SEC OGC Opinion No. 22-14: Legality of Converting a Non-Stock, Non-Profit Corporation to a Stock Corporation

On 07 October 2022, the Office of the General Counsel (“OGC”) of the Securities and Exchange Commission (“SEC” or “Commission”) addressed the following questions in relation to the legality of converting a non-stock, non-profit corporation to a stock corporation:

1. Whether or not a non-stock, non-profit corporation may be converted into a stock corporation without liquidating its assets;
2. Whether or not a non-stock, non-profit corporation may be converted into a stock corporation after it liquidates its assets; and
3. Whether an undertaking in the Corporate By-laws indicating that the corporation is accountable for the obligations acquired while it was still a non-stock corporation sufficient if the corporation does not liquidate its assets.

The OGC, in addressing the first and third questions in the negative, cited the SEC Opinion addressed to Atty. Maria Clara Tankeh-Asuncion dated 20 March 1995:

As aptly in Section 87 of the Corporation Code, a “non-stock corporation is one where no part of its income is distributable to its members, trustees, or officers,” that is, that the members of a non-stock corporation are not entitled to any profit or interest in the corporate assets that may be obtained out of the operation or activities of the corporation. Until the corporation is dissolved and unless it is so provided in the articles of incorporation or by-laws, the members are not entitled to any beneficial or vested interest over the assets of a non-stock corporation. In other words, a non-stock, non-profit corporation only holds its funds in trust for carrying out the objectives and purposes expressed in its charter or articles of incorporation.

The conversion of an existing “non-stock, non-profit corporation” into a “stock corporation” by mere amendment of the articles of incorporation would be tantamount to distribution of the corporate assets or income of the corporation to its members inasmuch as thereafter they automatically become stockholders thereof. This scheme might defraud the public who may have contributed the donations, gifts or grants to the non-stock, non-profit corporation since after its conversion the donated corporate assets would in effect be treated as paid-in capital or subscription payments of the stockholders.

Thus, the Commission previously ruled that a non-stock corporation cannot be converted into a stock corporation by mere amendment of the articles of incorporation. (Emphasis supplied)

As to the second question, the SEC stated that the former members of the non-stock educational corporation may incorporate and organize the educational institution as a stock corporation after liquidating its assets in accordance with the provisions of the Revised Corporation Code of the Philippines. It was discussed that the Commission previously opined that:

For purposes of transformation, it is fundamental that the non-stock corporation must be dissolved first under any of the methods specified in Title XIV of the Corporation Code so that the corporate assets shall be liquidated in accordance with the distribution procedure for non-stock corporations. Thereafter, the members thereof may organize a stock corporation directed to bring profits or pecuniary gains to themselves. (Emphasis supplied)