MODULE 8

BOARD OF DIRECTORS/TRUSTEE
AND OFFICERS

By: Atty. John Richard A. Delos Reyes

 Repository of Corporate Powers

Doctrine of Centralized Management

• General Rule: Unless otherwise provided in this Code, the Board of
Directors or Trustees shall exercise the corporate powers, conduct all
business, and control all properties of the corporation. [Sec. 22]
• It is well-established in corporation law that the corporation can act only
through its Board of Directors or Board of Trustees.
 Repository of Corporate Powers cont.

Exceptions:
• In case of an Executive Committee duly authorized in the by-laws;
• In case of a contracted manager which may be an individual, a
partnership, or another corporation
• In case of close corporations, the stockholders may manage the business
of the corporation rather than by a BOD, if the Articles of Incorporation so
provide.
 Repository of Corporate Powers cont.

• The power to purchase real property is vested in the BOD or trustees. While a
corporation may appoint agents to negotiate for the purchase of real property needed by
the corporation, the final say will have to be with the board, whose approval will finalize
the transaction. [Spouses Firme v. Bukal Enterprises and Devt. Corp., G.R. No. 146608
(2003)]
• Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in the election of
directors because it is the BOD that controls or manages the corporation. [Gamboa v.
Teves, G.R. No. 176579 (2011)]
.
 Limitations on the powers of the BOD/BOT

1. Limitations imposed by the Constitution, statutes, articles of incorporation or by-laws;

2. Certain acts of the corporation that require joint action of the stockholders and BOD:
• Removal of director [Sec. 27]
• Amendments of Articles of Incorporation [Sec. 15]
• Fundamental changes [Sec. 37]
• Declaration of stock dividends [Sec. 42]
• Entering into management contracts [Sec. 43]
• Fixing of consideration of no-par shares [Sec. 61]
• Fixing of compensation of directors [Sec. 29]
 Limitations on the powers of the BOD/BOT

3. Cannot exercise powers not possessed by the corporation.

• Note: Under Sec. 22 of the RCC, the power and the 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, by-laws, or relevant provisions of law.
 Tenure

• Directors – Term of 1 year from among the holders of stocks registered in

the corporation’s books. [Sec. 22]
• Trustees – Term not exceeding 3 years from among the members of the
corporation. [Sec. 22]
 Holdover Principle

• Each director and trustee shall hold office until the successor is elected
and qualified. [Sec. 22]
• Upon failure of a quorum at any meeting of the stockholders or members
called for an election, the directorate naturally holds over and continues to
function until another directorate is chosen and qualified.
• The failure to elect does not terminate the terms of incumbent officers nor
dissolve the corporation.
 Qualifications

a. Director: Must own at least one (1) share of stock.

• Trustee: Must be a member of the corporation.
b. Must be a natural person, of legal age, possess full legal capacity;
c. Must not be convicted by final judgment of an offense punishable by imprisonment for a
period exceeding 6 years; [Sec. 26]
d. Other qualifications as may be prescribed in the by-laws of the corporation. [Sec. 46]

Note: While additional qualifications may be prescribed, this cannot be in conflict with the
requirements as set by the RCC.
 Nomination
• General Rule: Each stockholder or member shall have the right to
nominate any director or trustee who possesses all of the qualifications
and none of the disqualifications set forth in this Code.
• Exception: When the exclusive right to nominate directors or trustees is
reserved for holders of founders’ shares under Section 7 of the RCC. [Sec.
23]
 Quorum
At all elections of directors or trustees, there must be present, either in person or through a
representative authorized to act by written proxy:
(1) Stock Corporations: The owners of majority of the outstanding capital stock;
(2) Non-Stock Corporations: A majority of the members entitled to vote. [Sec. 23]

NOTE: It is necessary that there be a quorum. An election without quorum is invalid.

 Voting via Remote Communication/In Absentia

• Notwithstanding the absence of a provision in the by-laws of the

corporation, the stockholders or members may also vote through remote
communication or in absentia by a resolution of the majority of the
Board of Directors; Provided, that the resolution shall only be applicable
for a particular meeting.
• A stockholder or member who participates through remote communication
or in absentia, shall be deemed present for purposes of quorum. The
election must be by ballot if requested by any voting stockholder or
member.
 Report to the SEC

• Within thirty (30) days after the election, the secretary, or any other officer
of the corporation, shall submit to the Commission, the elected trustees’
and officers’ names, nationalities, shareholdings, and residence addresses.
[Sec. 25]
 Adjournment of meeting

The meeting may be adjourned if:

• 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.
After such adjournment, the non-holding of elections and the reasons therefor shall be
reported to the Commission within thirty (30) days from the date of the scheduled
election. [Sec. 25]
The report shall specify a new date for the election, which shall not be later than sixty (60)
days from the scheduled date.
 Election of officers
Immediately after the election of directors, the directors must
formally organize by electing the corporate officers. They are
tasked to carry out the policies laid down by the Board, the AOI
and the by- laws. [Sec. 24]
 Corporate officers

President – must be a director;

Treasurer – may or may not be a director; must be a resident of the Philippines;
Secretary – need not be a director unless required in the by-laws; must be a citizen and
resident of the Philippines; and
Other officers as may be provided in the by-laws. [Sec. 24]

Note: Any 2 or more positions may be held concurrently by the same person, EXCEPT that
no one shall act as president and secretary or as president and treasurer at the same time,
unless otherwise allowed in the Code. [Sec 24]
 Disqualification of Directors, Trustees and Officers

A person shall be disqualified from being a director, trustee, or officer of any corporation if, within five (5) years
prior to the election or appointment as such, the person was:
A. Convicted by final judgment:
• Of an offense punishable by imprisonment for a period exceeding six (6) years;
• For violating this Code; and
• For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”
B. Found administratively liable for any offense involving fraudulent acts; and
C. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those
enumerated in paragraphs (a) and (b) above. [Sec. 26]
 Removal

• General Rule: Any Director or Trustee of a corporation may be removed

from office, with or without cause. [Sec. 27]
• Exception: If the director was elected by the minority, there must be
cause for removal because the minority may not be deprived of the right
to representation to which they may be entitled to under Sec. 23 of the
Code. [Sec. 27]
• Note: The right to representation refers to the right to cumulative voting
for one candidate.
 Requisites for removal

1. It must take place either at a regular meeting or special meeting of the stockholders or
members called for the purpose;
2. A special meeting for the purpose of removing directors or trustees must be called by:
a. The secretary, on order of the president; or
b. The secretary, upon written demand of the stockholders representing or holding at least a
MAJORITY of the capital stock or a MAJORITY of the members entitled to vote;
3. There must be previous notice to the stockholders or members of the intention to remove a
director; and
4. There must be a vote of the stockholders representing 2/3 of outstanding capital stock or in
case of a non-stock corporation, 2/3 of members entitled to vote.
 New Power of the SEC under the Revised Corporation Code

• 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 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 Commission may impose on the Board of Directors or
Trustees who, with knowledge of the disqualification, failed to remove
such director or trustee. [Sec. 27]
 Designation of director or trustee

A vacancy may be temporarily filled from among the officers of the

corporation by unanimous vote of the remaining directors or trustees 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.

Note: The action by the designated director or trustee shall be limited to the
emergency action necessary. [Sec. 28]
 Term of designated director or trustee
The term of the designated director or trustee shall cease:
• Within a reasonable time from the termination of the emergency; or
• Upon election of the replacement director or trustee, whichever comes
earlier. [Sec. 28]
 Compensation of directors or trustees
General Rule: Directors or trustees are only entitled to reasonable per diems.
They are not entitled to compensation as directors or trustees. [Sec. 29]
Exceptions: Compensation other than per diems may also be granted to directors:
• When Articles of Incorporation, by-laws, or an advance contract so provides;
• By the vote of stockholders representing at least a majority of the outstanding
capital stock or majority of the members
 Limitations to compensation under the
RCC
• The total yearly compensation of directors shall not exceed 10% of the net
income before income tax of the corporation during the preceding year.
• The 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. [Sec. 29]
 Business Judgment Rule

General Rule: Questions of policy or management are left solely to the

honest decision of officers and directors of a corporation and the courts are
without authority to substitute the judgment of the Board of Directors.
• The board is the business manager of the corporation and so long as it acts
in good faith, its orders are not reviewable by the courts or the SEC. [Phil.
Stock Exchange, Inc. v. CA, G.R. No. 125469, (1997)]
 Business Judgment Rule cont.
• Exceptions:
• If the acts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority;
•

• If they violate their duties under Sec. 30 (willfully and knowingly assents to patently
unlawful acts of the corporation, or are guilty of gross negligence or bad faith); and
•

• If they violate Sec. 33 (disloyalty of a director who acquires for himself business
opportunity that should have belonged to the corporation, unless his act is ratified by
a 2/3 vote of stockholders).
 Consequences of the Business Judgment Rule

• The resolution, contracts and transactions of the board cannot be

reversed or set aside by the Courts, under the principle that the business
of the corporation has been left to the hands of the Board.
• Directors and duly authorized officer cannot be held personally liable
for acts done, or contracts entered under the exercise of their business
judgment.
 Solidary liability for damages
• Willfully and knowingly voting for and assenting to patently unlawful acts of the
corporation; [Sec. 30]
• Gross negligence or bad faith in directing the affairs of the corporation; [Sec. 30]
• Acquiring any personal or pecuniary interest in conflict of duty; [Sec. 30]
• Consenting to the issuance of watered stocks, or, having knowledge thereof, fails
to file objections with secretary; [Sec. 64]
• Agreeing or stipulating in a contract to hold himself liable with the corporation; or
• By virtue of a specific provision of law.
 Personal liabilities

• General rule: Members of the Board, who acted in good faith for and on
behalf of the corporation within the lawful scope of their authority, are not
liable for the consequences of their acts. Such acts are attributed to the
corporation alone and no personal liability is incurred by the Board.
[Price v. Innodata Phils., Inc., G.R. No. 178505 (2008)].
• Exception: When sufficient proof exists on record that the officers acted
fraudulently, beyond his authority or when the officer agrees to be
personally liable on behalf of the corporation.
 Three-fold duties of Directors and Trustees

• Duty of Obedience - shall direct the affairs of the corporation only in

accordance with the purposes for which it was organized;
• Duty of Diligence - shall not willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or act in bad faith or with gross
negligence in directing the affairs of the corporation; and
• Duty of Loyalty - shall not acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees. [Strategic Alliance
Development Corp v. Radstock Securities Ltd., G.R. No. 178158 (2009)]
 Doctrine of Corporate Opportunity

Unless his act is ratified, a director shall refund to the corporation all the
profits he realizes on a business opportunity which:
• The corporation is financially able to undertake;
• From its nature, is in line with corporation’s business and is of practical advantage to
it; and
• One in which the corporation has an interest or a reasonable expectancy.
The rule shall be applied notwithstanding the fact that the director risked his
own funds in the venture. [Sec. 33]
Doctrine of Corporate Opportunity cont.
• By embracing the opportunity, the self-interest of the officer or director
will be brought into conflict with that of his corporation. Hence, the law
does not permit him to seize the opportunity even if he will use his own
funds in the venture.
• A 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. [Sec. 30]
 Creation of Executive Committee

• The by-laws may provide for the creation of an executive committee,

composed of not less than 3 members of the Board, to be appointed by
the Board.
• 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 by-laws or on a majority vote of the Board. [Sec. 34]
 Special Committees

• The Board of Directors may create special committees of temporary or

permanent nature and to determine the members’ term, composition,
compensation, powers, and responsibilities.
 Limitations on Its Power

The following CANNOT be delegated to the Executive Committee:

• Matters needing stockholder approval [Sec. 34];
• Filling up of Board vacancies [Sec. 34];
• Amendment, repeal or adoption of new by-laws [Sec. 34];
• Amendment or repeal of any resolution of the Board which by its express terms is not
amendable or repealable [Sec. 34];
• Cash dividend distribution [Sec. 34]; and
• Acts which would render the BOD powerless and free from all responsibilities imposed on
it by law.