SEC-OGC Opinion No. 24-37, Re: Number of Directors in a Financing Company

Is there a minimum number of directors for a financing company? Can a financing company have less than five (5) members in its Board of Directors (“BoD”)?

The above questions were addressed by the Securities and Exchange Commission-Office of the General Counsel (“SEC-OGC”) in SEC-OGC Opinion No. 24-37 (“the Opinion”) by reconciling its various Memorandum Circulars (“MC”) relevant to the number of directors in a financing company.

Under the Financing Company Act  of 1998 and its Implementing Rules and Regulations, financing companies shall be organized in the form of stock corporations and must comply with the provisions of the Revised Corporation Code (“RCC”) and its rules regarding the same.

Cannot be a One Person Corporation

The Opinion cited SEC MC No. 7, Series of 2019, which provides that non-bank financial institutions (such as financing companies) are prohibited from organizing as a One Person Corporation (“OPC”). This is further qualified by SEC MC No. 16, Series of 2019, which provides that only an OPC can have a single director. Thus, a financing company cannot be organized as an OPC with a single director-stockholder. An ordinary corporation must have at least two 2 regular directors.

Corporate Governance Rules

Further in the Revised Code of Corporate Governance or SEC MC No. 6, Series of 2009, secondary licensees of the SEC (such as financing companies) must have a BoD composed of at least five (5) but not more than fifteen (15) directors, of which at least two (2) are independent directors.

In SEC MC No. 5, Series of 2010, the applicability of such requirements was limited to financing companies that possess any of the following qualifications:

1. Have total assets of Fifty Million Pesos (Php50) Million or more;
2. Have more than forty percent (40%) foreign participation in their voting stock; or
3. Have issued exempt or registered commercial papers.

The above rule is further qualified by a subsequent issuance, SEC MC No. 14, Series of 2014, which carves out an exception in favor of financing companies registered as close corporations, subject to the following conditions:

1. Amend the Articles of Incorporation (“AOI”) to state provisions in the RCC for close corporations;
2. All commercial papers shall be issued ONLY to Directors, Officers, Stockholders, and Related Interests (DOSRI) not exceeding nineteen (19) persons and to institutional lenders as provided under SRC Rule 9.2, as amended; and
3. Restrictions on the right to transfer shares shall be provided in the AOI, By-Laws and Stock Certificates.

Conclusion

Based on the foregoing rules, if a financing company possesses any of the qualifications under SEC MC No. 5, Series of 2010, and is not a close corporation, which satisfies the conditions under SEC MC No. 14, Series of 2014, the financing company’s BoD must have at least five (5) members, at least two (2) of which must be independent directors.
If a financing company is a close corporation that satisfies the conditions under SEC MC No. 14, Series of 2014 or is not a close corporation but does not possess any of the qualifications under SEC MC No. 5, Series of 2010, then its BoD may have only at least two (2) regular directors.