SHAREHOLDERS’ RESOLUTION FOR RETRENCHMENT IN THE PHILIPPINES A Comprehensive Legal Guide (2025)
1. Retrenchment in Philippine Law — the Baseline
Retrenchment is an authorized cause for terminating employment under Article 298 (formerly Art. 283) of the Labor Code. It allows an employer to reduce its workforce to prevent existing or imminent substantial business losses. The statutory requisites, restated in Department Order (D.O.) 147-15 and consistently applied by the Supreme Court, are: (1) proof of actual or reasonably imminent losses; (2) good-faith implementation; (3) fair and objective selection of employees; (4) 30-day twin notice to the worker and to DOLE; and (5) payment of separation pay equal to one (1) month pay or one-half (½) month pay per year of service, whichever is higher. (padinlaw.ph, RESPICIO & CO., RESPICIO & CO.)
2. Board Primacy vs. Shareholder Oversight
Under Sections 22 and 42 of the Revised Corporation Code (RCC), day-to-day management—including personnel movements—rests with the Board of Directors. Retrenchment therefore does not normally require stockholder consent the way a sale of “all or substantially all” assets does.
Why, then, do many Philippine companies still seek a shareholders’ resolution?
| Typical Rationale | Legal / Regulatory Hook |
|---|---|
| Sizeable financial exposure for separation pay | Directors’ fiduciary duty to disclose material transactions (RCC §31) |
| Reputation / ESG / union concerns | PSE Listing Rules on “material information” |
| Financing covenants that prohibit mass termination without owner approval | Cross-default clauses |
Padin Law Offices, for example, lists “issuing a Board Resolution approving and authorizing the implementation of a retrenchment program” as best practice before notices are served. (padinlaw.ph) Publicly listed firms often elevate the matter further and secure a stockholders’ ratification to demonstrate transparency and mitigate derivative-suit risk.
3. Legal Bases for a Shareholders’ Resolution
- Voluntary elevation by the Board. Section 34 of the RCC allows directors to submit any matter “of fundamental importance” for stockholder vote.
- Company by-laws / Corporate Governance Manual. Many by-laws require stockholder approval for “programs resulting in extraordinary liabilities,” which a large retrenchment undoubtedly is.
- Collective Bargaining Agreement (CBA). Some CBAs stipulate that mass lay-offs above a threshold need union consultation and stockholder sign-off.
- Financing Documents. Loan covenants may require owner approval for workforce reductions exceeding a set percentage.
Because none of these sources are statutory, a shareholders’ resolution is usually advisory, but it powerfully records owner consent, minimizes accusations of ultra vires action, and strengthens the employer’s evidentiary package when the retrenchment is litigated.
4. Drafting the Resolution
A shareholders’ resolution for retrenchment normally contains six parts:
- Title and Recitals – Cite audited losses, market contraction, or other objective data.
- Legal Authority – Reference Art. 298 of the Labor Code, D.O. 147-15, and the RCC.
- Approval Proper – “RESOLVED, that the shareholders hereby approve and ratify the Retrenchment Program dated ___….”
- Delegation – Authorize the Board/President/HR Head to (a) select employees using fair criteria, (b) serve twin notices, (c) file DOLE RKS Form 5, and (d) disburse separation pay.
- Funding & Accounting – Appropriate a separation-pay budget, authorize drawdown on credit lines if needed, and instruct the Treasurer to book the liability under PAS 19.
- Formalities – Indicate quorum (majority of outstanding capital stock unless the by-laws require more), note the vote, and direct the Corporate Secretary to (a) issue a certified extract, (b) submit the resolution to the SEC/PSE as a material disclosure, and (c) attach it to DOLE filings when requested.
Sample Extract
SHAREHOLDERS’ RESOLUTION NO. 2025-01 “APPROVAL OF RETRENCHMENT PROGRAM” WHEREAS, the Audited Financial Statements for FY 2023 and FY 2024 show consecutive net losses amounting to Php 148 million; WHEREAS, Management has presented a Retrenchment Program dated 10 May 2025 that will reduce headcount by 15 % and save Php 60 million annually; NOW, THEREFORE, BE IT RESOLVED, that the shareholders representing 78 % of the outstanding shares hereby APPROVE and RATIFY the said Retrenchment Program and AUTHORIZE the Board of Directors to implement it in accordance with Article 298 of the Labor Code, DOLE D.O. 147-15, and existing jurisprudence; RESOLVED FINALLY, that the President and/or Vice-President for HR are hereby empowered to sign all notices, DOLE RKS Form 5, quitclaims, and checks for separation pay, and to do all acts necessary to carry out this Resolution.
(The language above is illustrative; tailor it to your charter and by-laws.)
5. Compliance Matrix
| Step | Who | Deadline / Rule | Key Document |
|---|---|---|---|
| Shareholders’ special meeting | Corporate Secretary | At least 21-day notice (RCC §49) or by-laws period | Notice & Agenda |
| Stockholder vote | Majority of OCS* | Meeting date | Shareholders’ Resolution |
| Board implementation vote | Board of Directors | Same day or separate meeting | Board Resolution & minutes |
| Twin 30-day notices | HR / President | ≥30 days before effectivity (Labor Code Art. 298) | Employee & DOLE notices |
| File RKS Form 5 | HR | Simultaneous with DOLE notice | DOLE RKS Form 5 |
| Separation-pay disbursement | Treasurer | On or before release of final pay | Checks / bank transfers |
| SEC / PSE disclosure (if listed) | Compliance Officer | Within same trading day (PSE LR 4.1) | SEC Form 17-C / PSE Edge disclosure |
*OCS = Outstanding Capital Stock.
6. Evidentiary Support & Jurisprudence
The Supreme Court has invalidated retrenchments where employers failed to substantiate losses or to use fair criteria (e.g., Lopez Sugar Corp. v. FFW, Jaka Food Processing v. Pacot, and the 2024 line of cases such as Philippine Pizza, Inc. v. Oraa, where the company was ordered to reinstate workers and pay back-wages). Presenting an owner-level resolution helps show good faith and “careful, deliberate” corporate decision-making. (E-Library)
7. Separation-Pay Funding and Tax
• Accrual & Deductibility. Separation pay booked in the year of the resolution is ordinarily deductible as a business expense under Section 34(A) of the Tax Code, provided it is “ordinary, necessary and duly substantiated.” • Withholding Tax. Payments made due to retrenchment under Art. 298 are tax-exempt, but only if the BIR is informed and the employer secures a confirmatory ruling or applies existing RMC 39-2023 safe-harbor rules. • Retirement Fund Interaction. If the company maintains a BIR-approved retirement plan, separation and retirement obligations must be clearly distinguished to avoid double counting. (RESPICIO & CO.)
8. Sector-Specific Nuances
| Sector | Additional Rule |
|---|---|
| Banks / Insurance | Prior BSP approval if the lay-off impairs minimum staffing ratios. |
| GOCCs / LGUs | Follow CSC’s 2024 Revised Rules on Government Reorganization—separation gratuity is one (1) month salary per year of service. (Civil Service Commission) |
| PEZA / BOI firms | Notify the respective investment-promotion agency; tax-incentive retention may be affected. |
9. Litigation-Proofing Tips
- Document Everything. Attach audited financials, board/stockholder minutes, cash-flow projections, and cost-saving analyses to the DOLE notice.
- Use Measurable Selection Criteria. Seniority + performance ratings remain the safest.
- Offer a Sweetener. Many employers add an ex-gratia amount (e.g., an extra ½-month pay) to blunt claims of bad faith; the Supreme Court views this favorably.
- Legal Audit. Before rollout, have counsel confirm that numbers, notices, and timings line up.
10. Take-Away
A Shareholders’ Resolution is not legally indispensable for retrenchment, but in 2025 it has become best practice—especially for midsize-to-large Philippine corporations—because it:
- shows unified owner support,
- buttresses the employer’s good-faith defense in NLRC cases,
- satisfies modern ESG and disclosure expectations, and
- clarifies funding authority for separation-pay liabilities.
Combined with scrupulous compliance with Article 298, D.O. 147-15 and current jurisprudence, an owner-level resolution is a practical shield against the twin perils of illegal-dismissal suits and shareholder derivative actions.
Need a bespoke resolution or a check-list tailored to your by-laws or listing-rule obligations? Feel free to let me know the particulars of your corporation’s capital structure and I can help draft a fully-custom document.