Non-stock corporations taking the limelight

Quoting a phrase not my own – “Corporations are not legal persons with constitutional rights and freedoms of their own, but legal fictions that we created and must therefore control.” Indeed control of these juridical entities is necessary since the law recognizes its existence, and confers to it certain rights and obligations which must be complied with otherwise penalties may be imposed by law.

Recently, the Securities and Exchange Commission (“SEC”), through the Office of the General Council (“OGC”), issued SEC-OGC Opinion No. 14-25 discussing what a non-stock corporation is, specifically quorum, voting requirements, and voting rights of members. The issuance illustrated the defining features of a non-stock corporation vis a vis a stock corporation.

The Corporation Code defines a non-stock corporation as a corporation where no part of its income is distributable as dividends to its members, trustees, or officers. It may be organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes. Any profit which a non-stock corporation may obtain shall inure to the benefit of the corporation.

A non-stock corporation may issue proprietary or non-proprietary certificates to its members. The certificates, whether proprietary or non-proprietary, are evidence of interest, participation or privilege over the use of certain properties of the corporation. Neither proprietary nor non-proprietary certificate entitles the members to dividends, as a non-stock corporation is not allowed to distribute dividends.

However, a proprietary certificate entitles the holder a proportionate ownership right over the assets upon liquidation, while a non-proprietary certificate has no such right over assets of the corporation.

According to the SEC, even if a proprietary certificate entitles the holder to share in the corporate assets upon liquidation and not to dividends or the corporation earnings, the certificate does not lose its proprietary character. This is consistent with the provision of the Code, since non-stock corporation are not allowed to distribute income to its members in the form of dividends.

A non-stock corporation issuing a proprietary certificate to its member does have its cost. Since proprietary certificates entitle the holder to corporate assets upon liquidation the non-stock corporation foregoes the benefit of income tax exemption provided by the Tax Code.

Under Section 30(E) of the Tax Code, non-stock corporations organized and operated exclusively for religious, charitable scientific, athletic or cultural purposes, or for the rehabilitation of veterans, no part of its net income or assets shall belong to or inure to the benefit of any member, organizers, officers or any specific purposes are exempt from income tax in respect to income received by them as such.

Generally, every member is entitled to one vote unless so limited, broadened or denied by the Articles of Incorporation or the By-laws as provided under Sec. 89 of the Corporation Code. Based on the said section, the SEC confirmed that provision disallowing proxies to vote in a non-stock corporation or limiting the voting rights of a member to one is valid.

The SEC further explains that in the case of stock corporation, proxies are allowed to vote as afforded by Sec. 58 of the Corporation Code. A By-law provision prohibiting proxy voting in stock corporation is void.

Quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. The SEC explained AOI or the By-laws may fix a greater number to constitute a quorum necessary for a valid business transaction since this provision only sets the minimum requirement. Quorum is necessary in either regular or special meeting to bind the corporation.

On the other hand, when the Corporation Code requires or fixes a minimum stockholders’ or members’ to vote for a certain corporate action, then there must necessarily be present or represented such number of members or stocks needed to make the required minimum vote. Meetings to amend the Articles of Incorporation requiring 2/3 of the outstanding capital stock or the members would be an example.

The SEC also confirmed that members constituting a quorum should be of good standing. The SEC attributed goods standing with the membership rights that are not lost due delinquency pursuant to Sec. 71 of the Corporation Code. 

Members considered delinquent are not entitled to vote or to represent at any meeting and any other rights of a stockholder except the right to dividend. However, no right to dividend will be entitled to members of a non-stock corporation since the corporation is forbidden by law to distribute income to its members.

The issuance also clarified that of the number of authorized membership is the number stated in the Articles of Incorporation or the By-law. However, in the case of APO, there is conflict between the Articles of Incorporation and the By-laws. The SEC explained that Articles of Incorporation will prevail since the By-laws are subordinate to and cannot contravene with the corporate charter.

Non-stock corporations, just like stock corporation must operate within the ambit of the Corporation Code. The Board of Trustees who are in control of the corporation must not only be vigilant in protecting the common interest of all its members but must steer the corporation within the parameters of the Corporation Code and other pertinent laws.

Jose Bernard V. Basallaje is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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