Cross-border capital investments or domestic institutional investments often get caught up in the final stages of their transaction due to discrepancies in the ownership history of the business. To ensure that your business maintains corporate compliance in the Philippines, it is essential that you have rigorous processes in place to ensure that you maintain compliance in your stock corporation. This means that if there are discrepancies between the equity ledgers in your business and those submitted to the Securities and Exchange Commission (SEC), then potential investors are left exposed to legal issues. Fixing these discrepancies will result in you having to halt the disbursement of capital for months while corporate lawyers sort out the discrepancies in the books.
Common Issues with Equity Ledgers in Stock Corporations
During due diligence reviews, we often find large discrepancies in the equity ledgers of businesses. The Revised Corporation Code of the Philippines (Republic Act No. 11232) stipulates that all stock corporations must have accurate equity ledgers in both the internal corporate ledgers and with the SEC. If corporate secretaries or administrators fail to update their internal registers when capital is moved, discrepancies will occur.
- Discrepancies between General Information Sheet (GIS) and Stock and Transfer Book (STB): Often a company will file an updated General Information Sheet with the SEC after they have received new shareholders from a Seed round or secondary sale. They will, however, not reflect this in their internal Stock and Transfer Book. Sometimes corporate officers will enter share transfers into the STB but fail to update the GIS.
- Unrecorded Share Transfers with Private Deeds of Sale: Sometimes stockholders will sign and deliver stock certificates privately via a deed of sale. Stock transfers are only valid under Philippine law between the contracting parties and must be recorded in the company’s books.
- No Certificate Authorizing Registration (eCAR) from the BIR: Before a share transfer can be entered into the STB in the Philippines, the corporate secretary must receive proof that capital gains tax and documentary stamp tax have been paid. If a company records secondary transfers without having a valid eCAR from the BIR, this will cause a broken chain of title.
- Unissued Stock Certificates: Many high-growth companies will operate for many years without issuing stock certificates. Often they will record the percentage of equity in their cap table spreadsheet or in unnotarized board minutes.
- Incorrect Paid-Up Capital: Often the paid-up capital reported in the Audited Financial Statements will not match the par value in the Articles of Incorporation and Annual SEC filings.
- Incomplete/Outdated Beneficial Ownership: As Anti-Money Laundering rules have been tightened, corporations will need to declare who the natural person beneficial owners are. If this section of the documents is left blank or the company lists nominee shareholders, then they will have major compliance issues.
Why Equity Ledgers Cause Deal Breakers
Before any capital is wired into a Philippine company, institutional investors, private equity funds, and strategic investors will bring in legal teams to perform due diligence. These teams will investigate to ensure the equity they are purchasing is validly issued. All equity transactions will be reviewed by legal teams. If there are any breaks in the chain of title, then this will cause major legal and financial liabilities which will not be accepted by investment committees.
- Invalid Share Issues: If there are no resolutions, shareholder approvals, waivers of preemptive rights, or registrations with the SEC for historical capital increases or secondary share transfers, then previous shareholders or minority shareholders will have grounds to dispute the validity of the equity.
- Unclear Shareholder Rights: If there are discrepancies in the STB in the Philippines, then it will be unclear whether the shareholders have had valid meetings, voted in quorum, and elected the board. Investors will not be able to be certain that the corporate officers they are dealing with have valid authority.
- Capital Gains Tax, Donor’s Tax & Documentary Stamp Tax: If capital gains tax, donor’s tax, or documentary stamp tax has not been paid on historical share transfers, then the incoming acquiring party will be liable to pay large amounts of tax, 25-50% tax and interest from the BIR.
- Foreign Investment Registration Difficulties: If the foreign investor needs to register their capital with the Bangko Sentral ng Pilipinas (BSP) to ensure they can repatriate their dividends and divestment, then they will need to provide clean, SEC-compliant documents to prove they own the equity.
- Exceeding Constitutional and Statutory Foreign Equity Limits: If the company operates within an industry which has constitutional and statutory foreign equity limits, then incorrect shareholder registers will cause legal teams to be unable to confirm they are complying with the mandatory Filipino-to-foreign equity ratios.
Key Documents Required by the SEC in the Philippines
It is essential that directors and officers understand that each of these statutory registers forms part of the company’s identity. To ensure compliance with the SEC in the Philippines, all corporate documents must be in line with each other.
- Stock and Transfer Book (STB): The STB is a document required under the Revised Corporation Code (RA 11232) to be registered with the SEC. This document acts as the main evidence of share ownership, assignments, pledges, and encumbrances within a stock corporation. Common issues we see are that it is left blank after incorporation, lost during office moves, or entered into without a valid eCAR from the BIR.
- General Information Sheet (GIS): The GIS is a document that must be filed with the Securities and Exchange Commission annually. It must be filed within 30 calendar days of the annual stockholders’ meeting. Common issues we see are companies failing to file on time, typos in the number of shares held by shareholders, or discrepancies with the equity reported in the STB.
- Beneficial Ownership: This document is enforced by Memorandum Circulars from the SEC. This document must be completed to show who the natural person beneficial owners are. Companies often fail this review as the beneficial owners pages are left blank or the information is not updated within the 30-day period. Sometimes the company will incorrectly identify corporate intermediaries as beneficial owners.
- Certificate Authorizing Registration (eCAR): This document is issued by the BIR once they have conducted a tax audit and confirmed that tax has been paid. This confirms that all capital gains tax and documentary stamp tax have been paid in full. If the corporate secretary enters stock transfers without the tax being cleared, then they are entering invalid transfers.
- Stock Certificates: Stock Certificates are governed by Section 62 of the Revised Corporation Code. They act as a written confirmation that a shareholder owns an interest in the capital stock of the company. Common issues we see are that they are issued for partially paid subscriptions or they are not signed, sealed, and signed by the President and countersigned by the secretary.
Why Fixing Discrepancies Will Delay Capital
If the buyer’s legal team identifies discrepancies in your statutory registers, then the deal will change from a business deal to a remediation project. As the regulatory bodies in the Philippines require strict processes to be followed to ensure documents are verified in order, fixing discrepancies will not be possible in a short space of time. Each document will require a previous clearance to be issued before it can be filed.
- Lost or Unregistered Books: If the company cannot locate its original STB, which was registered with the SEC, then the corporate secretary will need to complete an Affidavit of Loss (Notarised). They will also need clearance from the board to issue a new STB. The company will then need to apply to register a new STB with the SEC. The corporate secretary will also need to manually enter all share issues and transfers from the date of incorporation onwards using certified true copies of previous filings.
- Tax Clearance & BIR eCAR: If there were no tax clearances for historical secondary share transfers, then the parties will need to locate the original deeds of assignment. They will also need to locate the audited financial statements for the year the shares were transferred to determine the book value. Tax returns will need to be submitted to the BIR. The eCAR will need to be backdated, meaning we will need to calculate how much interest has accrued over the years. This can add between 8-16 weeks to the deal.
- Amended General Information Sheets: If there are discrepancies with the shareholders listed on previous GIS filings, then we will need to submit amended filings to the SEC. This will require notarised certificates from the secretary, board resolutions, and deeds of transfer. The SEC will often impose penalties for incorrect or late disclosures.
- Locating Former Shareholders: If early founders, angels, or exiting partners have transferred their shares without documentation, then corporate lawyers will need to locate them. Many of these people may have relocated overseas or gone quiet. They will need to sign a deed of assignment and waive their preemptive rights.
- Holding Application for Increase in Authorized Capital: If the investment is coming in via a subscription for newly issued shares (increase in authorized capital), then the SEC will hold the application until all discrepancies, penalties, and conflicting GIS have been resolved.
Corporate Housekeeping in the Philippines
To ensure that the discrepancies are removed from the equity ledgers, it is vital that the company performs an audit of the entire statutory history well before any data rooms are opened. As there are strict rules in Philippine corporate law relating to share transfers, tax clearances, and SEC filings, trying to amend historical errors often results in increased scrutiny and higher penalties. As the SEC and BIR have very detailed requirements, it is essential to work with an experienced advisor such as BusinessRegistrationPhilippines.com. We will ensure that your company receives full corporate housekeeping, statutory ledgers, and compliance management to ensure your STB, GIS, and tax clearances are in line.
- Pre-Investment Compliance Audits: By engaging specialist corporate compliance teams months prior to your capital raise, you can discreetly identify and resolve any discrepancies.
- Full Equity Chain of Title Audit: All equity subscriptions, assignments, conversions and redemptions since incorporation will need to be reconciled with board minutes, shareholder meetings, stock certificate stubs and BIR tax payment receipts.
- Strict Share Transfer Processes: By putting in place strict corporate secretarial processes, no shares will be entered into the STB until the original endorsed stock certificate, notarised deed of assignment and BIR eCAR have been verified and stored.
- Calendar of Statutory Filings: By implementing processes to track compliance, you can ensure that the GIS, Beneficial Ownership and Audited Financial Statements are lodged on time.
Wrapping Up
Think about statutory registers as an asset to your business. If your internal equity ledgers, tax clearances and disclosures all show one clear story, then your institutional investors can complete their legal reviews quickly, and funds can be wired on time. By ensuring you have consistent compliance in the Philippines, you will protect your founders from any indemnities, whilst protecting shareholders during complex equity restructuring. Your company will also be seen as a transparent partner to invest in within a competitive economy. By ensuring that your books are in line from the start and any discrepancies are resolved, you will ensure that your business can move forward with momentum and close your capital raise.
Is Assistance Available?
Yes! We can help your business with complex SEC compliance requirements in the Philippines; we can help rebuild your lost corporate documents and ensure your statutory books are in order for your investors. Our team of corporate lawyers and compliance experts can provide you with full corporate compliance in the Philippines. Contact us to speak to one of our experts today.
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