SEC-OGC Opinion No. 22-07: Board of Directors or Trustees of a Corporation; Residency Requirement

The Securities and Exchange Commission (“SEC”) in SEC-OGC Opinion No. 22-07 discussed the applicability of Section 22 of the Revised Corporation Code (“RCC”), particularly the requirement that majority of the members of the board of directors must be residents of the Philippines, on the existing provisions in the by-laws of the corporations.

In this opinion, the subject corporations sought an opinion on whether they may be allowed to elect directors who are non-residents, given the change in the RCC even if their by-laws still reflect the old and repealed provision of the Old Corporation Code. 

The subject corporations were formed and incorporated under the old Corporation Code which expressly required under Section 23 thereof that a majority of the directors or trustees must be residents of the Philippines. To comply with this requirement, the subject corporations indicated in their by-laws that a majority must be residents of the Philippines. However, this residency requirement was removed under Section 22 of the RCC which took effect on 23 February 2019.

The SEC opined that the corporations still cannot elect directors who are non-residents. The SEC cited Section 22 of the RCC which 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 by-laws the directors’ qualifications such as residency requirement. Thus, if a corporation provides in its by-laws the requirement that majority of its directors must be residents, then it may do so. Consequently, such corporation may not elect directors who are non-residents of the Philippines, it its by-laws still requires that the majority of the elected directors must be residents of the Philippines. 

The Commission even cited the case of Forest Hills Golf and Country Club, Inc. v. Gardpro, Inc. (2014), where the Supreme Court stated that until the by-laws of a corporation are repealed, they are a continuing rule for the government of the corporation and its officers, the proper function being to regulate the incidental business of the corporation. Thus, corporations with by-laws containing the residency requirement which desire to remove such requirement must amend their by-laws to formalize such choice pursuant to Section 46(f) of the RCC, notwithstanding the change introduced by Section 22.  

The subject corporations also sought an opinion on whether they may already elect directors who are not Philippine residents pending the approval of their application for amendment of their by-laws.

The Commission answered in the negative and cited Section 47 of the RCC which provides that the amended by-laws 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. Therefore, if the corporation decides to amend its by-laws to remove the residency requirement, such amendment will take effect upon the Commission’s issuance of the Certificate of Filing of Amended By-Laws. Prior to the issuance, the corporation is still required to make sure that the majority of its elected directors are residents of the Philippines.