How many directors should your company really have? Is a larger board always better, or does a smaller team lead to quicker decisions and more efficient operations? These are common questions you encounter when incorporating or restructuring your company.
As always, the short answer is—it depends. The ideal size of a board of directors is influenced by several factors, including legal requirements, company size, the complexity of operations, required skills and expertise, governance structure, investor requirements, decision-making efficiency, cost considerations, and board dynamics. As your business grows and evolves, the debate over the ideal number of directors can become even more complex.
Under the Revised Corporation Code (RCC) of the Philippines, ordinary stock corporations (OSCs) may now have a minimum of two and a maximum of 15 directors. Prior to this revision, the requirement was a minimum of five-member board, which posed challenges—particularly for foreign investors who had to seek nominee directors. More notably, existing corporations can also adjust their board size, either by increasing or decreasing it—within the prescribed limits.
In this blog, you will learn about the qualifications and roles of corporate directors, the reasons for adjusting the board size, and a step-by-step guide on how to amend your company’s Articles of Incorporation (AOI) to increase or reduce the number of directors.
Understanding Corporate Directors
To help you make an informed decision about adjusting your company’s board size, here are the key things you need to know about corporate directors:
What is a Corporate Director?
A corporate director is a high-level executive who serves as a member of a corporate board of a stock corporation (i.e., similar to a trustee in a non-stock corporation). The director plays a critical role in making important decisions regarding the company’s business affairs, policies, and strategic goals.
What are the Qualifications of a Corporate Director?
Under the RCC, a corporate director must be a natural person, hold at least one share of stock in his or her name, and not have been convicted of any offenses or violations under Section 26 of the RCC within five (5) years prior to election or appointment.
Corporations may also establish additional qualifications (e.g., age requirements, educational backgrounds, and professional experience, etc.) in their bylaws, provided these align with the provisions of the RCC.
How Does a Corporate Director Join the Board?
Directors are elected for a one-year term by stockholders listed in the corporation’s records. Unless the right to elect is exclusively reserved for holders of founders’ shares, any stockholder can nominate a director who meets the qualifications and does not have any disqualifications, as outlined in the RCC and company bylaws.
What are the Roles of a Corporate Director?
A corporate director serves on the board, which exercises all the powers of the corporation, including overseeing its affairs and controlling its properties. The board also proposes major changes, such as amendments to the articles of incorporation, mergers, or asset sales. However, these powers are limited by the corporation’s bylaws, applicable laws, and in some cases, shareholder approval.
How Many Corporate Directors are Required by Law?
Prior to the enactment of the Revised Corporation Code (RCC), those looking to establish a domestic corporation were required to have at least five incorporators, the majority of whom had to be residents of the Philippines. However, under the RCC, ordinary corporations can now operate with a minimum of two and a maximum of 15 directors.
What are Independent Directors?
An independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship that could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in fulfilling the responsibilities of a director.
As stated in Section 22 of the RCC, corporations vested with public interest—such as banks, insurance companies, and corporations covered by Section 17 of the Securities Regulation Code (R.A. 8799)—must have independent directors constituting at least twenty percent (20%) of the board.
6 Common Reasons Why Corporations Increase or Reduce Their Number of Directors
If you’re considering increasing or reducing the number of corporate directors, your decision may be influenced by factors such as:
1. Expansion or Contraction of Business Operations
As your company expands, you may consider increasing the board size to bring in more expertise to handle complex business operations. Conversely, during downsizing or restructuring, you might reduce the number of directors to streamline decision-making and save on administrative cost.
2. Regulatory Requirements
You may be compelled to increase your board size for regulatory compliance, such as the need for independent directors in public companies. Regulatory changes, like the enactment of the RCC, may also offer the opportunity to reduce the board size and simplify corporate governance.
3. Corporate Governance Considerations
A larger board of directors can bring more diversity and expertise, enhancing corporate governance. On the other hand, reducing the board size can improve efficiency, making decision-making faster and more cohesive.
4. Financial Constraints
When your corporation is financially strong, increasing the board size can provide additional expertise. However, financial difficulties may prompt a reduction in board members to cut costs, as smaller boards are generally less expensive to maintain.
5. Shareholder Pressure
You may push for a larger board if you feel that more oversight is necessary. On the other hand, if the current board is seen as inefficient, reducing the number of directors can lead to better accountability and performance.
6. Acquisitions and Mergers
After a merger or acquisition, you may choose to increase the board size to include directors from both companies for smoother integration. Alternatively, reducing the board size post-merger can help eliminate redundancies and focus on effective governance.
Amending Articles of Incorporation (AOI)
The Articles of Incorporation (AOI) serves as the foundational document that defines a company’s essential details, including its board structure. Any modification to the board size—whether an increase or reduction in the number of directors—must be duly reflected in the AOI to ensure alignment with the company’s actual operations.
To maintain compliance with the RCC, any amendments to the AOI must be filed with the Securities and Exchange Commission (SEC). This legal process ensures that the company’s governance structure remains updated and recognized by regulatory authorities. Moreover, it enhances transparency for stakeholders and safeguards the company from potential legal risks.
SEC Requirements for AOI Amendment (Increase or Reduce the Number of Directors)
When increasing or reducing the number of directors, companies must carefully prepare and submit the necessary documents to ensure compliance with SEC regulations. The required documents typically include:
- Cover Sheet for Amendment;
- Amendment Form (System-Generated);
- CMD Monitoring Clearance; and
- Additional requirements, such as clearances from other SEC departments and endorsements from other government agencies (if applicable).
How to Amend the AOI to Increase or Reduce the Number of Directors
Under the Revised Corporation Code of the Philippines, a corporation may amend its Articles of Incorporation (AOI) to increase or reduce the number of directors. This process is classified as a simple application and can be processed through the Securities and Exchange Commission (SEC) Electronic Application for Modification of Entity Data (eAMEND) Portal.
The eAMEND Portal is an online system designated to facilitate the acceptance, processing, approval for payment, and issuance of the digital and original copy of the amendment certificate for domestic stock and non-stock corporations. Here’s the step-by-step guide:
1. Create an Application and Generate the Amendment Form on eAMEND.
Log into the eAMEND Portal at https://eamend.sec.gov.ph/login. Complete the application by selecting the appropriate options and entering your company’s SEC Registration Number. After filling in the necessary fields, generate and download the Amendment Form.
2. Sign and Notarize the Documents.
Obtain the required signatures from your company’s authorized representatives, such as the president, corporate secretary, treasurer, and board members, on the Amendment Form and other relevant documents. Ensure that these documents are notarized as required by the SEC.
3. Upload the Finalized Documents to the eAMEND Portal.
Return to the eAMEND Portal and upload the signed and notarized Amendment Form along with supporting documents. These include the most recent CMD Monitoring Clearance issued by the SEC. If unavailable, select the box for the Affidavit of Undertaking.
6. Generate the Payment Assessment Form (PAF) and Pay the Fees.
Once the SEC Assigned Processor pre-approves your application, you will receive an email instructing you to download the Payment Assessment Form (PAF). The applicable fees are as follows:
- PHP 1,000 for the Amended Articles of Incorporation (AOI)
- PHP 10 for the Legal Research Fee
- PHP 30.00 for the Documentary Stamp Tax (DST)
Payment of the fees shall be through the available SEC payment channels.
7. Download the Digital Certificate of Amendment.
Upon confirmation of payment, you will receive an email indicating that your application status is “For Submission.” Click the link provided, log in to the eAMEND Portal, and navigate to the “Applications” section. Click “View Application” to download your digital Certificate of Amendment.
8. Submit the Hard Copies of the Documents.
Prepare four (4) sets of signed and notarized copies of your documents along with the payment receipt. Submit them to the SEC Processing Office. One set must contain the original notarized documents, while the other three may be photocopies.
9. Receive the Amendment Certificate.
The SEC will review your hard copy submissions, a process that may take a few months. Once the review is complete, you will receive an email notification. You may then visit the SEC Processing Office to collect the original Certificate of Filing of Amended Articles of Incorporation.
In conclusion, amending the Articles of Incorporation to modify the number of directors is a straightforward process when following the prescribed steps. By utilizing the SEC’s eAMEND Portal, corporations can efficiently file, process, and secure their amendments while ensuring compliance with the Revised Corporation Code of the Philippines.
The RCC now allows you to incorporate your company with as few as two (2) directors, unless you opt for a One Person Corporation (OPC). If your corporation was established prior to the enactment of the revised legislation, you can still adjust your board size. To ensure complete legal compliance and for other important purposes, you need to amend your company’s Articles of Incorporation (AOI) and file the necessary documentation with the Securities and Exchange Commission (SEC).
… and you might just need our assistance.
At FilePino, we ensure our team stays updated with the latest rules and regulations governing business compliance across various government agencies. We also leverage our extensive experience and expertise in navigating the intricacies of transactions.
Ready to increase or reduce the number of your corporate directors? Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.
