CHAPTER III During the elections of directors or trustees, the owners of majority of the

outstanding capital stockes, or if there be no capital stock, a majority of the

77
members entitled to vote must be present, in person or thru a
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS representative authorized per written proxy. Voting then could be in person,
via written proxy or remote communication or in absentia.
the company. Reckoning of the cumulative nine- year term is from 2012, in
connection with SEC Memorandum Circular No. 9, Series of 2011. In stock corporations, stockholders entitled to vote shall have the right to
vote the number of shares of stock standing in their own names in the stock
Any term beyond nine years for an independent director is subjected to books of the corporation at the time fixed in the bylaws or where the bylaws
particularly rigorous review, taking into account the need for progressive are silent, at the time of the election.
change in the Board to ensure an appropriate balance of skills and
experience. However, the shareholders may, in exceptional cases, choose to 2012 Bar: The By-laws of ABC
re-elect an independent director who has served for nine years. In such
Corporation is silent as to when a stockholder can be qualified to attend the
instances, the Board must provide a meritorious justification for the re-
meeting of the stockholders. The Corporate Secretary sent out the notice of
election.
the stockholders meeting two (2) days before the meeting and at that time X
Election of Directors or Trustees was not yet a stockholder. On the day of the meeting, however, X became a
shareholder which was duly recorded in the stock and transfer book. Which
One of the most important rights of a qualified shareholder or member is statement is most accurate?
the right to vote for the directors or trustees who are to manage the
corporate affairs. The right to choose the persons who will direct, manage
and operate the corporation is significant, because it is the main way in
which a stockholder can have a voice in the management of corporate
affairs, or in which a member in a nonstock corporation can have a say on
79
how the purposes and goals of the corporation may be achieved. Once the
directors or trustees are elected, the stockholders or members relinquish BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
corporate powers to the board in accordance with law 83
a. X is a stockholder of ABC Corporation as of the time of meeting of the
Under Section 23, each stockholder or member shall have the right to stockholders for the purpose of electing the members of the board.
nominate any director or trustee who possesses all of the qualifications and
b. X is not qualified to elect members of the board because at the time the
none of the disqualifications set forth in this Code.
notice of the meeting was sent, she was not yet a stockholder.
78 c. Qualifications as to who are considered as stockholders on record for
purposes of being able to elect members of the board are to be determined
PRIMER ON THE REVISED CORPORATION CODE (Republic Act No. 11232)
by the By- laws alone.
except when the exclusive right is reserved for holders of founders'
d. None of the above.
shares.84
The answer is (A).
Cumulative Voting for Stockholders
A viva voce or hand raising vote would be sufficient unless a vote by ballot is
requested by a stockholder or member.
In stock corporations, cumulative voting in the election of directors is
mandatory. A stockholder would have such number of votes equal to the
number of shares owned by the stockholders as shown in the books of the
corporation multiplied by the whole number of directors to be elected. The
said stockholder may: (a) vote such number of shares for as many persons as
there are directors to be elected; (b) cumulate said shares and give one (1)
candidate as many votes as the number of directors to be elected multiplied
by the number of the shares owned; or (c) distribute them on the same
principle
80
PRIMER ON
THE REVISED CORPORATION CODE (Republic Act No. 11232)
among as many candidates as may be seen fit. No delinquent stock shall be
voted.86
Cumulative voting grants and recognizes the right of a minority stockholder
to be elected director 87 To illustrate, in a corporation where there are 100
shares of stocks, all issued and outstanding held by the following
stockholders:
Dr. Armstrong-70 shares
Commander Robinson - 30 shares
Assuming that there are three vacant seats, and the candidates/nominees
are five, namely Steve, Mark, Jamie, Big Bert and Little John. Pursuant to
cumulative voting. Dr. Armstrong has 210 (70x3) votes while Commander
Robinson has 90 (30x3) votes. Steve and Mark were nominated by the
minority while Jamie, Big Bert and Little John were nominated by the
majority. Commander Robinson, the minority, is assured that he will get one
seat for his nominee by just pooling his 90 votes in favour of only one
person, either Steve or Mark. Dr. Armstong, if he will divide his votes into
three, which is mathematically 70 votes each, will get only two seats. The
same effect would happen if he divides his vote to two or 105 votes each.
The minority then would have an opportunity to be heard in the board.88
Now, for non-stock corporations, unless otherwise provided in the articles of
incorporation or
CHAPTER III
81
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
in the bylaws, members may cast as many votes as there are trustees to be
elected but may not cast more than one (1) vote for one (1) candidate.
Nominees for directors or trustees receiving the highest number of votes
shall be declared elected. 89
2011 Bar: In elections for the Board of
Trustees of non-stock corporations, members may cast as many votes as
there are trustees to be elected but may not cast more than one vote for
one candidate. This is true-
a. unless set aside by the members in plenary session.
b. in every case even if the Board of Trustees resolves otherwise.
C. unless otherwise provided in the Articles of Incorporation or in the By-
laws.
d. in every case even if the majority of the members decide otherwise
during the elections.
The answer is (C).
2011 Bar: EFG Foundation, Inc., a non-profit organization, scheduled an
election for its six-member Board of Trustees. X, Y and Z, who are minority
members of the foundation, wish to exercise cumulative voting in order to
protect their interest, although the Foundation's Articles and By- laws are
silent on the matter. As to each of
82
PRIMER ON
THE REVISED CORPORATION CODE (Republic Act No. 11232)
the three, what is the maximum number of
votes that he/she can cast?
a. 6
b. 9
C.
12
d. 3
The answer is (A).
If no election is held, or the owners of majority of the outstanding capital
stock or majority of the members entitled to vote are not present in person,
by proxy, or through remote communication or not voting in absentia at the
meeting, such meeting may be adjourned and the corporation shall proceed
in accordance with Section 25.
The non-holding of elections and the reasons therefor shall be reported to
the SEC within thirty (30) days from the date of the scheduled election. The
report shall specify a new date for the election, which shall not be later than
sixty (60) days from the scheduled date.
If no new date has been designated, or if the rescheduled election is likewise
not held, the SEC may, upon the application of a stockholder, member,
director or trustee, and after verification of the unjustified non-holding of
the election, summarily order that an election be held. The SEC shall have
the power to issue such orders as may be appropriate, including orders
directing the issuance of a notice stating the time and place of the election,
designated presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote.
CHAPTER III
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
83
Notwithstanding any provision of the articles of incorporation or bylaws to
the contrary, the shares of stock or membership represented at such
meeting and entitled to vote shall constitute a quorum for purposes of
conducting an election under this section.90
Should a director, trustee or officer die, resign or in any manner cease to
hold office, the secretary, or the director, trustee or officer of the
corporation, shall, within seven (7) days from knowledge thereof, report in
writing such fact to the SEC.
In the alternative, should the election pushes through, within thirty (30)
days after the election of the directors, trustees and officers of the
corporation, the secretary, or any other officer of the corporation, shall
submit to the SEC, the names, nationalities, shareholdings, and residence
addresses of the directors, trustees, and officers elected."
2012 Bar: The term of one (1) year of the Board of Directors of AAA
Corporation expired last February 15, 2012. No new election of the Board of
Directors was called, hence, the existing members of Board
The provisions regarding non-holding of elections are new. This provision
deals with the submission of a General Information Sheet (GIS) of a
corporation pursuant to the objective sought by the Corporation Code which
is to give the public information. under sanction of oath of responsible
officers, of the nature of business, financial condition, and operational status
of the company, as well as its key officers or managers, so that those dealing
and who Intend to do business with It may know or have the means of
knowing facts concerning the corporation's financial resources and business
responsibility.
84
PRIMER ON
THE REVISED CORPORATION CODE
(Republic Act No. 11232)
continue as Directors in hold over capacity. Which statement is most
accurate?
a. This is allowed provided there is a valid and justifiable reason for not
calling for an election of the new members of the Board.
b. This is not allowed because the term of the directors must only be for one
(1) year.
c. The positions of the members of the Board of Directors will be
automatically declared vacant.
d. Acting as members of the Board of Directors in a hold over capacity must
be ratified by the stockholders.
The answer is (A).
Corporate Officers
The officers shall manage the corporation and perform such duties as may
be provided in the bylaws and/or as resolved by the board of directors. The
minimum officers provided for under Section 24 and their qualifications are:
a. a president, who must be a director:
b. a treasurer?2, who must be a resident:
C. a secretary, who must be a citizen and resident of the Philippines; and
He is tasked with safekeeping of the corporate funds. The proper custodian
of the books, minutes and official records of a corporation is usually the
corporate secretary. Being the
CHAPTER III
85
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
d. such other officers as may be provided in the bylaws
e. a compliance officer, if the corporation is vested with public interest
The same person may hold two (2) or more positions concurrently, except
that no one shall act as president and secretary or as president and
treasurer at the same time, unless otherwise allowed in this Code, ⁹4
A position must be expressly mentioned in the by- laws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to
or under a by-law enabling provision is not enough to make a position a
corporate office. The only officers of a corporation were those given that
character either by the Corporation Code or by the by-laws so much so that
the rest of the corporate officers could be considered only as employees or
subordinate officials.95
The mere designation as a high-ranking
employee, however, is not enough to consider one as
a corporate officer. In Tabang vs. National Labor
custodian of corporate records, the corporate secretary has the duty to
record and prepare the minutes of the meeting. The signature of the
corporate secretary gives the minutes of the meeting probative value and
credibility. See Lopez Realty vs. Tanjangco, G.R. No. 154291, November 12,
2014.
The new law requires the treasurer to be a resident, as well as the creation
of a new officer, a compliance officer. The prohibition on dual positions on
the part of the president is in order to prevent possible abuse of power.
Matling Industrial and Commercial Corporation, et al. vs. Ricardo Coros, 633
SCRA 12.
86
PRIMER ON she wonders whether she should use a corporation as the business vehicle,
or just run it as a single proprietorship. She already has an existing
THE REVISED CORPORATION CODE (Republic Act No. 11232)
corporation that is producing meat products profitably and is also
Relations Commission, 266 SCRA 462, involving the dismissal of the Medical considering the alternative of simply setting up the restaurant as a branch
Director and Hospital Administrator which was held as a corporate officer, office of the existing corporation.
the Supreme Court discussed the distinction between an employee and a
a. If you advise your client to use a corporation, what officer positions must
corporate officer, regardless of designation.
the corporation at least have?
The president, vice-president, secretary and treasurer are commonly
b. What particular qualifications, if any, are these officers legally required to
regarded as the principal or executive officers of a corporation, and modern
possess under the Corporation Code?
corporation statutes usually designate them as the officers of the
corporation. However, other offices are sometimes created by the charter or The corporation must have a president, who must be a director; a treasurer,
by-laws of a corporation, or the board of directors may be empowered who must be a resident; and a secretary, who must be a citizen and resident
under the by-laws of a corporation to create additional offices as may be of the Philippines.
necessary.
Compliance Officer
It has been held that an "office" is created by the charter of the corporation
Again, under SEC Memorandum Circular No. 19- 16 dated November 22,
and the officer is elected by the directors or stockholders. On the other
2016 which covers the Code of Corporate Governance for Publicly-Listed
hand, an "employee" usually occupies no office and generally is employed
Companies, the Compliance Officer is a member of the company's
not by action of the directors or stockholders but by the managing officer of
management team in charge of the compliance function. Similar to the
the corporation who also determines the compensation to be paid to such
Corporate Secretary, he is primarily liable to the corporation and its
employee.
shareholders, and not to the Chairman or President of the company. He has,
The clear weight of jurisprudence clarifies that to be considered a corporate among others, the following duties and responsibilities:
officer, first, the office must be created by the charter of the corporation,
a. Ensures proper onboarding of new directors (l.e.. orientation on the
and second, the officer must be elected by the board of directors or by the
stockholders.
88
2010 Bar: Your client
PRIMER ON
Dianne approaches you for legal advice on putting up a medium-sized
THE REVISED CORPORATION CODE (Republic Act No. 11232)
restaurant business that will specialize in a novel type of cuisine. As Dianne
feels that the business is a little risky. company's business, charter, articles of incorporation and by-laws, among
others);
CHAPTER III
b. Monitors, reviews, evaluates and ensures the compliance by the
87 corporation, its officers and directors with the relevant laws, this Code, rules
and regulations and all governance issuances of regulatory agencies:
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
c. Reports the matter to the Board if violations are found and recommends
the imposition of appropriate disciplinary action;
d. Ensures the integrity and accuracy of all
documentary submissions to regulators;
e. Appears before the SEC when summoned in relation to compliance with
this Code;
f. Collaborates with other departments to properly address compliance
issues, which may be subject to investigation:
g. Identifies possible areas of compliance issues and works towards the
resolution of the same;
h. Ensures the attendance of board members and key officers to relevant
trainings; and
i. Performs such other duties and responsibilities as may be provided by the
SEC.
CHAPTER III
89
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
The Doctrine of Apparent Authority
Being a juridical entity, a corporation may act through its board of directors,
which exercises almost all corporate powers, lays down all corporate
business policies and is responsible for the efficiency of management.9%
The power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board,
subject to the articles of incorporation, bylaws, or relevant provisions of law.
However, just as a natural person who may authorize another to do certain
acts for and on his behalf, the board of directors may validly delegate some
of its functions and powers to officers, committees or agents. The authority
of such individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general course of
business.
Contracts entered into by a corporate officer or obligations assumed by such
officer for and in behalf of the corporation are binding on said corporation, if
such officer has acted within the scope of his authority, or even if such
officer has exceeded the limits of his authority, the corporation still ratifies
such contracts or obligations
90
PRIMER ON
THE REVISED CORPORATION CODE
(Republic Act No. 11232)
The doctrine of apparent authority or what is sometimes referred to as the
"holding out" theory, or the doctrine of ostensible agency, imposes liability.
not as the result of the reality of a contractual relationship, but rather
because of the actions of a principal or an employer in somehow misleading
the public into believing that the relationship or the authority exists.99
The doctrine of apparent authority provides that a corporation will be
estopped from denying the agent's authority if it knowingly permits one of
its officers or any other agent to act within the scope of an apparent
authority, and it holds him out to the public as possessing the power to do
those acts.
Apparent authority is derived not merely from practice. Its existence may be
ascertained through:
1. the general manner in which the corporation holds out an officer or agent
as having the power to act or, in other words, the apparent authority to act
in general, with which it clothes him; or
2. the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers.
It requires presentation of evidence of similar acts executed either in its
favor or in favor of other parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate
CHAPTER III
91
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
officer with the power to bind the corporation. The doctrine does not apply,
however, if the principal did not commit any act or conduct which a third
party knew and relied upon in good faith as a result of the exercise of
reasonable prudence, 100
Illustrations of the application of this doctrine are:
1. Contract entered into by the corporation's officer without a board
resolution held to be binding upon the corporation because it previously
allowed the officer to contract on its behalf despite the lack of board
resolution;101
2. Francisco's proposal for redemption of property was accepted by and
binding upon the Government Service Insurance System, notwithstanding
the fact that it was the Board Secretary and not the General Manager who
sent Francisco the acceptance telegram. The Government Service Insurance
System's failure to disown the telegram sent by the Board Secretary and its
silence while it accepted all payments made by Francisco for the redemption
of property estopped it from denying the lack of authority; 102
3. Loan contract entered into by the former president of Ricarcen which was
not supported
92
PRIMER ON
THE REVISED CORPORATION CODE (Republic Act No. 11232)
by any board resolution, is a valid loan. The broad authority given to the
former president can be seen with how the corporate secretary entrusted
her with blank yet signed sheets of paper to be used at her discretion. She
also had possession of the owner's duplicate copy of the land title covering
the property mortgaged to Calubad, further proving her authority from
Ricarcen, 103
4. The corporation is liable for the unpaid airline tickets taken by Sr. Medalle
for the Grand Chorale and Dance Company which she formed. She had been
giving financial support to the Group, in her capacity as President of Holy
Trinity College. The Board of Trustees never questioned the existence and
activities of the Group. Thus, any agreement entered into by Sr. Medalle as
President relating to the Group bears the consent and approval of Holy
Trinity. 104
5. Arma Traders is liable to pay the loans even when there is no board
resolution authorizing Tan and Uy to obtain the loans. To begin with, Arma
Traders' Articles of Incorporation provides that the corporation may borrow
or raise money to meet the financial requirements of its business by the
issuance of bonds, promissory notes and other evidence of indebtedness.
Likewise, it states that Tan and Uy are not just ordinary corporate officers
and authorized bank signatories because
CHAPTER III
93
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
they are also Arma Traders' incorporators. Furthermore, the sole
management of Arma Traders was left to Tan and Uy and the other officers
never dealt with the business and management of Arma Traders for 14
years, 105
2015 Bar: Define Doctrine of apparent
authority.
Ayaw kong sagutin. Magbasa ka na- man.
Disqualification of Directors, Trustees or Officers
Under Section 26, a person shall be disqualified from being a director, Note: SEC Memorandum Circular No. 19-16 dated November 22, 2016 which
trustee or officer of any corporation if, within five (5) years prior to the covers the Code of Corporate Governance for Publicly-Listed Companies
election or appointment as such, the person was: provides the following as grounds for the permanent disqualification of a
director:
a. Convicted by final judgment:
a. Any person convicted by final judgment or order by a competent judicial
1.
or administrative body of any crime that: (a) involves the purchase or sale of
Of an offense punishable by securities, as defined in the Securities Regulation Code; (b) arises out of the
person's conduct as an underwriter, broker, dealer, investment adviser,
imprisonment for a period principal, distributor, mutual fund dealer, futures commission merchant,
exceeding six (6) years; commodity trading advisor, or floor broker: or (c) arises out of his fiduciary
relationship with a bank, quasi-bank, trust company. investment house or as
2. For violating this Code; and an affiliated person of any of them;
3.
CHAPTER III
For violating Republic Act No.
95
8799, otherwise known as "The
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
Securities Regulation Code":
b. Any person who, by reason of misconduct, after hearing, is permanently
b. Found administratively liable for any offense involving fraudulent acts; enjoined by a final judgment or order of the SEC, Bangko Sentral ng Pilipinas
and (BSP) or any court or administrative body of competent jurisdiction from: (a)
acting as underwriter, broker, dealer, investment adviser, principal
c. By a foreign court or equivalent foreign regulatory authority for acts,
distributor, mutual fund dealer, futures commission merchant, commodity
violations or misconduct similar to those
trading advisor, or floor broker: (b) acting as director or officer of a bank,
quasi-bank, trust company, investment house, or investment company; (c)
94
engaging in or continuing any conduct or practice in any of the capacities
PRIMER ON mentioned in sub-paragraphs (a) and (b) above, or willfully violating the laws
that govern securities and banking activities.
THE REVISED CORPORATION CODE (Republic Act No. 11232)
The disqualification should also apply if (a) such person is the subject of an
enumerated in paragraphs (a) and (b)
order of the SEC, BSP or any court or administrative body denying, revoking
above. or suspending any registration, license or permit issued to him under the
Corporation Code, Securities Regulation Code or any other law administered
The foregoing is without prejudice to qualifications or other by the SEC or BSP, or under any rule or regulation issued by the SEC or BSP:
disqualifications, which the SEC, the primary regulatory agency, or the (b) such person has otherwise been restrained to engage in any activity
Philippine Competition Commission may impose in its promotion of good involving securities and banking; or (c) such person is the subject of an
corporate governance or as a sanction in its administrative proceedings. 106 effective order of a self- regulatory organization suspending or expelling him
from membership. participation or association with a member or participant
of the organization:
96
PRIMER ON
THE REVISED CORPORATION CODE (Republic Act No. 11232)
c. Any person convicted by final judgment or order by a court, or competent
administrative body of an offense involving moral turpitude, fraud,
embezzlement, theft, estafa, counterfeiting, misappropriation, forgery,
bribery, false affirmation, perjury or other fraudulent acts;
d. Any person who has been adjudged by final judgment or order of the SEC,
BSP, court, or competent administrative body to have willfully violated, or
willfully aided, abetted, counseled, induced or procured the violation of any
provision of the Corporation Code. Securities Regulation Code or any other
law, rule, regulation or order administered by the SEC or BSP;
e. Any person judicially declared as insolvent;
f. Any person found guilty by final judgment or order of a foreign court or
equivalent financial regulatory authority of acts, violations or misconduct
similar to any of the acts, violations or misconduct enumerated previously;
g. Conviction by final judgment of an offense punishable by imprisonment
for more than six years, or a violation of the Corporation Code committed
within five years prior to the date of his election or appointment; and
h. Other grounds as the SEC may provide.
CHAPTER III
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
97
In addition, the following may be grounds for temporary disqualification of a
director:
a. Absence in more than fifty percent (50%) of all regular and special
meetings of the Board during his incumbency, or any 12- month period
during the said incumbency. unless the absence is due to illness, death in
the immediate family or serious accident. The disqualification should apply
for purposes of the succeeding election:
b. Dismissal or termination for cause as director of any publicly-listed
company. public company, registered issuer of securities and holder of a
secondary license from the SEC. The disqualification should be in effect until
he has cleared himself from any involvement in the cause that gave rise to
his dismissal or termination:
c. If the beneficial equity ownership of an independent director in the
corporation or its subsidiaries and affiliates exceeds two percent (2%) of its
subscribed capital stock. The disqualification from being elected as an
independent director is lifted if the limit is later complied with; and
d. If any of the judgments or orders cited in the grounds for permanent
disqualification has not yet become final.
In Gokongwel vs. SEC. 97 SCRA 78, the amendment of the by-laws which
renders a stockholder ineligible to be director, If he be also director in a
corporation whose business is in
98
PRIMER ON
THE REVISED CORPORATION CODE (Republic Act No. 11232)
competition with that of the other corporation, has been sustained as valid.
CFC-Robina group, owned by Gokongwei, was in direct competition on
product lines of San Miguel Corporation. Access by a competitor to
confidential information regarding marketing strategies and pricing policies
of San Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance knowledge by
the competitor of the strategies for the development of existing or new
markets of existing or new products could enable said competitor to utilize
such knowledge to his advantage.
2011 Bar: A law
was passed disqualifying former members of Congress from sitting in the
Board of Directors of government-owned or controlled corporations.
Because of this, the Board of Directors of ABC Corp., a government- owned
and controlled corporation, disqualified C, a former Congressman, from
continuing to sit as one of its members. C objected, however, insisting that
under the Corporation Code members of the board of directors of
corporations may only be removed by vote of stockholders holding 2/3 of its
outstanding capital stock in a regular or special meeting called for that
purpose. Is C correct?
a. Yes, since the new law cannot be applied to members of the board of
directors already elected prior to its passage. CHAPTER III
99
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
b. No. since the disqualification takes effect by operation of law, it is
sufficient that he was declared no longer a member of the board.
c. Yes. since the provisions of the Corporation Code applies as well to
government-owned and controlled corporations.
d. No, since the board has the power to oust him even without the new law.
The answer is (B).
Removal of Directors or Trustees
Under Section 27, any director or trustee of a corporation may be removed
from office provided the following are present:
1. by a vote of the stockholders holding or representing at least two thirds
(2/3) of the outstanding capital stock, or in a non-stock corporation, by a
vote of at least two-thirds (2/3) of the members entitled to vote
2. removal shall take place either at a regular meeting of the corporation or
at a special meeting called for the purpose
3. previous notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting. The meeting must be
called by the secretary on order of the president. or upon written demand of
the stockholders representing or holding at least a majority of the
outstanding capital stock, or a majority of the members entitled to vote.
100
PRIMER ON
THE REVISED CORPORATION CODE (Republic Act No. 11232)
If there is no secretary, or if the secretary, despite demand, fails or refuses to
call the special meeting or to give notice thereof, the stockholder or member
of the corporation signing the demand may call for the meeting by directly
addressing the stockholders or members. Notice of the time and place of
such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided. That removal without
cause may not be used to deprive minority stockholders or members of the
right of representation to which they may be entitled under Section 23 of
this Code.
The SEC shall, motu proprio or upon verified complaint, and after due notice
and hearing, order the removal of a director or trustee elected despite the
disqualification, or whose disqualification arose or is discovered subsequent
to an election. The removal of a disqualified director shall be without
prejudice to other sanctions that the SEC may impose on the board of
directors or trustees who, with knowledge of the disqualification, failed to
remove such director or trustee, 107
In Bernas vs. Cinco, G.R. Nos. 163356-57, 163368- 69, July 1, 2015, a Special
Stockholders' Meeting was called by the Makati Sports Club Oversight
Committee. This resulted to the removal of the Bernas Group, as well as the
election of the Cinco Group. This is void, as nowhere in the Corporation
Code or in
101
CHAPTER III
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
the by-laws can it be gathered that the Oversight Committee is authorized to
step in wherever there is breach of fiduciary duty and call a special meeting
for the purpose of removing the existing officers and electing their
replacements even if such call was made upon the request of shareholders.
The Oversight Committee is neither empowered by law nor by-laws to call a
meeting and the subsequent ratification made by the stockholders did not
cure the substantive infirmity, the defect having set in at the time the void
act was done. The defect goes into the very authority of the persons who
made the call for the meeting.
Note that removal of a director or trustee before his term is over is one way
by which the stockholders or members may protect themselves from fraud,
incompetence or abuse of those in charge of management. The law allows
removal with or without cause. But if there is no cause, the power to
remove cannot be used to render nugatory the right of representation of the
minority through the use of cumulative voting. Removal must be for cause,
108
2017 Bar: Henry is a board director in XYZ Corporation. For being the
"fiscalizer" in the Board, the majority of the board directors want him
removed and his shares sold at auction, so he can no longer participate even
in the stockholders' meetings, Henry approaches you for advice on whether
he can be removed as board director and stockholder even without
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cause. What is your advice? Explain "amotion" and the procedure in
removing a director.
Henry cannot be removed by his fellow directors. The power to remove
belongs to the stockholders, by a vote of at least 2/3 of the outstanding
capital stock in a meeting called for that purpose. The removal may be with
or without cause except that in this case, the removal has to be with cause
because it is intended to deprive minority stockholders of the right of
representation.
"Amotion" is the act of removing an officer from his office before the end of
the term for which he was elected or appointed, but without depriving him
of membership in the body corporate. In contrast. "disenfranchisement" is
the act of depriving a member of a corporation of his right as such, by
expulsion. 109
Vacancies in the Office of Director or Trustee
Who can fill-up the vacancies? Under Section 28, the following are the rules:
1. Maybe filled by the vote of at least a majority of the remaining directors
or trustees, if still constituting a quorum - if the cause of the vacancy in the
board is for causes other than removal or by expiration of term
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2. Stockholders or members in a regular or special meeting called for that
purpose - if the cause of the vacancy in the board is for causes other than
removal or by expiration of term and there is no quorum on the remaining
directors or trustees
3. Stockholders or members in a regular or special meeting called for that
purpose - if the cause is removal or by expiration of term
When the vacancy arises as a result of removal by the stockholders or
members, the election may be held on the same day of the meeting
authorizing the removal and this fact must be so stated in the agenda and
notice of said meeting.
4. Stockholders or members in a regular or special meeting called for that
purpose - if the filling-up is by reason of an increase in the number of
directors or trustees
In all other cases, the election must be held no later than forty-five (45) days
from the time the vacancy arose.110 A director or trustee elected to fill a
vacancy shall be referred to as replacement director or trustee and shall
serve only for the unexpired term of the predecessor in office.
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Undoubtedly, trustees may fill vacancies in the board, provided that those
remaining still constitute a quorum. The phrase "may be filled" shows that
the filling of vacancies in the board by the remaining directors or trustees
constituting a quorum is merely permissive, not mandatory. Corporations,
therefore, may choose how vacancies in their respective boards may be
filled up either by the remaining directors constituting a quorum, or by the
stockholders or members in a regular or special meeting called for the
purpose.!!!
However, the remaining directors of the board, though still constituting a
quorum, cannot elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The holdover period is not part of the
term of office of a member of the board of directors. The term of office is
not affected by the holdover. The term is fixed by statute and it does not
change simply because the office may have become vacant, nor because the
incumbent holds over in office beyond the end of the term due to the fact
that a successor has not been elected and has failed to qualify. Term is
distinguished from tenure in that an officer's "tenure" represents the term
during which the incumbent actually holds office. The tenure may be shorter
(or. in case of holdover, longer) than the term for reasons within or beyond
the power of the incumbent.
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BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
Emergency Board
When the vacancy prevents the remaining directors from constituting a
quorum and emergency action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation, the vacancy may be
temporarily filled from among the officers of the corporation by unanimous
vote of the remaining directors or trustees. The action by the designated
director or trustee shall be limited to the emergency action necessary, and
the term shall cease within a reasonable time from the termination of the
emergency or upon election of the replacement director or trustee,
whichever comes earlier. The corporation must notify the SEC within three
(3) days from the creation of the emergency board, stating therein the
reason for its creation.113
The Executive Committee
Under Section 34, if the by-laws so provide, the board may create an
executive committee composed of at least three (3) directors. The said
committee may act, by majority vote of all its members, on such specific
matters within the competence of the board, as may be delegated to it in
the bylaws or by majority vote of the board, except with respect to the
following:
1. approval of any action for which shareholders' approval is also required;
2. filling of vacancies in the board:
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3. amendment or repeal of bylaws or the adoption of new bylaws;
4. amendment or repeal of any resolution of the board which by its express
terms is not amendable or repealable; and
5. distribution of cash dividends to the shareholders
The board of directors may create special committees of temporary or
permanent nature and determine the members term, composition,
compensation, powers, and responsibilities.114
2014 Bar: Pursuant to its By-Laws, Soei
Corporation's Board of Directors created an Executive Committee to manage
the affairs of the corporation in between board meetings. The Board of
Directors appointed the following members of the Executive Committee: the
President, Sarah L; the Vice President, Jane L; and, a third member from the
board, Juan Riles. On December 1, 2013. the Executive Committee, with
Sarah L and Jane L present, met and decided on the following matters:
1. Purchase of a delivery van for use in the corporation's retail business:
2. Declaration and approval of the 13th month bonus;
3. Purchase of an office condominium unit at the Fort; and
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3. amendment or repeal of bylaws or the adoption of new bylaws;
4. amendment or repeal of any resolution of the board which by its express
terms is not amendable or repealable; and
5. distribution of cash dividends to the shareholders
The board of directors may create special committees of temporary or
permanent nature and determine the members term, composition,
compensation, powers, and responsibilities.114
2014 Bar: Pursuant to its By-Laws, Soei
Corporation's Board of Directors created an Executive Committee to manage
the affairs of the corporation in between board meetings. The Board of
Directors appointed the following members of the Executive Committee: the
President, Sarah L; the Vice President, Jane L; and, a third member from the
board, Juan Riles. On December 1, 2013. the Executive Committee, with
Sarah L and Jane L present, met and decided on the following matters:
1. Purchase of a delivery van for use in the corporation's retail business:
2. Declaration and approval of the 13th month bonus;
3. Purchase of an office condominium unit at the Fort; and
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4. Declaration of P10.00 per share cash dividend.
Are the actions of the Executive Committee valid? Yes, all the acts are valid.
What is prohibited is distribution, not declaration, of cash dividend.
Compensation of Directors or Trustees
Under Section 29, the directors of a corporation shall not receive any
compensation for being members of the board of directors, except for
reasonable per diems. The instances where the directors are to be entitled
to compensation shall be:
1. when it is fixed by the corporation's by-laws or
2. when the stockholders, representing at least a majority of the outstanding
capital stock, vote to grant the same at a regular or special stockholder's
meeting
Subject to the qualification that, in any of the two situations:
1. the total yearly compensation of directors, as such directors, shall in no
case exceed ten (10%) percent of the net income before income tax of the
corporation during the preceding year
2. directors or trustees shall not participate in the determination of their
own per diems or compensation,
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Corporations vested with public interest shall submit to their shareholders
and the SEC, an annual report of the total compensation of each of their
directors or trustees.
There is no argument that directors or trustees are not entitled to salary or
other compensation when they perform nothing more than the usual and
ordinary duties of their office. This rule is founded upon a presumption that
directors/trustees render service gratuitously, and that the return upon their
shares adequately furnishes the motives for service, without compensation.
But when they render services to the corporation in a capacity other than as
directors/trustees by being officers of the corporation (Chairman, Vice-
Chairman, Treasurer and Secretary), they may receive compensation, in
addition to reasonable per diems.116
Liability of Directors, Trustees or Officers
A corporation is a juridical entity with a legal personality separate and
distinct from those acting for and in its behalf and, in general, from the
people comprising it. Thus, as a general rule, an officer may not be held
liable for the corporation's obligations.
However, under Section 30, directors, trustees or officers shall be liable
jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons in any of the
following instances:
1. willfully and knowingly vote for or assent to patently unlawful acts of the
corporation
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2. guilty of gross negligence or bad faith in directing the affairs of the
corporation
3. acquire any personal or pecuniary interest in conflict with their duty, in
which case, the said director, trustee or officer shall be liable as a trustee for
the corporation and must account for the profits which otherwise would
have accrued to the corporation
However, in so far as directors are concerned under Section 33 who acquires
a business opportunity which should belong to the corporation, the act can
be ratified by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock.
Under the Doctrine of Corporate
Opportunity, if there is presented to a corporate officer or director a
business opportunity which the corporation is financially able to undertake,
is from its nature, in the line of the corporation's business and is of practical
advantage to it, is one in which the corporation has an interest or a
reasonable expectancy, and by embracing the opportunity, the self-interest
of the officer or director will be brought into conflict with that of his
corporation, the law will not permit him to seize the opportunity for himself.
And, if, in such circumstances, the interests of the corporation are betrayed,
the corporation may elect to claim all of the benefits of the transaction for
itself, and the law will impress a trust in favor of
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the corporation upon the property, interests and profits so acquired.'17
The Business Judgment Rule dictates that questions of policy and
management are left to the honest decision of the officers and directors of a
corporation; and the courts are without authority to substitute their
judgment for that of the board unless said judgment had been attended
with bad faith,118 Courts and other tribunals are wont to override the
business judgment of the board mainly because, courts are not in the
business of business, and the laissez faire rule or the free enterprise system
prevailing in our social and economic set-up dictates that it is better for the
State and its organs to leave business to the businessmen; especially so,
when courts are ill-equipped to make business decisions. More importantly,
the social contract in the corporate family to decide the course of the
corporate business has been vested in the board and not with courts. 119
Thus, to hold a director or officer personally liable for corporate obligations,
two requisites must concur:
1. It must be alleged in the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the officer was guilty of
gross negligence or bad faith; and
2. There must be proof that the officer acted in bad faith, 120 The bad faith
or wrongdoing of the
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111
director must be established clearly and convincingly. Bad faith is never
presumed. Bad faith does not connote bad judgment or negligence. Bad
faith imports a dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the nature of
fraud. 121
In the cases of Carag vs. National Labor Relations Commission, 520 SCRA 28,
McLeod vs. National Labor Relations Commission, 512 SCRA 222, and David
vs. National Federation of Labor Unions, 586 SCRA 100, incidentally all labor
cases, the Supreme Court did not hold a director personally liable for
corporate obligations because the two requisites are lacking.
2005 Bar: Malyn, Schiera and Jaz are
the directors of Patio Investments, a close corporation formed to run the
Patio Café, an al fresco coffee shop in Makati City. In 2000, Patio Café began
experiencing financial reverses, consequently, some of the checks it issued
to its beverage distributors and employees bounced. In October 2003,
Schiera informed Malyn that she found a location for a second café in Taguig
City. Malyn objected because of the dire financial condition of the
corporation. Sometime in April 2004, Malyn learned about Fort Patio Café
located in Taguig City and that its development was undertaken by a new
corporation known as Fort Patio, Inc... where both Schiera and Jaz are
directors.
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Malyn also found that the duo, on behalf of Patio Investments, had obtained
a P500,000 loan from PBCom Bank for the purpose of opening Fort Patio
Café. This loan was secured by the assets of Patio Investments and
personally guaranteed by the duo. Malyn then filed a derivative suit against
Schiera and Jaz, alleging that the two directors had breached their fiduciary
duties by misappropriating money and assets of Patio Investments in the
operation of Fort Patio Café.
a. Briefly discuss the doctrine of corporate opportunity.
Ang sagot nasa itaas.
b. Did Schiera and Jaz violate the said
doctrine?
Yes. Both corporations are engaged in the same line of business. It appears
that Patio Investments, despite the financial reverses, is financially able to
undertake another coffee shop as it has sufficient assets. As a matter of fact,
the assets of Patio Investments were used to secure the loan with PBCom for
Fort Patio Café.
2012 Bar: A, B, C, D, E are all duly
elected members of the Board of Directors of XYZ Corporation. F, the general
manager. entered into a supply contract with an American firm. The contract
was duly approved by the Board of Directors. However, with the knowledge
and consent of F. no deliveries were made to the
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American firm. As a result of the non-delivery of the promised supplies, the
American firm incurred damages. The American firm would like to file a suit
for damages. Can the American firm sue:
a. The members of the Board of Directors individually, because they directors. The directors invoked the defense that they have no personal
approved the transaction? liability, being mere directors of a fictional being. Are they correct?

No, as they were acting in behalf of the corporation and not in their personal a. No, since as a rule only natural person
capacities.
like the members of the board of
b. The corporation?
directors can commit corporate crimes.
Yes, as the Board of Directors approved the contract and the general
b. Yes, since it is the corporation that did
manager entered into it.
not pay the tax and it has a personality
c. F. the general manager, personally, because the non-delivery was with his
knowledge and consent? distinct from its directors.
Yes, as he knowingly consented to its non-delivery. c. Yes, since the directors officially and
d. Explain the rules on liabilities of a corporation for the act of its corporate collectively performed acts that are
officers and the liabilities of the corporate officers and Board of Directors of
a corporation acting in behalf of the corporation. imputable only to the corporation. d. No, since the law makes directors of
the corporation solidarlly liable for gross negligence and bad faith in the
A corporation would be liable for the acts of its board and corporate officers discharge of their duties.
if the acts were performed in accordance with the power granted to them.
However, if they willfully and knowingly vote for or assent to patently The answer is (D).
unlawful acts of the corporation.
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THE REVISED CORPORATION CODE (Republic Act No. 11232) Dealings of Directors, Trustees or Officers with the Corporation A contract of
or are guilty of gross negligence or bad faith in directing the affairs of the the corporation with one or more
corporation or acquire any personal or pecuniary interest in conflict with of its directors or trustees or officers is voidable, at the option of such
their duty, they shall be liable jointly and severally for all damages resulting corporation, unless all the following conditions are present:
therefrom suffered by the corporation.
1. The presence of such director or trustee in the board meeting in which
2011 Bar: The Board of Directors of XYZ the contract was approved was not necessary to constitute a quorum for
Corp. unanimously passed a Resolution approving the taking of steps that in such meeting:
reality amounted to willful tax evasion. On discovering this, the government 2. The vote of such director or trustee was not necessary for the approval of
filed tax evasion charges against all the company's members of the board of the contract;
3. The contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full
disclosure of his adverse interest is made.
circumstances; and
In the following cases, the contracts were not found to be fair and
4. In case of corporations vested with public interest, material contracts are
reasonable resulting to nullification of the contracts entered into by the
approved by at least two-thirds (2/3) of the entire membership of the board
corporate officer with the corporation:
with at least a majority of the independent directors voting to approve the
material contract; and 1. Agdao Landless Residents Association, Inc. (ALRAI) vs. Maramion, G.R.
Nos. 188642, 189425, 188888-89, October 17, 2016, where transfers of
5. In case of an officer, the contract has been previously authorized by the
board of directors.
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Where any of the first three (3) conditions set forth in the preceding
117
paragraph is absent, in the case of a contract with a director or trustee, such
contract may be ratified by the vote of the stockholders representing at least BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3)
ALRAI's corporate properties to the directors are
of the members in a meeting called for the purpose: Provided. That full
disclosure of the adverse interest of the directors or trustees involved is void for want of full disclosure:
made at 2. Prime White Cement Corp. vs. Intermediate Appellate Court, 220 SCRA
116 103, where the dealership agreement was neither fair nor reasonable as
Prime White Cement was to sell and supply to a director 20,000 bags of
PRIMER ON
white cement per month, for five years. The director is a businessman
THE REVISED CORPORATION CODE (Republic Act No. 11232) himself and must have known, or at least must be presumed to know, that
prices of commodities in general, and white cement in particular, were not
such meeting and the contract is fair and reasonable under the
stable and were expected to rise.
circumstances. 122
2008 Bar: Pedro owns 70% of the subscribed capital stock of a company
Being the corporation's agents and therefore, entrusted with the
which owns an office building. Paolo and Juan own the remaining stock
management of its affairs, the directors or trustees and other officers of a
equally between them. Paolo also owns a security agency, a janitorial
corporation occupy a fiduciary relation towards it, and cannot be allowed to
company and a catering business. In behalf of the office building company.
contract with the corporation, directly or indirectly, or to sell property to it,
Paolo engaged his companies to render their services to the office building.
or purchase property from it, where they act both for the corporation and
Are the service contracts valid? Explain.
for themselves. One situation where a director may gain undue advantage
over his corporation is when he enters into a contract with the latter. 123 He
then becomes a "self-dealing director" should he contract with the
corporation. 124

On the other hand, a director's contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under the
The same is voidable. It can be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, full
disclosure of the adverse interest of the directors or trustees involved is
made at such meeting and the contract is fair and reasonable under the
circumstances.
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Contracts Between Corporations with Interlocking Directors
Interlocking directors is a situation where seats on boards of directors of
several different corporations are filled by the same persons. 125
Under Section 32, except in cases of fraud, and provided the contract is fair
and reasonable under the circumstances, a contract between two (2) or
more corporations having interlocking directors shall not be invalidated on
that ground alone, provided:
1. that if the interest of the interlocking director in one (1) corporation is
substantial and the interest in the other corporation or corporations is
merely nominal
Stockholdings exceeding twenty percent
(20%) of the outstanding capital stock shall be
considered substantial.
2. the contract shall be subject to the provisions of Section 31 insofar as the
latter corporation or corporations are concerned, meaning:
a. The presence of such director or trustee in the board meeting in which
the contract was approved was not necessary to constitute a quorum for
such meeting:
b. The vote of such director or trustee was not necessary for the approval of
the contract:
c. The contract is fair and reasonable under the circumstances; and
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d. In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the board
with at least a majority of the independent directors voting to approve the
material contract; and
e. In case of an officer, the contract has been previously authorized by the
board of directors.
Where any of the first three (3) conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee, such
contract may be ratified by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or at least two- thirds (2/3)
of the members in a meeting called for the purpose: Provided. That full
disclosure of the adverse interest of the directors or trustees involved is
made at such meeting and the contract is fair and reasonable under the
circumstances.
2011 Bar: The Corporation Code sanctions a contract between two or more
corporations which have interlocking directors, provided there is no fraud
that attends it and it is fair and reasonable under the circumstances. The
interest of an interlocking director in one corporation may be either
substantial or nominal. It is nominal if his interest:
a. does not exceed 25% of the outstanding capital stock.
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b. exceeds 25% of the outstanding capital stock.
C. exceeds 20% of the outstanding capital stock.
d. does not exceed 20% of outstanding capital stock

The answer is (D).