CONTRACTS BETWEEN

CORPORATIONS WITH
INTERLOCKING DIRECTORS
SECTION 32
SEC 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,
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.
VALIDITY and APPLICATION
◦ THERE IS A VALID CONTRACT BETWEEN 2 OR MORE
CORPORATIONS WHICH HAVE INTERLOCKING DIRECTORS.

◦ NOT APPLICABLE to 3rd Party Corporations

EVILS OF INTERLOCKING
DIRECTORATES
◦ (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].
Bylaws which prohibit a director of a corporation from serving at the same time as a director of a
corporation from serving at the same time as a director of a competing corporation, have been upheld as
valid and reasonable.

“If a director, for example, is to be faithful to both corporations, some accommodation may result. Suppose
X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would
injure B without violating his duty of loyalty to B; at the same time, he could hardly abstain from voting
without depriving A of his best judgment. If the firms really do compete in the sense of vying from
economic advantage at the expense of the other there can hardly be any reason for an interlock between
competitors other than the suppression of competition."