University of the Cordilleras

College of Accountancy

RFBT2(Law on Corporations, Partnerships and Cooperatives)

LESSON no. 3

Module 1

CORPORATIONS

Board of Directors and Corporate Officers

The Board of Directors or Trustees is the governing body of a corporation. They control
and direct the affairs of the corporation. They occupy a position of trusteeship in the
corporation. The board has the authority to enter into obligations on behalf of the
corporation. (Domingo, 2019)

A corporation exercises its powers through its board of directors or its duly authorized
officers and agents, except in instances where the corporation code requires
stockholder’s approval for certain acts.

A corporation’s board of directors is understood to be the body that:

1. Exercises all powers provided for under the Corporation Code
2. Conducts all business of the corporation; and
3. Controls and holds property of the corporation. (Sec. 22, Revised Corporation
Code)

3 levels of control in a corporation

1. Board of Directors
2. Corporate Officers
3. Stockholders (Domingo, 2019)

The directors are the executive representatives of the Corporation who are charged with
the administration of its internal affairs and management and use of its assets. A
corporation can only act through its directors and officers. The board is the central
power, which authorizes the executive agents to enter into contracts and to embark on
the business. It must be noted that in the exercise of corporate powers that:

A. with the exception of powers reserved by law to stockholders or members any action
by them is advisory in a resolution passed not recognizing the board is without effect.
• B. The powers that are expressly reserved by law to the stockholders or members
are: removal of directors or trustees
• granting of compensation, other than per diems, the directors
• Rectification of acts of self-dealing directors or trustees, interlocking directors,
disloyal directors
• The litigation of power to amend by laws
• calling off a meeting, upon good cause, when no person is authorized call it
 • direct management of the close Corporation is vested in the stockholders.

C. The courts or the SEC cannot interfere unless the acts are so unconscionable and
oppressive so as to amount to a wanton destruction of the rights of the majority. As long
as they are undertaken in good faith, they are not reviewable. This is known as the
BUSINESS JUDGMENT RULE.

D. The principal remedy to internal dissension our corporate elections as the majority must
be allowed to rule as long as he keeps within the powers provided in the charter.

Business Judgment Rule

The courts and the Securities and Exchange commission are barred from intruding into
the business judgments of the corporation, when the same are made in good faith
(Balinghasay, et. al, v. Castillo, et. al, G.R. No. 185664, April 8, 2015 and Philippine Stock
Exchange, Inc., v. Court of Appeals, et. al, G.R. No 125469, October 27, 1997)

Term of Office of Directors and Trustees

1. Director (SC) – 1 year
2. Trustee (SC) – 3 years (Sec 22, RCC)

Notes:
• The director or trustees shall hold office until a successor is elected and qualified.
So if there is yet no elected and qualified successor, then the Director or trustee
shall continue to hold office even after their term.
• Director who ceases to be a stock holder or a trustee, who ceases to be a
member, also ceases to be a director or a trustee.
• A juridical person cannot be a director, only an ex officio member without voting
rights in the board. The members of the board of directors must be elected from
the stockholders or trustees.
• Corporate powers may be conferred upon corporate officers.

Qualifications of a Director/ Trustee

1. Owner of atleast 1 share of stock (stock corporation), or must be a member (non
stock corporation)
1. Must be capacitated
2. Legal age
3. Other qualifications in the by laws.(Sec 22, RCC)

Independent directors
A person who apart from fees received from the corporation is independent of
management and free from any business or other relationship which could reasonably
be perceived to materially interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.

An independent director is required for corporations vested with public interest such as
the following:
 1. Corporations covered by sec 17.2 of the Securities and regulations code.
2. Banks, quasi banks, non-stock savings and loan associations, etc.
3. Other corporations vested with public interest. (Sec 22, RCC)

Disqualification of directors, trustees or officers (Sec 26, RCC)

1. If within 5 years prior to the election or appointment, such director or trustee was
convicted by final judgment of an offense punishable by imprisonment for a
period of 6 years

Example:
Joe was elected as corporate president on July 10, 2020. It was found out however
that Joe was convicted of Homicide on June 5, 2019. Here, Joe is disqualified to
be a corporate president since he was convicted by final judgment of an offense
punishable by imprisonment of more than 6 years within 5 years from his election.

2. For violating the revised Corporation Code; and

3. For violating the Securities regulations code
4. If within 5 years prior to the election or appointment, such director or trustee was
found administratively liable for any offense involving fraudulent acts.
5. If within 5 years prior to the election or appointment, he was found by a foreign
court or equivalent foreign regulatory authority for acts, or misconducts similar to
those enumerated in paragraph 1 and 2 above.

Removal of Directors or Trustees

Only the stockholders or members have the power to remove directors or

trustees. (Domingo, 2019)

General Rule:
A director or Trustee may be removed with or without cause. (Sec 27, RCC)

Exception:
If removal of the director is without cause, it should not be used to deprive minority
stockholders of the right of representation. (Sec 27, RCC)

Requisites for Removal:

1. Removal shall take place in a regular or special meeting duly called for that
purpose.
2. The director or trustee can only be removed by a vote of the stockholders
representing at least 2/3 of the outstanding capital stock or 2/3 of the members
entitled to vote in case of non-stock corporations.
3. There must be a previous notice to stock holders or members of the corporation
of the intention to propose such removal at the meeting
4. The special meeting of the stockholders or members for the purpose of removal
must be called by the secretary on order of the president on the written demand
of the stockholders representing or holding at least a majority of the outstanding
capital stock or a majority of members entitled to vote.
Vacancies in the BOD or BOT (Sec, 28, RCC)

Who may Fill up Reason for Vacancy?

Stockholders or members
By the members of the board of directors
1. Removal by stock holders
2. Expiration of term
3. Increase in the number of directors
due to amendment of the AOI
4. Other reasons other than expiration
or removal, like death, resignation,
abandonment, or disqualification,
if the remaining directors do not
constitute a quorum.
1. If the directors still constitute a
quorum, majority of them may fill in
the vacancy.

The Replacement director shall serve only the unexpired term.

Emergency Board of Directors

When the vacancy prevents the remaining directors to constitute a quorum and
emergency action is required to prevent grave, substantial, irreparable loss or damage
to the corporation, the vacancy may be filled from the officers of the corporation by
unanimous vote of the remaining directors. The term shall be only limited to the
emergency action necessary; the term shall cease within a reasonable time from the
termination of the emergency or upon election of the replacement director.

Compensation of Directors or Trustees. (Sec 29, RCC)

General Rule:
Directors or Trustees shall not receive any compensation, except for reasonable per
diems.

Exception:
1. When it is stated in the By laws
2. When the majority of the owners of the outstanding capital stock or majority of
members, vote or grant the same.

NOTE:
The total yearly compensation of the directors, as such directors shall
not exceed 10% of the net income before income tax of the
corporation during the preceding years.

Directors shall not participate in the determination of their per diems.

Liabilities of a Director

General Rule:
The corporation has a separate and distinct juridical personality from the persons
composing it. Thus directors many not be held liable for their acts.

Exeption: (when they may be held liable with the corporation) (Sec 30, RCC)
1. When directors assent to patently unlawful acts.
2. The directors act in bad faith or gross negligence.
3. Guilty of conflict of interest to the prejudice of the corporation.
4. When the director or officer has consented to the issuance of watered stocks
5. When the director agreed to be personally liable
6. When the director is made liable by provision of law.

References:

Revised Corporation Code

Domingo,A. (2019). Business Laws and Regulations: partnership, Revised Corporation,

Cooperative Law, Laws, Principles, and Jurisprudence (2019 Edition). Itogon, Benguet:
Coaching for Results Publishing.

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