FILIPINAS PORT SEVICES V.

GO
GR 161886

Topic: Business Judgemt Rule

Explanation:

The business judgement rule provides that mere errors of judgement committed by the Board
of Directors are not grounds for equity interference. The rule gives the Board the freedom to
make business decision without need to exercise an unnecessary degree of caution for fear of
liability to stockholders, provided that the following requisites are present:

1. A business decision
2. Made in good faith
3. Made within the powers of the Board of Directors
4. Due care in making such decision
5. Lack of personal interest influencing the decision by the Board

In the case at bar, even assuming that the creation of the executive committee did in fact
constitute mismanagement and prejudiced the stockholders, the Board of Directors cannot be
held liable for the damages because of the application of the business judgement rule. Under
the rule, for the Board to be liable to the stockholders, the decision made must have been
accompanied by bad faith. The Court defined “bad faith” not merely bad judgment or
negligence; but it imports a dishonest purpose or some moral obliquity and conscious doing of
a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the
nature of fraud. In this case there was no such dishonest purpose, nor fraudulent motives, but
only a legitimate business decision made by the Board.

FACTS:

On September 4 1992 Eliodoro C. Cruz, Filport’s president from 1968-1991 wrote a letter to the
corporation’s Board of Directors questioning the creation and election of the following positions:

1. Asst. Vice-President for Corporate Planning

2. Asst. Vice-President for Operations
3. Asst. Vice-President for Finance
4. Asst. Vice-President for Administration
5. Special Asst. to the Chairman
6. Special Asst. to the President

On June 4, 1993 Cruz, purportedly in representation of Filport and its stockholders, among

which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc., filed with the
SEC a derivative suit against Filport's Board for acts of mismanagement detrimental to the
interest of the corporation and its shareholders at large praying that the Board be made to pay
Filport, jointly and severally, the sums of money variedly representing the damages incurred as
a result of the creation of the positions complained of and the aggregate amount of the
questioned increased salaries.
ISSUES: 

1. Whether or not the Board of Directors of Filport may be held liable for damages caused by
the creation of the executive committee

HELD:

NO. Under Section 35 of the Corporation Code, the creation of an executive committee must be
provided for in the bylaws of the corporation. Notwithstanding the silence of Filport’s bylaws on
the matter, we cannot rule that the creation of the executive committee by the board of
directors is illegal or unlawful. One reason is the absence of a showing as to the true nature
and functions of executive committee. But even assuming there was mismanagement resulting
to corporate damages or business losses, respondents may not be held liable in the absence of
a showing of bad faith in doing the acts complained of.