WEEK 12: CORPORATIONS b.

) Trustees shall be elected for a term not

exceeding three (3) year
=Board of Directors and Trustees
-Tenure, qualifications, and disqualifications QUALIFICATIONS FOR DIRECTORS
-Elections, removal, filling of vacancies
-Compensations 1. For a stock corporation, ownership of at least
-Disloyalty 1 share of the capital stock of the corporation in
-Meetings his own name.
2. For a non-stock corporation, only members of
1. Repository of Corporate Powers (Sec. 23, the corporation can be elected.
RCC) 3. The director or trustee must be capacitated.
- COLEGIO MEDICO-FARMACEUTICO DE 4. The director or trustee must be of legal age.
FILIPINAS, INC., PETITIONER, V. LILY LIM AND 5. Must not possess any of the disqualifications
ALL PERSONS CLAIMING UNDER HER,
RESPONDENT, GR 212034, July 02, 2018 Note: Majority of the directors must be
residents of the Philippines. Majority, not all.
A corporation exercises its powers and transacts There is no citizenship requirement, except for
its business through its board of directors or nationalized industries. Even foreigners can be
trustees. voted as directors.

Being a juridical entity, a corporation may act QUALIFICATIONS FOR DIRECTORS

through its board of directors, which exercises
almost all corporate powers, lays down all 1. For a stock corporation, ownership of at least
corporate business policies and is responsible 1 share of the capital stock of the corporation in
for the efficiency of management, as provided his own name.
in Section 23 of the Corporation Code of the 2. For a non-stock corporation, only members of
Philippines: the corporation can be elected.
3. The director or trustee must be capacitated.
The power and the responsibility to decide 4. The director or trustee must be of legal age.
whether the corporation should enter into a 5. Must not possess any of the disqualifications
contract that will bind the corporation is lodged
in the board, subject to the articles of Note: Majority of the directors must be
incorporation, bylaws, or relevant provisions of residents of the Philippines. Majority, not all.
law. There is no citizenship requirement, except for
nationalized industries. Even foreigners can be
However, just as a natural person may authorize voted as directors.
ano
ther to do certain acts for and on his behalf, the DISQUALIFICATIONS OF DIRECTOR
board of directors may Section 26. Disqualification of Directors,
validly delegate some of its functions and Trustees or Officers.
powers to officers, committees or agents.
- A person shall be disqualified from being a
The authority of such individuals to bind the director, trustee or officer of any corporation if,
corporation is generally derived from law, within five (5) years prior to the election or
corporate by laws or authorization from the appointment as such, the person was
board, either expressly or impliedly by habit, (a) Convicted by final Judgment
custom or acquiescence in the general course of (1) Of an offense punishable by imprisonment
business, for a period exceeding six (6) years;
(2) For violating this Code; and
2. Tenure, qualifications and disqualifications of (3) For violating Republic Act No. 8799,
directors (Sec. 22, RCC) otherwise known as "The Securities Regulation
Code"
TENURE/TERM
a.) Directors shall be elected for a term of one (b) Found administratively liable for any offense
(1) year from among the holders of stocks involving fraudulent acts; and
registered in the corporation's book
(c) By a foreign court or equivalent foreign disqualifications, voting requirements, duration
regulatory authority for acts, violations or of term and term limit, maximum number of
misconduct similar to those enumerated in board membership and other requirements that
paragraphs (a) and (b) the Commission will prescribed to strengthen
*Republic Act 8799, otherwise known as The their independence and align with international
Securities Regulation Code, was enacted is a best practices.
landmark legislation seeking the achievement of Independent Directors shall make up at least
a free market that is self-regulating. 20% of the board such that when there are 10
members of the BOD, it requires at least two
3.Corporations vested with public interest (Sec. independent directors.
22, RC)
5. Election (Sec. 23, RCC)
- The board of the following corporations vested HOW ELECTIONS ARE CONDUCTED Normally,
with public interest shall have independent how do we replace officers?
directors constituting at least twenty percent - Through an election.
(20%) of such board: *Who calls the meeting?
(1) It is called by the secretary
(a) Corporations covered by Section 17.2 of a. On the order of the President
Republic Act No. 8799, otherwise known as b. By a written demand of the stockholders
"The Securities Regulation Code", namely those representing at least a majority of the
whose: securities are registered with the outstanding capital stock, or a majority of the
Commission, corporations listed with an members entitled to vote
exchange or, (2) Called by any stockholder or member of the
corporation signing the demand by directly
(b) Corporations with assets of at least Fifty addressing the stockholders or members if
million pesos (50,000,000.00) and having two there is no secretary, or the - secretary despite
hundred (200) or more holders of shares, each demand, refuses or fails to call the meeting
holding at least one hundred (100) shares of a Elections must be held once every year. The
class of its equity shares; Code does not provide. It authorizes the
corporation to provide in the remote
(c) Other corporations engaged in businesses communication.
vested with public interest similar to the above,
as may be determined by the Commission, after (2) The election must be by ballot if requested
taking into account relevant factors which are by any voting stockholder. Hence, voting by viva
germane to the objective and purpose of voces or roll call (raising hands) is valid except
requiring the election of an independent when there is a request that it be by ballot.
director, such as the extent of minority
ownership, type of financial products or 3) Stockholders shall have the right to vote the
securities issued or offered to investors, public number of shares of stock standing in their own
interest involved in the nature of business names (1 share = 1 vote) as long as the total
operations, and other analogous factors. number of votes cast shall not exceed the
number of shares owned by the stockholders.
4.Independent directors (Sec. 22,)
-An independent director is a person who apart Methods of voting:
from shareholdings and fees received from any a. Straight voting
business or other relationship which could, or - Vote for as many people as there are directors
could reasonable be received to materially to be elected.
interfere with the exercise of independent Example. A owns 100 shares. If there are 5
judgment in carrying out the responsibilities as directors to be elected, A is entitled to 500
a director. votes multiplying 100 by 5. He may give to the 5
candidates 100 votes each.
Note: Independent directors must be elected by
th shareholders present or entitled to vote in b. Cumulative voting (for 1 candidate)
absentia during the election of directors. Cumulate said shares and give 1 candidate as
many votes as the number of directors to be
Independent directors shall be subject to rules elected multiplied by the number of shares
an regulations governing their qualifications, owned.
 of the members entitled to vote in case of non-
What is the purpose of cumulative voting? stock corporations;
The intention of such mode of voting is to
protect the interest of the minority shareholder 3. There must be a previous notice to
and ensure that the minority has representation stockholders or members of the corporation of
in the Board of Directors. the intention to propose such removal at the
meeting; and
c. Cumulative voting by distribution
Distribute them on the same principle as many 4. The special meeting of the stockholders or
candidates as may be seen fit. members of a corporation for the purpose of
removal must be called by the secretary on
Note: Comparison with non-stock corporations: order of the president or on the written demand
Members may cast as many votes as there are of the stockholders representing or holding at
trustees to be elected, but may not cast more least a majority of the outstanding capital stock
than 1 vote for 1 candidate, unless otherwise or a majority of the members entitled to vote.
provided in the AOI or in the by-laws. They
cannot cumulate. 7. Filing of vacancies (Sec. 28, RCC)
Cause of Vacancies: DARI-DREI
(3) No delinquent stock shall be voted. (1) Death (2) A bandonment (3) Resignation (4)
Incapacity (5 Disqualification (6) Removal
Delinquent stocks declared by the Board as (7) Expiration of Term (8) Increase in the
delinquent because of their subscribers' failure number of Directors/Trustees
to pay the balance after the same was due or
after the Board called for payment. RULES IN FILLING UP VACANCIES
(A) For Removal
(4) Nominees for directors or trustees receiving - Filled up by the stockholders or members in a
the highest number of votes shall be declared regular or special meeting called for that
elected. purpose -When same day of the meeting
authorizing the removal
(5) If no election is held, such a meeting may be
adjourned, and the corporation shall follow the (B) For Expiration of Term
procedures laid out in Sec. 25. -Filled up by the stockholders or members in a
regular or special meeting called for that
6. Removal (Sec. 27, RCC) purpose
POWER TO REMOVE DIRECTORS OR TRUSTEE
-The power to remove directors or trustees -When - not later than the day of such
belongs to the stockholders or members expiration at a meeting called for that purpose
exclusive However, the Securities and Exchange either through a special or regular meeting
Commission shall, motu proprio or upon verified
complaint, (C) For Increase in the Number of Directors or
Trustee
General Rule: Removal of directors or trustees -Filled up by the stockholders in a;
may be with or without cause.
Exception: Removal without cause may not be (a) regular or special meeting called for that
used to deprive minority stockholders or purpose or in the same meeting.
members of the right of representation to (b) When in the same meeting authorizing the
which they may be entitled under Section 23 of increase of directors or trustees if so stated in
this Code. the notice of the meeting.

REQUISITES FOR REMOVAL (D) For other causes (DARID; death,

abandonment,resignation, incapacity,
1. The removal should take place at a regular or disqualification)r
special meeting duly called for the purpose; - Filled up by at least the majority of the
remaining directors or trustees if still
2. The director or trustee can only be removed constituting a quorum
by a vote of the stockholders representing at - existing board will fill the vacancy
least 2/3 of the outstanding capital stock or 2/3
-When - not later than 45 days from the time - In good faith
the vacancy arose - With the understanding that they were acting
in a way that was good for the business
8. Compensation of directors (Sec. 29, RCC)
GEN: The directors or trustees shall not receive Note: Directors who assented to the patently
any compensation in their capacity unlawful act cannot be liable if such act is drawn
XPN: (1) Reasonable per diems from a justifiable reason such as the business
(2) As stipulated in their by-laws fixing their judgment rule
compensation
(3) Voted upon by the stockholders What is important is that after weighing the
representing the majority of the outstanding pros and cons, the benefit of the corporation
capital stocks outweighs the negative, as a BOD, opt for what
is more beneficial to the corporation, in this
XPN to XPN: A vote of at least of the majority of case the patently unlawful act. In short, the
the outstanding capital stock or majority of the Business Judgment Rule prevails.
members entitled to vote grants the directors
compensation in a meeting specifically called for Based on the BJR, the acts of the BOD bind the
that purpose. corporation. As such, it cannot be questioned or
reviewed by the stockholders or the court
*If they are given compensation, is there a Insofar as the BOD exercises their powers under
limit? the BJR, the contract is valid but due to gross
Yes. They should not receive more than 10% of negligence they can be held liable.
the net income before tax of the preceding
year. b.Solidary Liability for Damages (Sec. 30, RCC)
LIABILITY OF DIRECTORS
*Why are they not paid? -The directors/trustees are liable to the
Being shareholders, they also receive a share in corporation for the commission of the
the dividends. following;

LIMITATION ON COMPENSATION (1) Knowingly and willfully vote or assent to

In no case shall the total yearly compensation of patently unlawful acts
directors, as such directors, exceed 10% of the (2) Guilty of gross negligence or bad faith
net income before income tax of the (3) Acquire any personal or pecuniary interest in
corporation during the preceding year. conflict of duty in conducting the affairs of the
corporation
Note: Directors or trustees shall not participate
in the determination of their own per diems or NATURE OF LIABILITY
compensation. As such, directors or trustees shall be liable
solidarily for all damages suffered by the
Note: Corporations vested with public interest corporation, the stockholders, or members and
shall submit to their shareholders and the other persons.
Commission, an annual report of the total
compensation of each of their directors or In the case of acquiring conflict of interest the
trustees. director, trustee or officer shall be liable as a
trustee for the corporation and must account
9. DISLOYALTY for the profits which otherwise would have
a.Business Judgment Rule accrued to the corporation.
- the board of directors of a corporation is given
the freedom to conduct business and is REQUISITES
protected from the courts digging into their 1. The complainant must allege in the complaint
business deals or decisions due to unfair or that the director or officer assented to patently
unwarranted allegations. unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad
Under the business judgment rule, a court will faith; and
no prosecute a director for his or her decisions
if it can be shown that they were made: 2. The complainant must clearly and
- Rationally convincingly prove such unlawful acts,
negligence or bad faith Inside information" is information not generally
available that a reasonable person would expect
10. Personal liabilities (Sec. 30, RCC) to have a material effect on the price or value of
LIABILITY OF DIRECTORS financial products. it consists of deductions,
-The directors/trustees are liable to the conclusions or inferences made or drawn from
corporation for the commission of the the readily observable matter.
following:
(1) Knowingly and willfully vote or assent to 14. Contracts (Sec. 31, RCC)
patently unlawful acts Summary: In the case of self-dealing directors, it
(2) Guilty of gross negligence or bad faith is not considered wrong in itself. However, if
(3) Acquire any personal or pecuniary interest in any of the conditions under the law is lacking,
conflict of duty in conducting the affairs of the the contract entered into can be voided at the
corporation. option of the corporation.

NATURE OF LIABILITY (Same kay Damages) GEN: A contract of the Corporation with 1 or
9. b. Solidary Liability for more of its directors, trustees, officers, or their
spouses and relatives within the 4th civil degree
11. Responsibility for Crimes of consanguinity or affinity is VOIDABLE, at the
- It clarified the obligations of corporate option of the corporation
directors and officers, and expressed in
statutory language established principles and XPN: The contract is held valid provided that the
doctrines. There are three duties of the following conditions are present:
directors, trustees and officers of a corporation:
the duty of obedience, the duty of diligence and 1. Presence of the director or trustee in the BOD
the duty of loyalty. Duty of obedience means meeting in which contract is approved was not
that they will direct the affairs of the necessary to constitute a quorum for such
corporation only in accordance with the meeting;
purposes for which it was organized. Duty of 2. Vote of such director or trustee was not
diligence and duty of loyalty are reflected in the necessary for the approval of the contract
Corporation Code wherein directors or trustees 3. The contract is fair and reasonable under the
who acquire any personal or pecuniary interest circumstances
in conflict with their duty as such directors or 4. In case of corporations vested with public
trustees shall be liable jointly and severally for interest, material contracts are approved by at
all damages resulting there from suffered by the least two- thirds (2/3) of the entire membership
corporation, its stockholders or members and of the board, with at least a majority of the
other persons. independent directors voting to approve the
material contract; an
12. Special fact doctrine - Special facts doctrine 5. In case of an officer, the contract has been
is a term used in corporate law to describe the previously authorized by the board of directors.
fiduciary duty of a corporate officer to
shareholders to disclose information during a Note: Only conditions 1-3 were mentioned
transaction involving a stock transfer. This duty during the recits
arises because of the superior knowledge the
officer holds by virtue of his or her position. RATIFICATION BY A VOTE OF 2/3
- Although the contract is VOIDABLE, the
This "special facts or special circumstances" rule contract may be ratified by the vote of the
meant that although directors generally had no stockholders representing at least 2/3 of the
duty to disclose material facts when trading outstanding capital stock. Provided that full
with shareholders, as the majority rule held, a disclosure of the director or trustee's adverse
duty might arise where there were special interest is made at such a meeting and the
circumstances, such as concealment of the contract is fair and reasonable.
defendant-purchaser's identity (the corporate
officer had used an agent go-between to avoid 15. Between corporations with interlocking
detection of his actions by the directors (Sec.32,) INTERLOCKING DIRECTOR
Interlocking director refers to a director of two
13. Inside information corporations having a transaction with each
other
 can be difficult to convent the board
GEN: A contract between two (2) or more sometimes.
corporations having interlocking directors shall Matters which cannot be delegated to the
not be invalidated on that ground alone. Executive Committee (SVB - EC)

XPN: 1. Approval of any action for which

shareholders' approval is also required;
Cases of fraud; and 2. Filling of vacancies within the board;
Contract is not fair and reasonable 3. Amendment or repeal of bylaws, or adoption
of new bylaws;
Note: In the case of an interlocking director who 4. The amendment or repeal of any resolution
has a substantial interest in one corporation and of the board which by its express terms is not so
a nominal interest in another corporation, the amendable or repealable;
provisions of the Self-Dealing Directors shall 5. A distribution of cash dividends to the
apply. The following requisites must be present, shareholders.
namely:
*NOTES
1. Presence of the director is not necessary to Executive Committee
constitute a quorum
2. Vote is not necessary to approve the contract Committee which exercises powers within the
3. Contract is fair and reasonable competence of the Board that requires
Note: IOW, the interlocking directorship is authority under the by-laws. The Board cannot
perfectly valid UNLESS it involves a substantial just create their own executive committee if
interest in one corporation and a nominal such committee will be exercising the powers of
interest in the other, in which case, the the Board.
requirements under the Self-Dealing Director
should be complied with in order for it to be Special Committee Can be created by the Board
considered valid. Otherwise, the status of the even without the authority under the by-laws.
contract is deemed VOIDABLE. Any other committee exercising a mere
recommendatory power whose actions require
Note: Stockholdings exceeding twenty percent ratification and confirmation by the board. It
(20%) of the outstanding capital stock shall be cannot approve resolutions on its own. The
considered substantial for purposes of reason here is that the Board is the
interlocking directors. corporation's governing body, clearly upholding
the power to exercise the corporation's
Is there something wrong with being an prerogatives in managing the corporation's
interlocking director? - Generally, nothing is business affairs.
wrong.
17. Meetings
DISADVANTAGE DIRECTOR OF HAVING AN a. Regular and Special Meetings (Sec. 52, RCC)
INTERLOCKING REGULAR MEETING
However, even if it is valid, the law recognizes When: Held monthly unless the bylaws provide
the disadvantages of an interlocking otherwise.
directorship - it is prone to DANGER.
SPECIAL MEETING
16. Executive and other special committees When: Held anytime upon:
(Sec. 34, RCC) EXECUTIVE COMMITTEE (a) The call of the president; or
- A smaller committee given delegated powers (b) As provided for in the bylaws.
by the board. It is composed of not less than Regular Meeting and Special Meeting
three (3) members, who are to be appointed by
the board. Notice of Meeting:
GEN: Notice of regular or special meetings
T/N: The board can delegate, except matters stating the date, time and place of the meeting
which are discretionary. However, the intention must be sent to every director or trustee a t
of creating the committee is for purposes of least two (2) days
expediency so that the board doesn't have to
meet at all times to make a decision, because it prior to the scheduled Meeting.
XPN: A longer time is provided in the bylaws. Under Section 52 of the RCC for conduct of
How conducted: regular and special meetings of board of
May be done electronically or other means as directors or trustees, directors and trustees may
allowed by the Commission. attend such meetings in person or through
remote communication or in absentia.
T/N: Teleconferencing is now very common and However, directors and trustees are still
is now the standard way. expressly prohibited to attend or vote through
proxy.
Reasons why SEC allows teleconferencing:
-In order to take advantage of the advances of The attendance of both the stockholders and
technology; To save time for the busy members the directors and trustees through remote
of the board. As long as the minutes will reflect communication or in absentia is counted for
the true and accurate information, the BOD or purposes of quorum.
BOT don't have to conduct a physical meeting.
e. Rule on abstention (Sec. 52, RCC)
NO REPRESENTATION ALLOWED IN A BOARD Abstention is a term in election procedure for
MEETING when a participant in a vote either does not go
-Directors or trustees cannot attend or vote by to vote (on election day) or, in parliamentary
proxy at board meetings. This is because a procedure, is present during the vote, but does
director's presence is personal due to his not cast a ballot.
qualification and expertise.
A majority of the directors or trustees as stated
b. Who presides (Sec. 53, RCC) in the articles of incorporation shall constitute a
-Section 53. Who Shall Preside at Meetings. The quorum to transact corporate business, and
chairman or, in his absence, the president shall every decision reached by at least a majority of
preside at all meetings of the directors or the directors or trustees constituting a quorum,
trustees as well as of the stockholders or except for the election of officers which shall
members, unless the bylaws provide otherwise. require the vote of a majority of all the
members of the board, shall be valid as a
c. Quorum (Sec. 52, RCC) corporate act.
-Section 51. Quorum in Meetings. Unless
otherwise provided in this Code or in the
bylaws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of nonstock corporations.
Quorum is the number of shareholders needed
in order to validly conduct a meeting.

2 KINDS OF QUORUM
(1) Simple quorum - 50% + 1
(2) Qualified Quorum - any number greater than
the simple quorum

Note: In so far as non-stock corporations are

concemed, quorum is based on the majority of
the living members.

d. Remote communication (Sec. 52, RCC)

Section 52 allows directors or trustees who
cannot
physically attend to participate and vote
through remote communication. However,
directors or trustees cannot participate or vote
in such meetings by proxy.