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AT A GLANCE:
A non-stock corporation may not be converted into a stock corporation without liquidating its assets. (SEC-OGC Opinion No. 22-14 Re: Legality of Converting a Non-Stock, Non-Profit Corporation to a Stock Corporation, dated October 7, 2022)
Under the Revised Corporation Code of the Philippines (Republic Act No. 11232), corporations can be classified either as stock corporations or non-stock corporations.
On the one hand, stock corporations are those which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held. (Section 3, Revised Corporation Code of the Philippines)
On the other hand, non-stock corporations are those where no part of its income is distributable as dividends to its members, trustees, or officers. (Section 86, Id.)
Under SEC OGC Opinion No. 29-06 (addressed to Ms. Rayla Melchor Santos dated June 7, 2006), the following are the most common characteristics of a non-stock corporation:
- Any profit derived by it from any authorized activity cannot be distributed as dividends to its members;
- It may not lawfully engage in any business activity for profit as it would run counter to its very nature as a non-profit entity;
- When incidental to the objects and purposes of the corporation and without the end of making profits to be distributed to the members, it may engage in certain economic activities stated in its articles of incorporation;
- Does not issue stock and distribute dividends to its members; it is created not for profit but for public good and welfare; and
- The mere fact that a non-stock corporation may earn profit does not make it a profit-making corporation where such profit or income is used to carry out the purposes set forth in the articles of incorporation and is not distributed to its incorporators, members, trustees or officers.
SEC OGC Opinion No. 22-14 (Re: Legality of Converting a Non-Stock, Non-Profit Corporation to a Stock Corporation, dated October 7, 2022) provides that a non-stock corporation may not be converted into a stock corporation without liquidating its assets. To wit:
A non-stock corporation may not be “converted” into a stock corporation without liquidating its assets nor is 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.
As per SEC OGC Opinion addressed to Atty. Maria Clara Tankeh-Asuncion dated March 20, 1995, 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, viz:
As aptly defined in Section 87 of the Corporation Code, a “non-stock corporation is one where no part of its income is distributable as dividends 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 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)
Moreover, the SEC OGC states that for purposes of transformation, it is fundamental that the non-stock corporation must be dissolved first under any of the methods specified under Title XIII of the Revised Corporation Code so that the corporate assets 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. (SEC OGC Opinion addressed to Atty. Maria Clara Tankeh-Asuncion dated March 20, 1995)
Related Article/s:
When does a Stock Corporation become a Non-Stock Corporation?
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