VACANCIES IN THE BOARD (Sec.

28)

Any vacancy occurring in the board of directors or trustees other than by

removal or by expiration of term, may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders or members in a regular or
special meeting called for that purpose.

When the vacancy is due to term expiration, the election shall be held no later
than the day of such expiration at a meeting called for that purpose. 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. In all
other cases, the election must be held no later than forty-five (45) days from
the time the vacancy arose. 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.
However, 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 Commission
within three (3) days from the creation of the emergency board, stating
therein the reason for its creation.
Any directorship or trusteeship to be filled by reason of an increase in the
number of directors or trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members duly called for the purpose,
or in the same meeting authorizing the increase of directors or trustees if so
stated in the notice of the meeting.
In all elections to fill vacancies under this section, the procedure set forth in
Sections 23 and 25 of this Code shall apply.
• Vacancies may be filled either by the stockholders or by the
remaining directors constituting a quorum depending on the reason
for the vacancy.
• Vacancy is the operative fact that justifies the election or
appointment of the replacement. Thus an election to choose
replacements cannot be done if there is a complete board.
• Stockholders shall replace/elect the director if the vacancy is due to
(1) removal, (2) expiration of term, (3) a ground other than removal
or expiration of term (Death, resignation, abandonment) where the
remaining directors do not constitute a quorum or (4) increase in the
number of directors.
• If vacancy is caused other than the reasons stated above, the Board
may elect to fill up the vacancies based on the following requisites,
(1) the vacancy was occasioned by reasons other than removal by
the stockholders or expiration of the term, (2) the remaining
directors constitute a quorum.
• The filling up of the vacancy by the remaining directors presupposes
that the vacancy occurred within the director’s term.
• Filling up of vacancy is not mandatory and the remaining board may
choose not to fill up the vacancy and leave the matter for the
stockholders to decide. Provided that there is still a quorum.
• If after the expiration of the term of the directors, and while the
same directors continue to function in a holdover capacity, one of
them resigns, the position of the resigning director cannot be filled
out by the remaining hold over directors. The vacancy, in legal effect,
not due to resignation but to expiration of the term of the directors.
A vacancy is created the moment the term of the director expires.
Hence, only the stockholders can fill the vacancy.
 Rules to prevent hold overs:

CAUSE OF VACANCY WHEN ELECTION OF REPLACEMENT

SHOULD BE MADE
Term Expiration No later than the day of such expiration
at a meeting called for that purpose
Removal by the Stockholders or members May be held on the same day of the
meeting authorizing the removal,
provided that the agenda and notice of
the meeting provide for such election of
a replacement director/trustee
Increase in the number of directors or At a regular or at a special meeting of
trustees stockholder or members duly called for
the purpose, or in the same meeting
authorizing the trustees if so stated in
the notice of the meeting.
All other grounds No later than 45 days from the time the
vacancy arose.
• The director who will fill up the vacancy will not serve for another
one year term. The replacement does not change the length of the
term.
• 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 Emergency Board is subject to the following conditions:
• The actions by the designated director or trustee shall be 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, whichever comes
earlier and
• The corporation must notify the SEC within 3 days from the creation of the
emergency board, stating therein the reason for its creation.
 Compensation of Directors
SEC. 29. Compensation of Directors or Trustees. – In the absence of any
provision in the by-laws fixing their compensation, the directors or
trustees shall not receive any compensation in their capacity as such,
except for reasonable per diems: Provided however, That the
stockholders representing at least a majority of the outstanding capital
stock or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or special
meeting.
In no case shall the total yearly compensation of directors exceed ten
(10%) percent of the net income before income tax of the corporation
during the preceding year.
Directors or trustees shall not participate in the determination of their
own per diems or compensation. Corporations vested with public
interest shall submit to their shareholders and the Commission, an
annual report of the total compensation of each of their directors or
trustees.
 Compensation of Directors

• By laws may provide the fixed compensation of directors.

• If not in the by laws, compensation may be granted with a vote of
majority of the stockholders
• Total Compensation should not exceed 10% of the net income of the
corporation during the preceding year.
• Directors cannot participate in the determination of their per diems/
compensation
• If Corp is vested with public interest, they must submit to the
stockholders and SEC an annual report of the total compensation of
each of their directors.
• Per diem is limited to pay for a day’s service. They are allowances for
expenses for each day.
• In case the salary is abused by the directors, the remedy is to file a
derivative suit.
 Liability of Directors or Trustees or
Officers

SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who

willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

A Director, Trustee, or Officer shall not attempt to acquire, or acquire any

interest adverse to the corporation in respect of any matter which has been
reposed in them in confidence, and upon which, equity imposes a disability
upon themselves to deal in their own behalf, otherwise 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.
 Dealings of Directors, Trustees or
Officers of the Corporation
Dealings of Directors, Trustees or Officers with the Corporation. – A contract of
the corporation with (1) one or more of its directors, trustees, officers or their
spouses and relatives within the fourth civil degree of consanguinity or affinity is
voidable, at the option of such corporation, unless all the following conditions
are present:
(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;
(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
 Dealings of Directors, Trustees or
Officers of the Corporation

(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 of 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.
 Dealings of Directors, Trustees or
Officers of the Corporation
• Self Dealing Directors, trustees or officers (DTO) are those who personally
contract with the corporation in which they are directors, trustees or officers.
It is discouraged because the directors, trustees and offices have fiduciary
relationship with the corporation and there can be no real bargaining where
the same person/s is/are acting on both sides of the trade.
• Status of the contract of self dealing DTO: Generally voidable. The contract
between the corporation and the self-dealing DTO is voidable at the option
of the corporation. Intent to defraud or losses is not required for it to be
annulled.
• Contract will remain valid if the following are present: (1) The presence of
self dealing DT in the board meeting wherein the contract was approved was
not necessary to constitute a quorum. (2) The vote of such DT was not
necessary for the approval. (3) The contract is fair and reasonable. (4) In case
of corp vested with public interest, contracts are approved by at least 2/3 of
the entire board with a atleast a majority of the independent Directors
voting to approve the material contract. (5) in case of an officer, there was
previous authorization by the board.
 Dealings of Directors, Trustees or
Officers of the Corporation

• Ratification of voidable contracts. A safe harbor provision is allowing

ratification. Even if not all the requirements previously stated were met, the
contract with self dealing DTO may still be ratified by a vote of stockholders
representing at least 2/3 of the outstanding capital stock called for that
purpose. Ratification requisites: (1) Full disclosure of adverse interest of DTO
and disclosed at the meeting. (2) The contract must be fair and reasonable.
• Fair and reasonable Typically requires that the transaction reflect terms one
would expect in an arm’s length transaction, which means generally that self-
dealing director must treat his corporation’s interest as his own. The DTO
should not take advantage from his position on both sides of the transaction
nor act in conflict with the corporation’s interest even the slightest extent.
 Contracts between corporations
with interlocking directors

SEC. 32. Contracts between Corporations with Interlocking Directors. –

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, 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, the contract shall be
subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital
stock shall be considered substantial for purposes of interlocking
directors.
 Contracts between corporations
with interlocking directors

• There is interlocking directorship when (or some or all) of the directors in

one corporation is/are also a director/s of another corporation.
• Contracts with interlocking directors cannot be invalidated on that ground
alone except in cases of fraud or the contract is not fair and reasonable.
• The interest of an interlocking director is substantial if he owns more than
20% of the outstanding capital stock and nominal if it is 20% below.
• If the interest of the interlocking stockholder in one of the corporations is
nominal and substantial in the, the contract is voidable and the corporation
wherein the director has the nominal interest can annul the contract, unless
the following are present: (1) The presence of the interlocking director in the
board meeting, where he has a nominal share, in which the contract was
approved was not necessary to constitute a quorum. (2) The vote of such
director was not necessary for the approval. (3) The contract is fair and
reasonable.
• The contract will be valid if the interest of the interlocking director is
substantial or nominal on both corporations.
 Disloyalty of a director (Section 33)
Where a director, by virtue of such office, acquires a business opportunity which
should belong to the corporation, thereby obtaining profits to the prejudice of
such corporation, the director must account for and refund to the latter all such
profits, unless the act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the fact that the director risked
one’s own funds in the venture.

• Doctrine of Corporate Opportunity. The duty of loyalty mandates that

directors should not give preference to their own personal amelioration by
taking the opportunity belonging to the corporation.
• “It is true that when a business opportunity comes to a corporate officer or director
in his individual capacity rather than his official capacity, and the opportunity is one
which, because of the nature of the enterprise, is not essential to his corporation, and
is one which it has no interest or expectancy, the officer or director is entitled to treat
the opportunity as his own, and the corporation has no interest in it, if, of course, the
officer or director has not wrongfully embarked the corporation’s resources therein”
(Gutt v Loft, Inc.)
 Disloyalty of a director (Section 33)

• Applies if the following are presented to a director: (1) Business opportunity which the
corporation is financially able to exploit, (2) from its nature, the business opportunity
is in line with the corporation’s business, (3) The corporation has an interest or a
reasonable expectancy in the business opportunity and (4) by taking the business
opportunity as his own, the director will thereby be placed in a position inimical to his
duties to the corporation.
• Tests to determine the conflict: (1) Interest or expectancy test, (2) Line of Business Test,
(3) Fairness Test), (4) mixed test.
• Profits will go to the corporation if director will proceed with the opportunity. Based
on the Principal-Agency principle.
• This only covers Directors and excludes trustees and corporate officers. Non-Stock
corporations are not supposed to be engaged in business as a main purpose.
 Executive Management

SEC. 34. Executive, Management, and Other Special Committees. – If the

bylaws so provide, the board may create an executive committee
composed of at least three (3) directors. 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: (a) approval of
any action for which shareholders’ approval is also required; (b) filling of
vacancies in the board; (c) amendment or repeal of bylaws or the
adoption of new bylaws; (d) amendment or repeal of any resolution of
the board which by its express terms is not amendable or repealable;
and (e) distribution of cash dividends to the shareholders.
The board of directors may create special committees of temporary or
permanent nature and to determine the members’ term, composition,
compensation, powers, and responsibilities.
 Executive Management

• Purpose: The executive committee is a corporate body with standing

in law, although in a sense, it is an agent of the BOD because it
performs what otherwise is vested in law in the BOD. The RCCP allows
the creation of an executive committee because the Board may not
readily face the contingency of confronting urgent matters that
require its attention.
• It can only be created by provision in the by-laws. The BOD itself
cannot create an Executive Committee
• Composed of not less than 3 members of the board, to be appointed
by the BOD. There can be appointment of non BOD members but
there should be atleast 3 BOD members.
• The powers of the Exec Committee are define in the Board Resolution
of the board and/or by the by laws. Any resolution of the exec
committee are as valid as resolutions of the BOD.
• Quorum is the same, majority.