LAW 2

Sabile, Reggiel Kyle L.

9.14. CONTRACTS:
Dealings of Directors, Trustees or Officers with the Corporation
Relevant Provision
Under Revised Corporation Code 11232 Section 31: Dealings of Directors,
Trustee or Officers with the corporation. Any contract entered between the
corporation and self-dealing director is voidable.
General Rule
A contract of the corporation with one (1) 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.
Exceptions
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
e) In case of an officer, the contract has been previously authorized by the board of
directors.
RATIFICATION by stockholders on self-dealing directors or trustees, or
officers
A contract of the corporation with directors or trustees or officers 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. The requisites are:
1.Any of the first three conditions set forth in the first paragraph of the above
section is absent;
2.Full disclosure of the adverse interest of the directors or trustees involved is
made at such meeting; and
3.That the contract is fair and reasonable under the circumstances.

Discussion
What is Self-Dealing Director?
 It is between corporation where the said director, trustee, or officers belong.
 Directors, trustee or officers or their spouses and relatives within the fourth
civil degree of consanguinity.
Take note: The fourth civil degree is your first cousin.
Let say you are dealing to your first cousin or the corporation deals to your first
cousin then you are considered a self-dealing director and generally it will make a
VOIDABLE CONTRACT but that is only a GENERAL RULE.
The following conditions/exemptions and meanings. (Once we meet this
exceptions it will not make VOIDABLE and it is perfectly valid.
TAKE NOTE: Voidable Contract is valid until annulled. (Concept in Obligations
and Contracts)
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;

Example: In a corporation, you have 15 directors and you belong to that 15.
How many will be in the quorum of 15 directors? The general rule is 8
directors. If ever they have 8 directors out of 15 directors including yourself,
automatically we cannot meet letter A. When that's the case, we have to say
that there is a quorum but you attend and you are among the eight directors.
If you are not included, you can be disregarded because you are self-dealing.
 When you are removed from there, there will be only 7 directors, which
means that they will not be able to constitute a quorum. What if 9 directors
attend to the meeting including yourself, that means even if you don't come,
they can still constitute a quorum; it's just irrelevant if you attend.

b) The vote of such director or trustee was not necessary for the approval of
the contract;
General Rule when it comes on validating corporate acts we need to have a
majority vote for those directors who attend. For example, there are 9 directors
attend, so how many votes are needed to approve the contract? We need 5.
For example, we got 5 votes including yourself, the question is, Did we meet
the letter B? The answer is no; assuming that you are not among 5, the answer
is 4. Is 4 the majority of 9? No. Another example is that we assume seven (7),
including yourself. Even if we remove one, there are still six, and 6 (six) is the
majority of the nine who attended.
c)The contract is fair and reasonable under the circumstances;
-Based on judgement
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
-It only applies in a corporation with public interest.
e) In case of an officer, the contract has been previously authorized by the board of
directors.