Setting up a corporation has always been a challenge, even daunting, for single business owners, since they were required to gather a fixed number of warm bodies under the Old Corporation Code (“OCC”) – some whom they may not even know well – to join him/her as incorporators. Now that the Revised Corporation Code (“RCC”) allows for one person corporations (“OPC”), what now happens to those ordinary stock corporations (“OSC”) formed prior? Can these OSCs be converted into the now allowed OPC to reflect the single business owner’s original intention? Conversely, what about those OPCs formed under the RCC that have forged new relationships with other business partners – can these OPCs be converted into OSCs to reflect their changed intention?

Thankfully, these issues are long gone – flexibility is now finally available for corporations seeking to make the conversion that best reflect their intentions and interests.

The Securities and Exchange Commission (“SEC”), on 25 August 2020, issued Memorandum Circular (“SEC MC”) No. 27 Series of 2020, which provides for guidelines on the conversion from an OSC to a OPC, and vice versa. The SEC MC primarily specifies the documentary requirements which need to be submitted to the SEC to process such conversion.

Removal of Minimum Number of Incorporators

In the past, the OCC prescribed a minimum of five (5) incorporators.[1] Now, with the effectivity of the RCC, a qualified person (i.e. a natural person, trust, or an estate) can now form an OPC.[2] With the new OPC feature under the RCC, even a single business owner can choose to incorporate, providing him/her a viable and more advantageous alternative to a sole proprietorship.

Conversion from OSC to OPC

An OSC is also now allowed to convert to an OPC, particularly when a single stockholder acquires all the outstanding capital stock of the OSC.[3]

When such circumstance takes place, the OSC may file an Application for Conversion (“Application”) and submit all the documentary requirements to the SEC. After due consideration, the SEC will then issue a Certificate of Filing of Amended Articles of Incorporation (“Certificate”) reflecting the conversion.[4]

The SEC MC specifies that together with the Application signed by the single stockholder and countersigned by the corporate secretary, the following documentary requirements must be submitted to the SEC:[5]

1. Document Effecting the Transfer of Ownership of Shares (e.g. deed of assignment);
2. Certificate Authorizing Registration (“CAR”) or Tax Clearance from the BIR;
3. Secretary’s Certificate of No Intra-Corporate Dispute;
4. Articles of Incorporation (“AOI”) of the OPC;[6]
5. Letter of Acceptance of Appointment by the Nominee and Alternate nominee;[7]
6. Self-appointed Treasurer’s Bond, if applicable;[8]
7. Name Reservation, if applicable;
8. Monitoring Clearance from the SEC Compliance Monitoring Division (“CMD”) or Company Registration and Monitoring Division (“CRMD”);
9. Endorsement Clearance from government agencies, if applicable;
10. Undertaking to change corporate name;
11. Undertaking to assume all liabilities of the OSC.

Upon approval and issuance of the Certificate of Filing of Amended AOI by the SEC, the AOI and by-laws of the OSC shall be deemed superseded.[9] The OPC shall then succeed the OSC and shall be responsible for the latter’s outstanding liabilities as of the date of conversion,[10] which is the date when the Certificate, which shall bear and retain the original SEC registration number of the corporation,[11] is issued.

Conversion from OPC to OSC

On the other hand, an OPC may also be converted into an OSC after giving the SEC a Notice of Conversion (“Notice”) of the circumstances leading to the conversion, [12] i.e. when the shares of the OPC ceases to be held solely by a single stockholder.[13]

The Notice, which shall be signed by all stockholders and countersigned by the corporate secretary, must be filed with the SEC within sixty (60) days from the transfer of shares.[14] This 60-day period shall be observed even though the conversion is applied for at a later time or will only take place afterwards.[15] If such period for filing the Notice is not observed, the SEC may still approve the conversion, however, the corporation may be subject to sanctions[16] under the RCC.[17] Thereafter and subject to its approval, the SEC shall issue a Certificate reflecting the conversion.[18] Similarly, the OSC shall succeed the OPC and shall assume the latter’s outstanding liabilities as of the date of conversion.[19]

As regards the necessary documents to be filed with the SEC, the Notice shall be submitted together with substantially the same documents[20] required in converting an OSC to an OPC.[21]

Other Provisions

It must be noted that under the SEC MC, the conversion of OSC to OPC is optional, while converting from OPC to OSC is generally mandatory, unless when winding-up and dissolution is appropriate, as in the case of the death of the single stockholder of an OSC.[22]

Under the RCC, in case of death of the single stockholder, the nominee shall transfer the shares to the duly designated legal heir or estate within seven (7) days from receipt of the legal document declaring the legal heirs of the single stockholder. Within sixty (60) days from the transfer of the shares, the legal heirs shall notify the SEC of their decision either to convert the OPC into an OSC, or wind up and dissolve the same.[23] The SEC MC also gives an aggrieved party a remedy to dispute or oppose a conversion, by filing with the SEC Company Registration and Monitoring Department a verified petition for cancellation of the Certificate on the ground of fraud.[24]

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[1] The Corporation Code of the Philippines [“Old Corporation Code” or “OCC”], B.P. No. 68, 1 May 1980, Section 10.

[2] Revised Corporation Code of the Philippines [“RCC”], Republic Act No. 11232, 20 February 2019, Section 116.

[3] RCC, Section 131.

[4] Id.

[5] SEC MC No. 27 s. 2020, Section 1.

[6] Under the SEC MC, the new AOI must have an Article stating that the old AOI and shall be superseded. For this purposes, the latest AOI of the OSC must likewise be attached.

[7] See Section 124 of the RCC which states: “The single stockholder shall designate a nominee and an alternate nominee who shall, in the event of the single stockholder’s death or incapacity, take the place of the single stockholder as director and shall manage the corporation’s affairs. xxx”

[8] See Section 122 of the RCC which states that a single stockholder who is also the self-appointed treasurer of the corporation shall give a bond to the SEC in such a sum as may be required.

[9] SEC MC No. 27 s. 2020, Section 2.

[10] RCC, Section 131; SEC MC No. 27 s. 2020, Section 4.

[11] SEC MC No. 27 s. 2020, Section 3.

[12] RCC, Section 132.

[13] SEC MC No. 27 s. 2020, Section 7.

[14] Id., Section 8.

[15] Id.

[16] See Section 158 of the RCC which states that: “If, after due notice and hearing, the Commission finds that any provision of this Code, rules or regulations, or any of the Commission’s orders has been violated, the Commission may impose any or all of the following sanctions, taking into consideration the extent of participation, nature, effects, frequency and seriousness of the violation:

(a) Imposition of a fine ranging from Five thousand pesos (₱5,000.00) to Two million pesos (₱2,000,000.00), and not more that One thousand pesos (₱1,000.00) for each day of continuing violation but in no case to exceed Two million pesos (₱2,000,000.00);

(b) Issuance of the permanent cease and desist order;

(c) Suspension or revocation of the certificate of incorporation; and

(d) Dissolution of the corporation and forfeiture of its assets under the conditions in Title XIV of this Code.”

[17] SEC MC No. 27 s. 2020, Section 10.

[18] RCC, Section 132.

[19] Id.

[20] SEC MC No. 27 s. 2020, Section 7.

[21] In converting a OPC to an OSC, however, there is NO need to submit the following as the same are inapplicable to such conversion: (1) Secretary’s Certificate of No Intra-Corporate Dispute; (2) Letter of Acceptance of Appointment by the Nominee, and (3) Self-appointed Treasurer’s Bond.

[22] SEC MC No. 27 s. 2020, Section 16.

[23] RCC, Section 132.

[24] SEC MC No. 27 s. 2020, Section 18.