BUSLAW 2

NOTES

Title III: Board of Directors/ Trustees and Officers Business Judgement Rule

Contracts intra vires (within authority) by the Board of Directors are binding upon the
Correlation of the board of Directors/Trustees, officers and
corporation.
stockholders
Courts will nit interfere unless such contracts are so unconscionable and oppressive
Board of Directors/trustees as to amount to wanton destruction to the rights of the minority.
• periodically elected by stockholders/members.
• In turn, periodically elects officers, to carry out management functions on a Reason Behind the Rule: Dean Cesar L. Villanueva
day-to-day basis. • The social contract in the corporate family to decide the course of the
corporate business has been vested in the board and nit with courts.
As owners stockholders/members have residual powers over fundamental and major • Courts are not in the business of business, social and economic set-up dictates
corporate changes. that it is better for the state and its organs to leave business to the
businessmen.
Acts of Management and Ownership •
SECTION 22. The Board of Directors or Trustees of a Corporation; Qualification
Board of Directors/Trustees as representatives and agents are lodged with the and Term
management and direction of the corporation. Unless otherwise provided in this Code, the board of directors or trustees
shall exercise the corporate powers, conduct all business, and control all properties
Acts of Management – Board of Directors/Trustees of the corporation.
Acts of Ownership – stockholders or members.
Directors shall be elected for a term of one (1) year from among the holders
• The board cannot act alone an must seek approval of the of stocks registered in the corporation's books, while trustees shall be elected for a
stockholders/members. term not exceeding three (3) years from among the members of the corporation.
Each director and trustee shall hold office until the successor is elected and
Corporate Power qualified. A director who ceases to own at least one (1) share of stock or a trustee
who ceases to be a member of the corporation shall cease to be such.
Once the directors or trustees are elected, the stockholders or members relinquish The board of the following corporations vested with public interest shall
corporate powers to the board in accordance with law. have independent directors constituting at least twenty percent (20%) of such board:

• One of the most important rights of a qualified stockholder is the right to vote a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise
either personally or by proxy. known as "The Securities Regulation Code", namely those whose
• Right to vote – is the main way a stockholder can have a voice in the securities are registered with the Commission, corporations listed with an
management of corporate affairs or members can have a say on how the exchange or with assets of at least Fifty million pesos (P50,000,000.00) and
purposes and goals of the corporation may be achieved. having two hundred (200) or more holders of shares, each holding at least
one hundred (100) shares of a class of its equity shares;
BUSLAW 2
NOTES

b) Banks and quasi-banks, nonstock savings and loan associations, In drawing itself the power of the corporation, the board occupies a position of
pawnshops, corporations engaged in money service business, preneed, trust trusteeship in relation to the minority.
and insurance companies, and other financial intermediaries; and
Where a corporate directors are guilty of breach of trust
c) Other corporations engaged in businesses vested with public interest • Not mere error of judgement or abuse of discretion and intracorporate remedy
similar to the above, as may be determined by the Commission, after taking us futile or useless.
into account relevant factors which are germane to the objective and • A stockholder may institute a suit in behalf of himself and other stockholders
purpose of requiring the election of an independent director, such as the and for the benefit of the corporation.
extent of minority ownership, type of financial products or securities issued
or offered to investors, public interest involved in the nature of business Derivative Suit
operations, and other analogous factors.
Derivative Suit: the right of stockholder to sue on behalf of a corporation.
An independent director is a person who, apart from shareholdings and • Whenever official of the corporation refuse to sue or are the ones to be sued
fees received from the corporation, is independent of management and free from or hold the control of the corporation.
any business or other relationship which could, or could reasonably be perceived to
materially interfere with the exercise of independent judgment in carrying out the In case of mismanagement, stockholders may have no remedy because the
responsibilities as a director. directors.trustees are vested by law with the right to decide whether or not the
corporation should sue, and they will never be willing to sue themselves.
Independent directors must be elected by the shareholders present or
entitled to vote in absentia during the election of directors. Independent directors Nominal Party – suing stockholder
shall be subject to rules and regulations governing their qualifications, Party in Interest – corporation
disqualifications, voting requirements, duration of term and term limit, maximum
number of board memberships and other requirements that the Commission will
Authority of the Board of Directors or Trustees
prescribe to strengthen their independence and align with international best
practices.
The authority of the board of directors/trustees is restricted to the management if the
regular business affairs of the corporation unless more extensive power is expressly
Governing Body of a Corporation conferred.

Board of Directors is the governing body of the corporation. Raiso d’etre (reason/justification) is not lost on court.

Stockholders are too numerous, scattered, and unfamiliar with the business of a
Corporation Exercises its powers through its board of directors
corporation to conduct its business directly.
Corporation exercise its power through its Board of Directors or officers and agents,
The Board Shall exercise Good Faith except in instances where the Corporation Code requires stockholders’ approval for
certain specific acts.
The Board shall exercise good faith, care, and diligence in the administration of the
affairs of the corporation, and protect not only the interest of the majority but also that
of the minority if the stock.
BUSLAW 2
NOTES

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

1) Exercises all powers provided for under the Corporation Code; A corporate officer or agent may represent and bind the corporation in transactions
2) Conducts all business of the corporation. when:
3) controls and holds all property of the corporation. • authority to do so has been intentionally conferred upon him.
• Usual course of business are incidental or may be implied from powers
Trustees/Directors are clothes with a fiduciary character. intentionally conferred.

• The property of the corporation is NOT the property of its Corporate Powers Directly Conferred upon Corporate Officers
stockholders/members and may not be sold by them without express
authorization from the Board of Directors. Corporate powers may be directly conferred upon corporate officers or agents by
• Treasurer whose powers are limited, cannot bind the corporation in sale of statute, the articles of incorporation, the by-laws or by resolution or other act of the
its assets. board of directors.

Three Levels of Control Express Powers - Officer who is NOT a director may also appoint agents when
authorized by the by-laws or by the Board of Directors.
General Rule: all corporate powers are to be exercised by the board of directors,
exceptions are made where the Code provides otherwise. Powers Incidental – express powers conferred.

1) The Board of Directors Qualifications of a Board of Director/Trustee

• Responsible for corporate policies and general management.
• May validly delegate some of its functions to individual officers or agents. 1) Stock Corporation – ownership of atleast 1 share of the capital stock of the
corporation in his own name.
2) The Officers Non-stock Corporation – only members of the corporation can be elected.
• In theory execute policies laid down by the board.
• In practice often have wide latitude (freedom to act) in determining the course 2) The Director/Trustee must be capacitated.
of business operations. 3) The Director/Trustee must be of legal age.
4) Other Qualifications as may be prescribed in the by-laws of the corporation.
3) The Stockholders
• Have residual power over fundamental corporate changes like amendments Independent Director
of the articles of incorporation.
Independent Director:
Power to Decide Whether a Corporation can Enter into a Binding • Shareholdings and fees received from the corporation.
Contract • Independent of management and free from any business or other relationship
which could reasonably be perceived to materially interfere with the exercise
General Rule: in the absence of authority from the board, no person not even officers, of independent judgement carrying out the responsibilities as a director.
can validly bind a corporation. • Must be elected by the shareholders present or entitled to vote in absentia
during the election of directors.
BUSLAW 2
NOTES

The board of the following corporations vested with public interest shall have Provided, That the total number of votes cast shall not exceed the number
independent directors constituting at least twenty percent (20%) of such board: of shares owned by the stockholders as shown in the books of the corporation
1) Corporations covered by Section 17.2 of the Securities Regulation Code; multiplied by the whole number of directors to be elected: Provided, however, That
2) Banks and quasi-banks, non-stock savings and loan associations, pawnshops, no delinquent stock shall be voted. Unless otherwise provided in the articles of
corporations engaged in money service business, preneed, trust and insurance incorporation or in the bylaws, members of nonstock corporations may cast as many
companies, and other financial intermediaries, votes as there are trustees to be elected but may not cast more than one (1) vote for
3) Other corporations engaged in business vested with public interest similar to one (1) candidate. Nominees for directors or trustees receiving the highest number
the above, as may be determined by the Commission. of votes shall be declared elected.

SECTION 23. Election of Directors or Trustees 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,
Except when the exclusive right is reserved for holders of founders' shares or through remote communication or not voting in absentia at the meeting, such
under Section 7 of this Code, each stockholder or member shall have the right to meeting may be adjourned and the corporation shall proceed in accordance with
nominate any director or trustee who possesses all of the qualifications and none of Section 25 of this Code.
the disqualifications set forth in this Code.
The directors or trustees elected shall perform their duties as prescribed by
At all elections of directors or trustees, there must be present, either in law, rules of good corporate governance, and bylaws of the corporation.
person or through a representative authorized to act by written proxy, the owners of
majority of the outstanding capital stock, or if there be no capital stock, a majority Requirements for the Election of Directors/Trustees
of the members entitled to vote. When so authorized in the bylaws or by a majority
of the board of directors, the stockholders or members may also vote through remote 1) - Owners of Majority of the outstanding capital stock
communication or in absentia: Provided, That the right to vote through such modes - if there be no capital stock, a majority of the members entitled to vote,
may be exercised in corporations vested with public interest, notwithstanding the of the corporation must be present, either in person or through a
absence of a provision in the bylaws of such corporations. representative authorized to act by written proxy.

A stockholder or member who participates through remote communication 2) When so authorized in the bylaws or by a majority of the board of directors,
or in absentia, shall be deemed present for purposes of quorum. the stockholders or members may also vote through remote communication
or in absentia.
The election must be by ballot if requested by any voting stockholder or
member. 3) Election must be by ballot, if requested by any voting stockholder or
member.
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 books 4) In stock corporations, the total number of votes cast shall not exceed the
of the corporation at the time fixed in the bylaws or Where the bylaws are silent, at number of shares owned by the stockholder as shown in the books of the
the time of the election. The said stockholder may: (a) vote such number of shares corporation multiplied by the whole number of directors to be elected.
for as many persons as there are directors to be elected; (b) cumulate said shares Provided, no delinquent stock shall be voted.
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 among as many candidates as may be seen fit:
BUSLAW 2
NOTES
b) Must be a stockholder on record of at least 1 share.

5) In Nonstock Corporation, the members may cast as many votes as there as

trustees to be elected but may not cast more than one (1) vote for one (1) Citizenship: Need not to be a Filipino Citizen.
candidate. Residency: need not be a resident of the Philippines.
6) Nominees for directors/trustees receiving the highest number of votes shall
be declared elected. ➢ Secretary:
Requirement: may or may not be a director.
SECTION 24. CORPORATE OFFICERS Citizenship: must be a Filipino Citizen.
Residency: must be a resident of the Philippines.
Immediately after their election, the directors of a corporation must
formally organize and elect: ➢ Treasurer:
(a) A president, who must be a director; Requirement: may or may not be a director.
(b) A treasurer, who must be a resident; Citizenship: need not to be a Filipino Citizen.
(c) A secretary, who must be a citizen and resident of the Philippines; Residency: must be a resident of the Philippines.
(d) Such other officers as may be provided in the bylaws.
➢ Compliance Officer: if the corporation is vested with public interest.
If the corporation is vested with public interest, the board shall also elect a ➢ Other Officers: qualification may be provided for in the by-laws.
compliance officer. The same person may hold two (2) or more positions
concurrently, except that no one shall act as president and secretary or as president Any 2 or more positions may be held concurrently by the same person, except that no
and treasurer at the same time, unless otherwise allowed in this Code. one shall act as president and secretary or as president and treasurer at the same time.
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. Corporate Officer VS. Corporate Employee

Basis of Corporate Officer: position is provided for under the Corporation Code or
Corporate Officer in the by-laws of the corporation.

• Position myst be expressly mentioned in the by-laws in order to be considered Basis of Corporate Employee: employed by the action of the managing officer of the
as a corporate office. corporation.

General Rule: acts of corporate officers within the scope of their authority are binding Quorum at the meeting of Directors/Trustees
on the corporation.
Exception: when officers exceed their authority, their actions cannot bind the QUORUM – minimum number of attendees required to be present before an official
corporation, unless it has ratified such acts or is estopped from disclaiming them. meeting can take place.

Corporate Officers General Rule:

• A majority of the number of directors/trustees, as fixed in the articles of
➢ President incorporation, shall constitute a quorum for the transaction of corporate
Requirement: business. (Majority means fifty percent plus one (50% + 1)
a) must be a director.
BUSLAW 2
NOTES

• Every Decisions of at least a majority of the directors/trustees present at a Objective of the Report of Election
meeting which there is a quorum shall be valid as a corporate act.
• Except for the election of officers which shall require the vote of a majority All corporations duly organized pursuant thereto are required to submit withi the
of all the members of the board. period of 30 days to the SEC the names, nationalities, shareholdings, and residences
of the directors, trustees and officers elected.
Exception: if the articles of incorporation or the by-laws provide for a greater majority.
• To give the public information under sanction of oath of responsible officers,
SECTION 25. Report of Election of Directors, trustees and Officers, Non-holding nature of business, financial condition and operational status of the company
of Election and cessation from Office together with information on its key or managers so that those who intent to
do business with it may know or have the means of knowing facts concerning
Within thirty (30) days after the election of the directors, trustees and the corporation’s financial resources and business responsibility.
officers of the corporation, the secretary, or any other officer of the corporation,
shall submit to the Commission, the names, nationalities, shareholdings, and SECTION 26. Disqualification of Directors, Trustees or Officers
residence addresses of the directors, trustees and officers elected.
A person Shall be disqualified from being a director, trustee or officer of
The non-holding of elections and the reasons therefor shall be reported to any corporation if, within five (5) years prior to the election or appointment as such,
the Commission within thirty 30) days from the date of the scheduled election. The the person was:
report shall specify a new date for the election, which shall not be later than sixty
(60) days from the scheduled date. (a) Convicted by final judgment:

If no new date has been designated, or if the rescheduled election is likewise (1) Off an offense punishable by imprisonment for a period exceeding six
not held, the Commission may, upon the application of a stockholder, member, (6) years;
director or trustee, and after verification of the unjustified non-holding of the
election, summarily order that an election be held. The Commission shall have the (2) For violating this Code; and
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 (3) For violating Republic Act No. 8799, otherwise known as
officer, and the record date or dates for the determination of stockholders or "The Securities Regulation Code";
members entitled to vote.
(b) Found administratively liable for any offense involving fraudulent acts; and
Notwithstanding any provision of the articles of incorporation or bylaws to
the contrary, the shares of stock or membership represented at such meeting and (c) By a foreign court or equivalent foreign regulatory authority for acts, violations
entitled to vote shall constitute a quorum for purposes of conducting an election or misconduct similar to those enumerated in paragraphs (a) and (b) above.
under this section.
The foregoing is without prejudice to qualifications or other
Should a director, trustee or officer die, resign or in any manner cease to disqualifications, which the Commission, the primary regulatory agency, or the
hold office, the secretary, or the director, trustee or officer of the corporation, shall, Philippine Competition Commission may impose in its promotion of good corporate
within seven (7) days from knowledge thereof, report in writing such fact to the governance or as a sanction in its administrative proceedings.
Commission.
BUSLAW 2
NOTES

Disqualification VS. Removal SECTION 27. Removal of Directors/Trustees

Disqualification: it pertains to the fact or condition that disqualifies a person from Any director or trustee of a corporation may be removed from office by a
being director, trustee or officer. vote of the stockholders holding or representing at least two-thirds (2/3) of the
Removal: It pertains to the act of taking away a person from the position of a director, outstanding capital stock, or in a nonstock corporation, by a vote of at least two.
thirds (2/3) of the members entitled to vote:
trustee or officer.
Provided, That such removal shall take place either at a regular meeting of
the corporation or at a special meeting called for the purpose, and in either case,
Disqualifications of Directors, Trustees, and Officers after previous notice to stockholders or members of the corporation of the intention
to propose such removal at the meeting.A special meeting of the stockholders or
1) Within five (5) years prior to the election or appointment, the members for the purpose of removing any director or trustee must be called by the
Director/Trustee/Officer 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
a) was convicted by final judgement of an offense punishable by majority of the members entitled to vote.If there is no secretary, or if the secretary,
imprisonment for a period exceeding six (6) years. 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
b) Found administratively liable, by final judgement for refusal to allow meeting by directly addressing the stockholders or members. Notice of the time and
tthe inspection and/or reproduction of corporate records. 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
2) Within the tenure, director/trustee/officer
deprive minority stockholders or members of the right of representation to which
they may be entitled under Section 23 of this Code.
a) was convicted by final judgement of an offense punishable by
imprisonment for a period exceeding six (6) years. The Commission shall, motu proprio or upon verified complaint, and after
due notice and hearing, order the removal of a director or trustee elected despite the
3) Both, Within five (5) years prior to the election or appointment and within disqualification, or whose disqualification arose or is discovered subsequent to an
the tenure, director/trustee/officer: election. The removal of a disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the board of directors or trustees who,
a) Convicted by final judgement for violating the Revised Corporation Code. with knowledge of the disqualification, failed to remove such director or trustee.

b) Convicted by final judgement for violating the Securities Regulation Code REMOVAL
(SRC).
Removal: the term shall pertain to the act of taking away a person from the position
c) Found administratively liable, by final judgement, for any offense involving of a director.trustee.officer.
fraudulent acts punishable under Republic Act No,11232 (RCCP, R.A.
No.8799), otherwise knows as SRC, and other laws, rules or regulations Power to Remove Directors or Trustees
enforced or implemented by the Commission.
General Rule: The power to remove directors/trustees belongs to the
d) Convicted or found administratively liable by a foreign court, or equivalent stockholders/members exclusively.
foreign regulatory for act, violations , or misconduct similar to those
enumerated in paragraphs (a) and (b) Section 26 of the RCC.
BUSLAW 2
NOTES

Exception: SECTION 28. Vacancies in the Office of Director or Trustee; Emergency Board

The SEC shall, motu proprio or upon verified complaint, and after due notice and Anv vacancy occurring in the board of directors or trustees other than by
hearing, order the removal of a director/trustee elected despite disqualification or removal or by expiration of term may be filled by the vote of at least a majority of
whose disqualification arose or is discovered subsequent to an election. 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
Without prejudice to other sanctions that that the Commission may impose on the meeting called for that purpose.
board of directors/trustees who, with knowledge of the disqualification, failed to
remove such director/trustee. 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
All independent administrative actions for removal shall be commenced and heard at vacancy arises as a result of removal by the stockholders or members, the election
the main office of the SEC in Metro Manila, or any of the Extension Officer of the SEC, may be held on the same day of the meeting authorizing the removal and this fact
subject to their respective geographical jurisdictions. 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.
General Rule: Removal of directors/trustees may be with or without cause.
However, when the vacancy prevents the remaining directors from
Exception: removal without cause may not be used to deprive minority
constituting a quorum and emergency action is required to prevent grave,
stockholders/members of the right of representation to which they may be entitled substantial, and irreparable loss or damage to the corporation, the vacancy may be
under section 23 of this code. 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
Requisites for Removal 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
1) The removal should take place at a regular or special meeting duly called for replacement director or trustee, whichever comes earlier. The corporation must
the purpose; notify the Commission within three (3) days from the creation of the emergency
board, stating therein the reason for its creation.
2) The director/trustee can only be removed by a vote of the stockholders
representing atleast 2/3 of the outstanding capital stock/members entitled Any directorship or trusteeship to be filled by reason of an increase in the
to vote. 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
3) There must be a previous notice to stockholders/members of the corporation same meeting authorizing the increase of directors or trustees if so stated in the
of the intention to propose such removal at the meeting notice of the meeting.

4) The special meeting of the stockholders/members of the corporation for the In all elections to fill vacancies under this section, the procedure set forth
purpose of removal must be called by the secretary on order if the president in Sections 23 and 25 of this Code shall apply.
or on the 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.
BUSLAW 2
NOTES

Filing of Vacancies in the Office of the Director/Trustee Emergency Board of Director

1) By the Stockholders/Members When vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or
a) Removal by the stockholders/members damage to the corporation, the vacancy may be temporarily filled among the officers
b) Expiration of term of the corporation by unanimous vote of the remaining directors/trustees.
c) Increase in the number of directors/trustees due to amendment of the articles
of incorporation. The designated director/trustee shall be limited to the emergency action necessary,
d) Other than the removal or expiration of term, like death, resignation, and the term shall cease within a reasonable time from the termination of the
abandonment, or disqualification, if the remaining directors/trustees do not emergency or upon election if the replacement director/trustee.
constitute a quorum for the purpose of filling the vacancy.
Notification to the SEC must be within three (3) days from the creation of the
2) By the members of the Board of Directors/Trustees emergency board, stating therein reason for its creation.

If still constituting a quorum, at least a majority of them are empowered to fill any SECTION 29. Compensation of Directors or Trustees
vacancy occurring in the board other than by removal by the stockholders/members or
by expiration of term. In the absence of any provision in the bylaws fixing their compensation,
the directors or trustees shall not receive any compensation in their capacity as such,
Replacement Director/Trustee except for reasonable per diems: Provided, however, That the stockholders
representing at least a majority of the outstanding capital stock or majority of the
A director/trustee elected to fill a vacancy shall be referred to as replacement members may grant directors or trustees with compensation and approve the amount
director/trustee and shall serve only for the unexpired term of the predecessor in thereof at a regular or special meeting.
office.
In no case shall the total yearly compensation of directors exceed ten
➢ When vacancy is due to term Expiration percent (10%) of the net income before income tax of the corporation during the
preceding year.
The election shall be held no later than the day of such expiration at a meeting called
for that purpose. Directors or trustees shall not participate in the determination of their own
per diems or compensation.
➢ When Vacancy arises as a result of removal by the stockholders/members
Corporations vested with public interest shall submit to their shareholders
Election may be held on the same day of the meeting authorizing the removal and this and the Commission, an annual report of the total compensation of each of their
fact must be so stated in the agenda and notice of the said meeting. directors or trustees.

Other Causes of Vacancy Provision on compensation of directors does not include officers who are not
directors.
In all other cases, election must be held no later than forty-five (45) days from the time
the vacancy arose. ‘
BUSLAW 2
NOTES

General Rule: Directors/trustees shall not receive any compensation, as such A Director, Trustee or Officer shall not attempt to acquire, or acquire any
directors/trustees, except for reasonable per diems. 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
Per diems (per day) – daily amount paid to a person for expenses incurred during to deal in their own behalf; otherwise, the said director, trustee or officer shall be
work travel. liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
Exception:
Doctrine of Corporate Opportunity
1) When it is fixed by the corporation’s by-laws
2) When the stockholders, representing at least a majority of the outstanding Holds personally liable corporate directors found guilty of gross negligence or bad
capital stock/members vote to grant the same. faith in directing the affairs of the corporation, which results in damage or injury to
the corporation, its stockholders/members and other persons.
Directors/trustees, are not entitled to salary or compensation when they perform
nothing more than the usual and ordinary duties of their office. This is rule if founded Bad Faith
on the presumption that directors/trustees render service gratuitously. • Implies breach of faith and willful failure to respond to plain and well
understood obligation.
Limitation on Compensation • Does not simply connote bad judgement or negligence;
• it imports a dishonest purpose or some moral obliquity and conscious doing
In no case shall the total yearly compensation of directors, as such directors, exceed of wrong.
10% of the net income before income tax of the corporation during the preceding year. • Partakes the nature of fraud.

Directors/Trustees shall not participate in the determination of their own per Gross Negligence
diems/compensation. • the want of even slight care, acting or omitting to act in a situation where
there is duty to act, not inadvertently but willfully and intentionally, with a
Corporations vested with public interest shall submit to their shareholders and the conscious indifference to consequences.
Commission, an annual report of the total compensation of each of their • The want or absence of or failure to exercise slight care or diligence, or the
directors/trustees. entire absence of care.

Examples when solidary liability attach to the

directors/officers/employees
SECTION 30. Liability of Directors, Trustees, or Officers
The general rule is that obligations incurred by the corporation, acting through its
Directors or trustees who willfully and knowingly vote for or assent to patently
directors/officers/employees are its sole, liabilities, and vice versa.
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
Times when solidary liabilities may be incurred and the veil of corporate fiction
interest in conflict with their duty as such directors or trustees shall be liable jointly
may be pierced (exceptional circumstances warranting such disregard of a separate
and severally for all damages resulting therefrom suffered by the corporation, its
personality):
stockholders or members and other persons.
BUSLAW 2
NOTES

1) When directors/trustees, or in appropriate case, the officers of a corporation: Requisites to hold directors/officer can be helf p[ersonally liable
a) Vote for or assent to patently unlawful acts of the corporation. for corporate obligations
b) Act in bad faith or with gross negligence in directing the corporate
affairs. 1) The complainant must allege in the complaint that the director/officer
c) Are guilty of conflict of interest to the prejudice of the corporation, its assented to patently unlawful acts of the corporation, or that the officer was
stockholders/members and other persons. guilty of gross negligence or bad faith;

2) When a director/officer has consented to the issuance of watered down stocks 2) The complainant must clearly and convincingly prove such unlawful acts,
or who, having knowledge thereof did not forthwith file with the corporate negligence or bad faith.
secretary his written objection thereto.
3) When director/trustee/officer has contractually agreed or stipulated to hold
Error in Business Judgement
himself personally and solidarily liable with the corporation.
4) When a director/trustee/officer is made, by specific provision of law,
Directors/Trustees/Officers are not liable, if the cause of the losses is merely error in
personally liable for his corporate action.
business judgement, not amounting to bad faith or negligence.

The court is without authority to substitute its judgement for that of the board,
➢ Requisites before a director/officer can be held personally liable for
questions of policy or management are left solely to the honest decision of the board.
corporate obligations
As long as it acts in Good Faith and in the exercise of honest judgement in the interest
1) The complainant must allege in the complaint that the director or officer
of the corporation, its orders are not reviewable by the courts.
assented to patently unlawful acts of the corporation
a) Vote for or assent to patently unlawful acts of the corporation;
SECTION 31. Dealings of Directors, Trustees or Officers with the Corporation.
b) Act in bad faith or with gross negligence in directing the corporate
affairs; A contract of the corporation with one (1) opr more of its directors, trustees.
c) Are guilty of conflict of interest to the prejudice of the corporation, its
officers or their spouses and relatives within the fourth civil degree of consanguinity
stockholders/members, and other persons;
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
2) When a director/officer has consented to the issuance of watered down stocks contract was approved was not necessary to constitute a quorum for such meeting;
or who, having knowledge thereof, did not forthwith file with the corporate
secretary his written objection thereto; b) The vote of such director or trustee was not necessary for the approval of the
contract;
3) When a director/trustee/officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the corporation; c) The contract is fair and reasonable under the circumstances;

4) When a director/trustee/officer is made, by specific provision of law,

personally liable for his corporate action.
BUSLAW 2
NOTES

d) In case of corporations vested with public interest, material contracts Ratification by stockholders o. self-dealing
are approved by at least two-thirds (2/3) of the entire membership of directors/trustees/officers
the board, with at least a majority of the independent directors voting
to approve the material contract; Contract may be ratified by the vote of at least two-thirds (2/3) the outstanding capital
stock/members.
e) In case of an officer, the contract has been previously authorized by 1) Any of the first three conditions set forth in the first paragraph of the above
the board of directors. section is absent.
2) Full disclosure of the adverse interest of the directors/trustees involved is
Where any of the first three (3) conditions set forth in the preceding
made at such meeting.
paragraph is absent, in the case of a contract with a director or trustee, such contract
3) The contract is fair and reasonable under the circumstances.
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 SECTION 32. Contracts Between Corporations with Interlocking Directors
of the directors or trustees involved is made at such meeting and the contract is fair
and reasonable under the circumstances. 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
Self-Dealing Directors or Trustees or Officers 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
A contract of the corporation with one or more of its directors/trustees/officers or their the interest in the other corporation or corporations is merely nominal, the contract
spouses and relatives within the fourth civil degree of consanguinity or affinity. shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
General Rule: Contract is voidable, at the option of such corporation.
Stockholdings exceeding twenty percent (20%) of the outstanding capital
Exceptions: stock shall be considered substantial for purposes of interlocking directors.
1) The presence of such directors/trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such Interlocking Directors
meeting.
2) The vote of such director/trustee was not necessary for the approval of the Members of the board of directors in a certain corporation who are also directors in
contract. another corporation.
3) The contract is fair and reasonable under the circumstances;
4) In case of corporations vested with public interest, material contracts are General Rule: Contract between two or more corporations having interlocking
approved by at least two-thirds (2/3) of the entire members or at least a directors shall not be invalidated on that ground alone.
majority of the independent directors voting to approve the material contract.
5) That in case an officer, of the contract has been previously authorized by the Requisites:
board of directors. 1) Contract is not fraudulent.
2) The contract is fair and reasonable under the circumstances.