chapter 14
Netherlands������������������������������������������������������������������190
Geert Raaijmakers and Marlies Stek
Chapter 15
Nigeria��������������������������������������������������������������������������������210
Simeon Obidairo and Ajibola Asolo
Chapter 16
Norway�������������������������������������������������������������������������������221
Terje Gulbrandsen and Odd Moe
Chapter 17
Philippines������������������������������������������������������������������������235
Pearl T Liu and Charles J Veloso
Chapter 18
Portugal���������������������������������������������������������������������������250
Bernardo Abreu Mota and Mariana Veiga Montez
Chapter 19
Qatar�����������������������������������������������������������������������������������262
Nadine Naji
Chapter 20
Romania�����������������������������������������������������������������������������274
Cristian Radu
Chapter 21
Singapore�������������������������������������������������������������������������290
Annabelle Yip and Joy Tan
iv
Contents
Chapter 22
SOUTH AFRICA�������������������������������������������������������������������304
David Walker, Matodzi Ramashia and Faith Rambau
Chapter 23
Spain�������������������������������������������������������������������������������������315
Carlos Paredes
Chapter 24
Sweden�������������������������������������������������������������������������������326
Hans Petersson and Emma Kratz
Chapter 25
Switzerland�������������������������������������������������������������������339
Rolf Watter and Katja Roth Pellanda
Chapter 26
Turkey��������������������������������������������������������������������������������352
Ümit Hergüner and Zeynep Ahu Sazci
Chapter 27
Ukraine������������������������������������������������������������������������������364
Vadym Samoilenko and Oles Kvyat
Chapter 28
United Arab Emirates�������������������������������������������������375
Ibrahim Elsadig and Catherine Beckett
Chapter 29
United Kingdom�����������������������������������������������������������388
Andy Ryde and Murray Cox
Chapter 30
United States�����������������������������������������������������������������401
Adam O Emmerich, William Savitt, Sabastian V Niles
and S Iliana Ongun
Chapter 31
United States: Delaware������������������������������������������413
Ellisa O Habbart and Lisa R Stark
Appendix 1
about the authors�����������������������������������������������������425
Appendix 2
Contributing Law Firms’ contact details���444
v
Editor’s Preface
I am proud to present to you the new edition of The Corporate Governance Review.
In this third edition, we can see that corporate governance is becoming a more
prominent topic with each year. We see that everyone wants to be involved in ‘better
corporate governance’: parliaments, governments, the European Commission, the SEC,
the OECD, the UN (as demonstrated in its ‘protect, respect and remedy’ framework),
the media, supervising national banks, shareholder activists and other stakeholders. The
business world is getting more complex and overregulated, and there are more black swans,
while good strategies can become quite quickly outdated. Most directors are working
diligently; nevertheless, there have been failures in some sectors and this means that trust
has to be regained. How can directors carry out their increasingly complex work and
communicate with all the parties mentioned above?
What should executive directors know? What should outside directors know? What
systems should they set up for better enterprise risk management? How can chairs create
a balance against imperious CEOs? Can lead or senior directors create sufficient balance?
Should outside directors understand the business? How much time should they spend on
the function? How independent must they be? Should their pay be lower? What about
diversity?
Governments, the European Commission and the SEC are all pressing for more
formal inflexible legislative Acts, especially in the area of remuneration. Acts set minimum
standards, while codes of best practices set aspirational standards.
More international investors, voting advisory associations and shareholder activists
want to be involved in dialogue with boards about strategy, succession and income. Indeed,
wise boards have ‘selected engagements’ with stewardship shareholders in order to create
trust. What more can they do to show stakeholders that they are improving the enterprises
other than by setting a better ‘tone from the top’. Should they put big signs on the buildings
emphasising: integrity, stewardship and respect?
Interest in corporate governance has been increasing since 1992, when shareholder
activists forced out the CEO at General Motors and the first corporate governance code –
the Cadbury Code – was written. The OECD produced a model code and many countries
vii
Editor’s Preface
produced national codes along the model of the Cadbury ‘comply-or-explain’ method.
This has generally led to more transparency, accountability, fairness and responsibility.
However, there have been instances where CEOs have gradually amassed too much power,
or companies have not developed new strategies and have fallen into bad results – and
sometimes even failure. More are failing in the financial crisis than in other times, hence the
increased outside interest in legislation, further supervision and new corporate governance
codes for boards, and stewardship codes for shareholders and shareholder activists.
This all implies that executive and non-executive directors should work harder and
increasingly as a team on strategy and innovation. It is still a fact that more money is lost
due to lax directorship than to mistakes. On the other hand, corporate risk management is
an essential part of directors’ responsibilities, and sets the tone from the top.
Each country has its own measures; however, the various chapters of this book
show a convergence. The concept underlying this book is to achieve a one-volume text
containing a series of reasonably short, but sufficiently detailed, jurisdictional overviews
that will permit convenient comparisons, where a quick ‘first look’ at key issues is helpful
to general counsel and their clients.
My aim as editor has been to achieve a high quality of content so that The Corporate
Governance Review will be seen, in time, as an essential reference work in our field.
To meet the all-important content quality objective, it was a condition sine qua non
to attract as contributors colleagues who are among the recognised leaders in the field of
corporate governance law from each jurisdiction.
I thank all the contributors who helped with this project, and I hope that this book
will give the reader food for thought; you always learn about your own law by reading
about the laws of others.
Further editions of this work will obviously benefit from the thoughts and suggestions
of our readers. We will be extremely grateful to receive comments and proposals on how we
might improve the next edition.
Willem J L Calkoen
NautaDutilh
Rotterdam
April 2013
viii
Chapter 17
Philippines
Pearl T Liu and Charles J Veloso 1
I
OVERVIEW OF GOVERNANCE REGIME
The Philippine corporate governance regime is governed primarily by the 2009 Revised
Code of Corporate Governance (‘the CG Code’), the Philippine Securities Regulation
Code (‘the SRC’) and its implementing rules and regulations (‘the SRC Rules’), and for
listed corporations, the Revised Listing Rules and the Disclosure Rules of the Philippine
Stock Exchange (‘the PSE’). In addition to the mandatory rules and regulations, best
practice recommendations are also found in the PSE’s Corporate Governance (‘CG’)
Guidelines for Listed Companies (‘the PSE Guidelines’) and the Institute of Corporate
Directors’ (‘the ICD’) CG Scorecard for Publicly Listed Companies.
The Philippine Securities and Exchange Commission (‘the SEC’) enforces the
CG Code, the SRC and the SRC Rules on domestic corporations and branches or
subsidiaries of foreign corporations operating in the Philippines that meet any of the
following criteria (‘covered corporations’):
a
they sell equity or debt securities (or both) to the public that are required to be
registered with the SEC;
b
they have assets in excess of 50 million pesos and at least 200 stockholders who
own at least 100 shares each of equity securities;
c
their equity securities are listed on an exchange (‘listed corporations’); or
d
they are grantees of secondary licences from the SEC (e.g., investment houses,
brokers and dealers of securities, finance companies, pre-need companies, stock
and other exchanges).
The PSE enforces its Listing Rules and Disclosure Rules on listed corporations. The PSE
also enforces the SRC and the SRC Rules on listed corporations. The Bangko Sentral
1
Pearl T Liu is a partner and Charles J Veloso is an associate at Quisumbing Torres.
235
Philippines
ng Pilipinas (‘the BSP’), the Philippine central banking authority, and the Insurance
Commission enforce their own more stringent corporate governance rules on banks (and
other financial institutions regulated by the BSP) and insurance companies, respectively.
The CG Code replaced the 2002 Code of Corporate Governance (‘the Old CG
Code’) and aims to incorporate reforms in the Old CG Code. Among the salient features
in the CG Code are the following:
a
Covered corporations are required to establish and implement their corporate
governance rules in accordance with the CG Code. These rules must be embodied
in a manual, called the CG Manual, which can be used as a reference by the
members of the corporation’s board of directors (‘the board’) and management.
b
The CG Code expanded the penalty coverage to any violation of the provisions
of the CG Code, not just the failure to submit a manual of corporate governance.
Unlike the Old CG Code, most of the corporate governance provisions of the CG
Code are now mandatory, and not just mere best practice recommendations.
c
Corporate governance is defined as ‘the framework of rules, systems and processes
in the corporation that governs the performance by the board and management
of their respective duties and responsibilities to the stockholders’.2 By deleting
all references to the term ‘stakeholders’ found in the Old CG Code, the SEC
seems to have reaffirmed the maximisation of shareholder value (i.e., to seek the
maximum amount of profits for the corporation) as the cornerstone of corporate
governance in the Philippines.3
d
The CG Code promotes good corporate governance through the system of
independent directors (‘IDs’), independent audit mechanism, internal audit, the
creation of board committees and a self-rating system.
e
The CG Code has introduced as one of the duties and functions of the board
the establishment and maintenance of an alternative dispute resolution system to
amicably settle conflicts or differences between the corporation and its stockholders,
and the corporation and third parties, including the regulatory authorities.4
II
CORPORATE LEADERSHIP
i
Board structure and practices
Philippine corporations generally adopt a single-tier board. The board is primarily
responsible for the governance of the corporation. Under the Corporation Code (‘the
Code’), the board exercises all corporate powers, conducts all business, and controls and
holds all property of the corporation.5 Corporate power is granted to the board as a body,
and not to its individual members. Circular or written resolutions without an actual meeting
of the board are generally not allowed. Directors must meet and counsel with each other,
and any determination affecting the corporation shall only be arrived at after a consultation
2
Article 1(a), CG Code.
3Villanueva, Philippine Corporate Law, pp. 1110–14 (2010).
4
Article 3(F)2(j), CG Code.
5
Section 23, Code.
236
Philippines
at a meeting of the board upon notice to all, attended by at least a quorum of its members.6
This rule is based on the public policy that makes it a better management practice for the
board to discuss corporate affairs and decide on the basis of their consensus.7
A director may not be represented by a proxy at board meetings.8 The SEC explains
that the board is the governing body of the corporation, and on account of the directors’
responsibilities, they are supposed to exercise their own judgement and discretion in
running the affairs of the corporation. The directors represent the stockholders who
voted them into office presumably because of their personal qualifications and business
experience and, therefore, they cannot delegate their power to vote or their duties.9
Contracts or acts of a corporation must be made either by the board or by a corporate
officer or agent duly authorised by the board. In the absence of a board authorisation,
the general rule is that declarations of an individual director relating to the affairs of the
corporation, but that are not in the course of or connected with the performance of the
authorised duties of such director, are not binding on the corporation.10
The board must be composed of at least five, but not more than 15, members who
are elected by the stockholders. The CG Code prescribes that the membership of the
board be a combination of executive and non-executive directors (which include IDs)
in order that no director or small group of directors can dominate the decision-making
process. The non-executive directors should possess such qualifications and stature that
would enable them to effectively participate in the deliberations of the board.11
The CG Code imposes a general responsibility on the board to foster the longterm success of the corporation, and to sustain its competitiveness and profitability in a
manner consistent with its corporate objectives and the best interests of its stockholders.
The board is required to formulate the corporation’s vision, mission, strategic objectives,
policies and procedures that shall guide its activities, including the means to effectively
monitor management’s performance.12
Board chair
One of the duties and responsibilities of the chair in relation to the board is to maintain
qualitative and timely lines of communication and information between the board and
management. To foster an appropriate balance of power, increased accountability and
better capacity for independent decision-making by the board, the CG Code prescribes
that the roles of chair and CEO should be separate. A clear delineation of functions
should be made between the chair and CEO upon their election. If the positions of chair
6
SEC Opinion dated 10 March 1972.
7
Villanueva, op. cit. ref. 3, p.331.
8
Section 25, Code.
9
SEC Opinion dated 7 February 1994, Jose M Millarez.
10
Manila Metal Container Corporation v. PNB, GR No. 166862, 20 December 2006.
11Ibid.
12
Article 3, CG Code.
237
Philippines
and CEO are unified, the proper checks and balances should be laid down to ensure that
the board benefits from independent views and perspectives.13
Committees
The CG Code requires the board to constitute an audit committee (‘AC’) consisting of at
least three directors, who shall preferably have accounting and finance backgrounds, one
of whom shall be an ID and another of whom shall have audit experience. The chair of the
AC should be an ID. The AC’s function is to oversee the corporation’s financial reporting
process, system of internal control, audit process and risk management activities, and to
monitor compliance with applicable laws, rules and regulations.
The AC is required to review the quarterly, half-year and annual financial statements
before their submission to the board, with particular focus on the following matters:
a
any changes in accounting policies and practices;
b
major decisions;
c
significant adjustments resulting from the audit;
d
going concern assumptions;
e
compliance with accounting standards; and
f
compliance with tax, legal and regulatory requirements.
Under the recent SEC guidelines, the AC of a listed company is required to promulgate
its own charter, which should specify how the AC should perform its oversight functions.
The AC is also required to conduct an annual assessment of its performance in relation
to the best practices and standards.14
Covered corporations are also required to create a nomination committee consisting
of at least three members, one of whom is an ID.15 The nomination committee’s function
is to review and evaluate the qualifications of all persons nominated to the board and
other appointments that require board approval, and to assess the effectiveness of the
board’s processes and procedures in the election or replacement of directors.16
The CG Code encourages covered corporations to create a remuneration or
compensation committee to be composed of at least three members, one of whom should
be an ID, to establish a formal and transparent procedure for developing a policy on
remuneration of directors and officers to ensure that their compensation is consistent with
the corporation’s culture, strategy and the business environment in which it operates.17
Remuneration
A covered corporation must comply with the following minimum requirements relating
to compensation of directors:
13
Article 3(C), CG Code.
14
SEC Memorandum Circular (‘SMC’) No. 4-12
15
SMC No. 16-02.
16
Article 3(K), CG Code.
17Ibid.
238
Philippines
a
b
c
d
e
no director should participate in deciding on his or her remuneration;18
the corporation’s annual reports, information and proxy statements shall include a
clear, concise and understandable disclosure of all fixed and variable compensation
that may be paid, directly or indirectly, to its directors and top four management
officers during the preceding fiscal year;19
in the absence of any provision in the by-laws fixing their compensation, the
directors shall not receive any compensation, as such directors, except for
reasonable per diems;20
any compensation other than per diems may be granted to directors by the vote of
the stockholders representing at least a majority of the outstanding capital stock
at a regular or special stockholders’ meeting;21 and
in no case shall the total yearly compensation of directors exceed 10 per cent of
the net income before income tax of the corporation during the preceding year.22
The CG Code prescribes that the levels of remuneration of the corporation should be
sufficient to be able to attract and retain the services of qualified and competent directors
and officers. A portion of the remuneration of executive directors may be structured or
based on corporate and individual performance.23 This is a departure from the principle
under general corporate law that directors render service gratuitously, and that the return
upon their shares adequately furnishes the motives for service, without compensation.24
iiDirectors
The CG Code requires individual directors to act in the best interest of the corporation
in a manner characterised by transparency, accountability and fairness, and imposes
norms of conduct on each director.25 This is consistent with the principle that a director
holds a position of trust and owes a duty of loyalty to the corporation. In the event that
his or her interests conflict with those of the corporation, he or she cannot sacrifice the
latter to his or her own advantage and benefit. In one case, the Supreme Court (‘the
Court’) explained that:
[a]s corporate managers, directors are committed to seek the maximum amount of profits for the
corporation. This trust relationship is not a matter of statutory or technical law. It springs from
the fact that directors have the control and guidance of corporate affairs and property and hence
of the property interests of the stockholders.26
18
Article 3(J), CG Code.
19Ibid.
20
Section 30, Code.
21Ibid.
22Ibid.
23
Article 3(J), CG Code.
24
Western Institute of Technology, Inc v. Salas, GR No. 113032, 21 August 1997.
25
Article 3(J), CG Code.
26
Prime White Cement Corporation v. Intermediate Appellate Court, et al, G.R. No. 68555, 19
March 1993.
239
Philippines
Every director must own at least one share of the capital stock of the corporation of
which he or she is a director, which share shall stand in his or her name on the books
of the corporation. Any director who ceases to be the owner of at least one share of the
capital stock of the corporation of which he or she is a director shall thereby cease to be
a director. A majority of the directors of all corporations organised under Philippine law
must be residents of the Philippines.27
If the corporation is engaged in a nationalised or partly nationalised industry,
foreign nationals may serve on the board only in proportion to their allowable and actual
share in the corporation’s equity.28
Director’s liability
Under Philippine law, a director may be subject to personal liability if he or she:29
a
assents to a patently unlawful act of the corporation, acts with bad faith or gross
negligence in directing the corporation’s affairs, or has a conflict of interest
resulting in damages to the corporation, its stockholders or other persons;
b
consents to the issuance of watered stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his or her written objection thereto;
c
agrees to hold himself or herself personally and solidarily liable with the
corporation; or
d
is made, by a specific provision of law, to personally answer for his or her corporate
action.
Directors may rely upon the ‘business judgement rule’ as a defence against claims that
they have failed to discharge their duties. Under the ‘business judgement rule,’ resolutions
passed in good faith by the board are valid and binding, and the court has no authority
to review them.30 Directors that lawfully act in good faith and within the scope of their
corporate powers may not be held liable for losses to the corporation resulting from their
acts. Thus, directors will be held accountable only if they acted in bad faith or with malice
or negligence in carrying out the assailed acts.31 This rule is premised upon the rationale
that in a free enterprise society, courts should ‘leave business to the businessmen’ and not
supplant legitimate business decisions.32
The applicability of the business judgement rule is determined on a case-by-case
basis by the courts, considering all relevant circumstances. Generally, to qualify under
the business judgement rule, the following conditions must be met:
a
management acts in good faith and belief that its decision is in the company’s best
interest;
27
28
29
30
31
32
Section 23, Code.
Section 2-A, Anti-Dummy Law.
Tramat Mercantile v. Court of Appeals, 238 SCRA 14 (1994).
Montelibano v. Bacolod-Murcia Milling Co, Inc, GR No. L-15092, 18 May 1962.
Filipinas Port Services, Inc v. Go, GR No. 161886, 16 March 2007.
Ong Yong v. Tiu, GR Nos. 144476 and 144629, 8 April 2003.
240
Philippines
b
c
it exercises due care in ascertaining relevant facts and law before making the
decision; and
it has no personal interest in the transaction.33
Independent directors
All covered corporations are required to have at least two IDs or such number of IDs
that constitutes 20 per cent of the members of the board (whichever is lesser), but in no
case less than two.34
The policy behind the appointment of an ID is that a non-executive director
must not have a relationship with the corporation that would materially interfere with
his or her exercise of independent judgement in carrying out his or her responsibilities
as a director.35 Moreover, any relationship the ID may have with the covered corporation
must not compromise said director’s objectivity and loyalty to the stockholders.36 Thus,
the following cannot be an ID of a covered corporation:37
a
a director, officer or substantial stockholder (i.e., holding at least 10 per cent
beneficial ownership of the outstanding shares) of the corporation or of its related
companies, or any of its substantial stockholders (other than as an ID);
b
a relative of any director, officer or substantial stockholder of the corporation, any
of its related companies or any of its substantial stockholders;
c
a nominee or representative of a substantial stockholder of the corporation, any of
its related companies or any of its substantial stockholders;
d
anyone employed in any executive capacity by the corporation, by any of its related
companies or by any of its substantial stockholders within the last five years;
e
a professional adviser of the corporation, any of its related companies or any of its
substantial stockholders within the last five years, either personally or through his
or her firm;
f
any person holding any office of trust and responsibility in a broker-dealer firm,
which includes, among others, a director, officer, principal stockholder, nominee
of the firm to the PSE, associated person or salesperson, or an authorised clerk of
the broker or dealer;38
g
a regular director who resigns or whose term ends within a two-year ‘cooling-off
period’ from the date that he or she ceases to be a regular director;39
h
persons appointed as chair emeritus, ex officio directors, officers or members of any
executive advisory board, or otherwise appointed in a capacity to assist the board
33
34
35
36
37
38
39
SEC Opinion dated 9 December 1988, Siguion Reyna, Montecillo and Ongsiako.
Article 3(A), CG Code.
Article 1(E), CG Code.
SEC-OGC Opinion No. 11-07.
SMC No. 16-02.
SMC No. 16-06.
SMC No. 09-09.
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in the performance of its duties and responsibilities, within a one-year ‘cooling-off
period’.40
The nomination of IDs shall be conducted by the nomination committee prior to a
stockholders’ meeting. All recommendations shall be signed by the nominating
stockholders together with the acceptance of and conformity by the would-be nominees.
The nomination committee shall pre-screen the qualifications of all candidates and put in
place screening policies and parameters to enable it to effectively review the qualifications
of the nominees for IDs. After the nomination, the committee shall prepare a final list of
candidates, which shall contain all the information about all the nominees for IDs. Only
nominees whose names appear on the final list of candidates shall be eligible for election
as IDs during the annual stockholders’ meeting.
In order to enhance the effectiveness of IDs and encourage the infusion of fresh ideas
in the board, the SEC recently imposed a term limit for IDs. Effective on 2 January 2012,
IDs can only serve as such for five consecutive years. After the completion of the five-year
service period, an ID shall be ineligible for election in the same corporation unless the ID
has undergone a ‘cooling-off’ period of two years. After serving as ID for a total of 10 years,
the ID will be perpetually barred from being elected as such in the same corporation.41
IIIDISCLOSURE
i
Accountability and audit 42
The CG Code requires the management to formulate, under the supervision of the AC,
the rules and procedures on financial reporting and internal control in accordance with
the following guidelines:
a
the extent of the management’s responsibility in the preparation of the financial
statements, with the corresponding delineation of the responsibilities that pertain
to the external auditor, should be clearly explained;
b
an effective system of internal control that will ensure the integrity of the financial
reports and protection of the assets of the corporation should be maintained;
c
on the basis of the approved audit plans, internal audit examinations should cover,
at the minimum, an evaluation of the adequacy and effectiveness of controls
that cover the corporation’s governance, operations and information systems,
including the reliability and integrity of financial and operational information,
effectiveness and efficiency of operations, protection of assets, and compliance
with contracts, laws, rules and regulations;
d
the corporation should consistently comply with the financial reporting
requirements of the SEC;
40Ibid.
41
SMC No. 09-11.
42
Article 5, CG Code.
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Philippines
e
f
the external auditor should be rotated or changed every five years or earlier, or the
signing partner of the external auditing firm assigned to the corporation should
be changed with the same frequency; and
the internal auditor should submit to the AC and management an annual report
on the internal audit department’s activities, responsibilities and performance
relative to the audit plans and strategies as approved by the AC. The annual report
should include significant risk exposures, control issues and such other matters as
may be needed or requested by the board and management. The internal auditor
should certify that he or she conducts his or her activities in accordance with the
International Standards on the Professional Practice of Internal Auditing. If he or
she does not, he or she shall disclose to the board and the management the reasons
why he or she has not fully complied with the said standards.
The board, after consultations with the AC, shall recommend to the stockholders an
external auditor duly accredited by the SEC who shall undertake an independent audit
of the corporation, and who shall provide an objective assurance on the manner by which
the financial statements shall be prepared and presented to the stockholders.
ii
Disclosure system
Covered corporations are required to file structured and unstructured reports with the SEC.
Listed corporations are also required to submit reports to the PSE. Structured reports are
the periodic reportorial requirements of the SEC and the PSE (e.g., annual and quarterly
reports, information statements). The purpose of the structured reports is to assure the
public availability of continuing adequate information on covered corporations.43
Unstructured reports are the disclosures on corporate developments to the investing
public as they occur. The purpose of these disclosures is to update the investing public
with any material fact or event that occurs that would reasonably be expected to affect an
investor’s decision in relation to the shares. The following events are presumed material:44
a
events that may influence or affect the control over the management, direction or
ownership of the corporation;
b
events that may affect the corporation’s business operations, financial or economic
results or performance;
c
events that may affect the corporation’s financial, business or economic position
or standing;
d
events that may affect the rights and obligations of the corporation’s stockholders,
creditors and other stakeholders; and
e
events that may affect the corporation’s compliance with reporting obligations.
Listed corporations are required to disclose material events to the PSE within 10 minutes
after notice or occurrence of the event and prior to its release to the public through the
43
44
Article 3(M), CG Code.
SEC Form 17-C; PSE Disclosure Rules.
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news media. Disclosures of listed corporations must be filed electronically using the
Online Disclosure System of the PSE.
IV
CORPORATE RESPONSIBILITY
i
Risk management
The CG Code requires the board to identify key risk areas and performance indicators
and monitor these factors with due diligence to enable the corporation to anticipate
and prepare for possible threats to its operational and financial viability. The CG Code
also requires the AC to perform oversight functions over management’s activities in
managing credit, market, liquidity, operational, legal and other risks of the corporation.
This function shall include regular receipt from management of information on risk
exposures and risk management activities.
The PSE Guidelines recommend that listed corporations adopt a formal risk
management policy that guides the corporation’s risk management and compliance
processes and procedures, and have a unit at the management level headed by a risk
management officer.
ii
Compliance policies
The CG Code requires the board to appoint a compliance officer who shall report directly
to the chair. The function of the compliance officer is to monitor the corporation’s
compliance with the CG Code and the rules and regulations of regulatory agencies
and, if any violations are found, to report the matter to the board and recommend the
imposition of appropriate disciplinary action on the responsible parties and the adoption
of measures to prevent a repetition of the violation. The compliance officer is required
to issue a certification every year on 30 January regarding the extent of the corporation’s
compliance with the CG Code for the completed year and, if there are any deviations, to
explain the reason for such deviation.
The SEC promotes and monitors good corporate governance in the Philippines
by requiring all covered corporations to participate in a self-rating system by completing
the ICD’s annual CG Scorecard for Publicly Listed Companies.
The PSE requires all listed corporations to annually submit a Disclosure Template
for the PSE Guidelines (‘Disclosure Template’). The Disclosure Template is a ‘comply
or explain’ regime wherein listed corporations must disclose whether they comply with
the PSE Guidelines and respective best practices under each guideline, or otherwise
explain the reason for their non-compliance or state the alternative the company may
have chosen to adopt. The PSE promotes a corporate governance framework that takes
into consideration the rights and interests of a listed company’s stakeholders, other than
its stockholders and investors.
The SRC Rules also require covered corporations to disclose the following
information in their annual reports and information statements:
a
the evaluation system established by the corporation to measure or determine the
level of compliance of the board and top-level management with the CG Code;
b
measures being undertaken by the corporation to fully comply with the adopted
leading practices on good corporate governance;
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Philippines
c
d
any deviation from the CG Code, including the name and position of the persons
involved, and the sanctions imposed on said individual; and
any plan to improve corporate governance of the corporation.
iii
Corporate social responsibility
Corporate social responsibility remains a nascent principle in the Philippines. By deleting
all references to the term ‘stakeholders’ (a term that encompasses the corporation’s
creditors, employees, customers, suppliers and other sectors in the community in which
the corporation operates or that are directly affected by its operations) found in the Old
CG Code, the SEC seems to have reaffirmed the maximisation of shareholder value
(i.e., to seek the maximum amount of profits for the corporation) as the cornerstone
of corporate governance in the Philippines.45 Thus, the SEC’s regulation under the CG
Code focuses on the performance of the duty that the corporation and its directors and
officers owe to the stockholders and other investors to maximise profits and foster the
long-term success of the corporation. Insofar as other stakeholders are concerned, the
CG Code only requires the board to identify the sectors in the community in which the
corporation operates or that are directly affected by its operations, and formulate a clear
policy of accurate, timely and effective communication with them.46 The SEC leaves it to
the government agency that regulates the particular industry or business sector to define
and regulate the performance of a corporation’s duty to its other stakeholders.47
VSHAREHOLDERS
i
Voting rights
Under the Code, no share may be deprived of voting rights except those classified and
issued as ‘preferred’ or ‘redeemable’ shares. There shall always be a class or series of shares
that has complete voting rights.48 Under the doctrine of equality of shares, in the absence
of any provision in the AOI and in the certificates of stock to the contrary, all stocks,
regardless of their nomenclature, enjoy the same rights and privileges, including general
voting rights, and are subject to the same liabilities.49
The Code requires stockholders’ approval for the following corporate acts:
a
to amend the AOI;
b
to elect directors;
c
to remove directors;
d
to call a special meeting to remove directors;
e
to ratify a contract of a director or officer with the corporation;
f
to extend or shorten the corporate term;
g
to increase or decrease the capital stock;
45Villanueva, op. cit. ref. 3, pp. 1110–14.
46
Article 3(F), 2, CG Code.
47Villanueva, op. cit. ref. 3, pp. 1114–21.
48
Section 6, Code.
49
SEC-OGC Opinion No. 10-09.
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Philippines
h
i
j
k
l
m
n
o
p
q
to incur, create or increase bonded indebtedness;
to sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially
all of the corporate assets;
to invest corporate funds in another corporation or business, or for any purpose
other than the primary purpose;
to declare stock dividends;
to enter into a management contract;
to adopt, amend or repeal the by-laws;
to delegate to the board the power to amend or repeal the by-laws or adopt new
by-laws;
to revoke the preceding power delegated to the board;
to effect or amend a plan of merger or consolidation; and
to dissolve the corporation.
A corporation may prescribe a greater voting requirement for the approval of any of the
above corporate acts in its AOI or by-laws (or both) in order to protect the rights of
minority stockholders. Such higher number is also the number necessary to constitute
a quorum.
ii
Minority protection rights
Pre-emptive right 50
Pre-emptive rights give stockholders the first option to subscribe, in proportion to
their shareholdings, to any issuance of shares out of the unissued capital stock of the
corporation, or out of any increase of the authorised capital stock of the corporation.
This is a minority protection device provided by the Code to prevent the dilution of the
voting power of stockholders and to preserve the stockholders’ proportionate interest
in the corporation. Without this pre-emptive right, the voting power and interest of
minority stockholders may be deliberately diluted or negated by the subsequent issuance
of new shares.
Appraisal right
In instances where a proposed corporate action is required to be approved by the vote of
the stockholders, the majority stockholders may dominate the results of the voting. For
this reason, a dissenting stockholder that usually belongs to the minority is allowed by
law, under certain instances, to demand payment of the fair market value of its share and
cease to be a stockholder of the corporation. Under the Code, a dissenting stockholder’s
appraisal right is available in the following instances:51
a
any amendment to the authorised capital stock has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorising
preferences in any respect superior to those of outstanding shares of any class, or
of extending or shortening the term of corporate existence;
50
51
Section 39, Code.
Sections 42 and 81, Code.
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b
c
d
e
extension or shortening of the term of corporate existence;
sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets;
investment of the corporation’s funds in another corporation or business outside
of its primary purpose; and
merger or consolidation.
Right to information
All corporations are required to keep and carefully preserve at their principal office a
record of all business transactions, and minutes of all meetings of stockholders or of the
board. The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director or stockholder of the corporation at
reasonable hours on business days and a director or stockholder may demand, in writing,
a copy of excerpts from said records or minutes, at his or her expense. Any officer or
agent of the corporation who refuses to allow any director or stockholder to examine and
copy excerpts from its records or minutes shall be liable to such director or stockholder
for damages, and in addition shall be guilty of violating the Code.52
In an opinion issued by the SEC,53 a corporation must keep and preserve its
corporate books and records, even after dissolution and until final settlement and
liquidation of its business, assets and obligations. In another opinion,54 the SEC opined
that ‘records of all business transactions’ would include the journal, ledger, financial
statements, income tax returns, vouchers, receipts, contracts and all papers pertaining to
the operation of the corporation of interest to its stockholders.
The Court explained that the stockholder’s right of inspection of the corporation’s
books and records is based upon his or her ownership of shares in the corporation and
the necessity for self-protection.55 However, in order that a stockholder’s right to inspect
may not be taken in a sweeping sense, the Court qualified that:
... there are some things which a corporation may undoubtedly keep secret, notwithstanding the
right of inspection given by law to the stockholder; as, for instance, where a corporation, engaged
in the business of manufacture, has acquired a formula or process, not generally known, which
has proved of utility to it in the manufacture of its products. It is not our intention to declare that
the authorities of the corporation, and more particularly the board, might not adopt measures for
the protection of such process from publicity.56
Mandatory tender offer
Tender offer rules protect minority stockholders against any scheme that dilutes the
share value of their investments. It gives the minority stockholders the chance to exit
52
53
54
55
56
Section 74, Code.
SEC Opinion dated 30 April 1987, Termulo, Yumang, Muñoz and Adamos.
SEC Opinion dated 15 March 1991, Roel C Reyes.
Joselito Puno v. Puno Enterprises, Inc, GR No. 177066, 11 September 2009.
WG Philpotts v. Philippine Manufacturing Co, GR No. 15568, 8 November 1919.
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the company under reasonable terms and the opportunity to sell their shares at the same
price as those of the majority stockholders.57
Under the SRC Rules, any person or group of persons acting in concert with the
intention of acquiring 35 per cent or more of equity shares in a covered corporation
shall disclose such intention and contemporaneously make a tender offer for the percent
sought to all holders of such class. Any person or group of persons acting in concert, with
the intention of acquiring 35 per cent or more of equity shares in a covered corporation
in one or more transactions within a period of 12 months shall also be required to make
a tender offer to all holders of such class for the number of shares so acquired within the
said period. In the event that the tender offer is oversubscribed, the aggregate amount
of securities to be acquired at the close of such tender offer shall be proportionately
distributed across both the selling stockholder with whom the acquirer may have been
in private negotiations and the minority stockholders. If any acquisition of even less
than 35 per cent would result in ownership of over 51 per cent of the total outstanding
equity securities of a covered corporation, the acquirer shall be required to make a tender
offer for all the outstanding equity securities to all remaining stockholders of the covered
corporation at a price supported by a fairness opinion provided by an independent
financial advisor or equivalent third party. The acquirer in such a tender offer shall be
required to accept any and all securities thus tendered.58
Philippine law does not distinguish between direct and indirect acquisitions of 35
per cent of the equity shares in a covered corporation. In one case decided by the Court,
even if the acquisition of the 35 per cent equity of the target company is achieved by
means of the acquisition of the shares of a holding company that owns the shares of the
target company, the tender offer rules apply.59
Derivative suit
An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he or she holds stocks in order to protect or vindicate corporate
rights whenever the officials of the corporation refuse to sue, or are the ones to be sued,
or they hold the control of the corporation.60
Generally, it is the board as the governing body of the corporation that should
bring suit to protect the interest of the corporation. However, the members of the board
representing the majority stockholders may refuse to vote for a resolution authorising the
bringing of the suit. A stockholder may sue for mismanagement, waste or dissipation of
corporate assets because of a special injury to him or her for which he or she is otherwise
without redress.61
57
Cemco Holdings, Inc v. National Life Insurance Co of the Phil, Inc, GR No. 171815, 7 August
2007.
58
Rule 19, SRC Rules.
59Ibid.
60
Francis Chua v. Court of Appeals, GR No. 150793, 19 November 2004.
61
Yu v. Yukayguan, GR No. 177549, 18 June 2009.
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Cumulative voting
A stockholder may cumulate his or her shares and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his or her shares, or he or
she may distribute his or her votes to as many candidates as he or she wishes.62 Through
cumulative voting, minority stockholders may pool their votes to a number of nominees
to ensure that they would have minority representation in the board. Stockholders may
not be deprived of their cumulative voting rights.
Removal of directors
Under the Code, directors may be removed by an affirmative vote of stockholders
representing two-thirds of the outstanding capital stock of the corporation. The
removal may be with or without cause. However, as an added protection to minority
stockholders, the law provides that removal without cause may not be used to deprive
minority stockholders of the right of representation in the board. This means that there
must be a valid cause for removal of the director elected by the minority stockholders.
Minimum public ownership requirement
To provide liquidity for investors, listed corporations are required to maintain a minimum
percentage of listed securities held by the public of 10 per cent of the listed corporation’s
issued and outstanding shares, exclusive of treasury shares. Non-public shares are those held
for the purpose of gaining substantial influence over how the corporation is being managed.
Shares held by a corporation’s principal stockholders (i.e., stockholders holding beneficial
ownership of at least 10 per cent of any class of shares of the corporation), directors, officers
and affiliates are considered as non-public. Shareholdings held by government-run social
security funds, banks and employees are generally considered as non-public.63
VIOUTLOOK
There is a continuing trend towards a rules-based approach, where the SEC and the
PSE provide and enforce mandatory rules, in promoting good corporate governance
in the Philippines. A number of current best-practice recommendations may evolve to
become mandatory rules (e.g., internal audit, risk management and self-rating systems),
and current mandatory rules may become more stringent (e.g., public ownership levels,
IDs, and qualifications of directors and officers).
There is also a growing emphasis on the creation and implementation of selfrating systems, and disclosure and transparency of covered corporations’ compliance with
corporate governance best practices. However, the danger of over-regulation is tempered
by the fact that the corporate governance regime in the Philippines is essentially based
on a recognisable norm of protection of the rights of stockholders and investors and
maximisation of shareholder value.
62
63
Section 24, Code.
PSE Rule on Minimum Public Ownership, 28 October 2010.
249
Appendix 1
about the authors
Pearl T Liu
Quisumbing Torres
Pearl Liu heads Quisumbing Torres’ corporate and commercial practice group and the
energy, mining, and infrastructure industry group. Her career spans 29 years, representing
a broad spectrum of leading multinational clients in the Philippines and advising on
cross-border acquisition-related transactions. Ms Liu has been consistently ranked in
corporate/commercial, corporate/M&A, real estate and capital markets in Chambers
Global and Chambers Asia Pacific, IFLR1000 and The Legal 500 Asia Pacific.
Ms Liu’s practice focuses on M&A, foreign investment structuring, equity
restrictions, joint ventures, divestitures, and corporate reorganisations. She has extensive
experience in the structuring, establishment, and operations of corporate entities engaged
in, among others, the infrastructure, pharmaceuticals, logistics, energy, outsourcing,
hotels, resorts, and tourism, and information technology industries.
Ms Liu received her bachelor of laws degree from the Ateneo de Manila University.
She was admitted to the Philippine Bar in 1983. She co-authored the Philippine chapter
in The Corporate Governance Review (second edition) in 2012.
Charles J Veloso
Quisumbing Torres
Charles Veloso is an associate of Quisumbing Torres’ corporate and commercial practice
group with six years of experience in corporate and commercial law, M&A, securities,
pharmaceuticals, and natural resources law.
Mr Veloso has advised and represented multinational companies in natural
resources, energy, infrastructure, pharmaceuticals, advertising, securities dealing
and brokerage, private wealth management, business process outsourcing, retail and
distribution, manufacturing, information technology and telecommunications, power
generation, and real estate and construction. He handles corporate maintenance of
various corporations, including public companies.
425
About the Authors
Mr Veloso holds a bachelor of laws degree (cum laude and class valedictorian,
2006) and a bachelor of science degree in accountancy (cum laude and class salutatorian,
2001) from the University of the Philippines. He was ranked 10th in the 2006 Philippine
Bar exams and was admitted to the Philippine Bar in 2007.
Mr Veloso is a professorial lecturer in transportation and public utilities law,
and land titles and registration, at the Centro Escolar University School of Law and
Jurisprudence. He is a certified public accountant.
He was a resource speaker in the local TV programme Legal Forum, tackling
corporate governance issues in the Philippines, following his co-authorship of the
Philippines chapter in The Corporate Governance Review (second edition) in 2012.
Quisumbing Torres
Member firm of Baker & McKenzie International
12th Floor, Net One Center
26th Street Corner 3rd Avenue
Crescent Park West
Bonifacio Global City
Taguig City 1634
Philippines
Tel: +63 2 819 4700
Fax: +63 2 816 0080
pearl.liu@bakermckenzie.com
charles.veloso@bakermckenzie.com
www.bakermckenzie.com
426