CORPORATION

 LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    

 
specifically   prescribes   that   vacancies   in   the   board   must   be   filled   up   by    
the  remaining  trustees  who  must  sit  as  a  board  in  order  to  validly  elect   The   directors   or   trustees   and   officers   to   be   elected   shall   perform   the  
the  new  ones.   duties   enjoined   on   them   by   law   and   the   by-­‐laws   of   the   corporation.  
  Unless   the   articles   of   incorporation   or   the   by-­‐laws   provide   for   a  
Doctrine:   Membership   in   and   all   rights   arising   from   a   non-­‐stock   greater  majority,  a  majority  of  the  number  of  directors  or  trustees  as  
corporation   are   personal   and   non-­‐transferable,   unless   the   articles   of   fixed  in  the  articles  of  incorporation  shall  constitute  a  quorum  for  the  
incorporation   or   the   bylaws   of   the   corporation   provide   otherwise.   The   transaction   of   corporate   business,   and   every   decision   of   at   least   a  
determination   of   whether   or   not   “dead   members”   are   entitled   to   majority   of   the   directors   or   trustees   present   at   a   meeting   at   which  
exercise   their   voting   rights   (through   their   executor   or   administrator)   there   is   a   quorum   shall   be   valid   as   a   corporate   act,   except   for   the  
depends  on  the  articles  of  incorporation  or  bylaws.   election   of   officers   which   shall   require   the   vote   of   a   majority   of   all   the  
  members  of  the  board.  
• Atty.   Hofileña   à   if   you   push   the   point   that   the   directors   are   the    
agents  of  the  stockholders,  there  may  be  complications  because   Directors   or   trustees   cannot   attend   or   vote   by   proxy   at   board  
in  agency,  the  principal  can  override  the  agent.  However,  in  the   meetings.  
case   of   corporations,   the   stockholders   (principal)   are   not    
allowed   to   overrule   or   supplant   the   decisions   of   the   Board   of   • Atty.  Hofileña  à  the  secretary  as  a  matter  of  policy  should  not  
Directors  (agent).   also  be  the  treasurer.  This  was  laid  down  via  a  SEC  rule  and  not  
  found  in  the  Corporation  Code.  
C.  Board  Must  Act  As  a  Body  (Section  25)   • General  Rule:  The   grant   of   corporate   power   is   to   the   board   as   a  
  body,   and   not   to   the   individual   members.   The   corporation   can  
Section  25.  Corporate  officers,  quorum.   be  bound  only  by  the  collective  act  of  the  board.  
Immediately   after   their   election,   the   directors   of   a   corporation   must   o The   rationale   for   this   rule   is   the   public   policy,   that   it  
formally   organize   by   the   election   of   a   president,   who   shall   be   a   makes  better  management  practice  for  the  board  to  sit  
director,   a   treasurer   who   may   or   may   not   be   a   director,   a   secretary   down,   to   discuss   corporate   affairs,   and   decide   on   the  
who  shall  be  a  resident  and  citizen  of  the  Philippines,  and  such  other   basis  of  their  consensus.1  
officers   as   may   be   provided   for   in   the   by-­‐laws.   Any   two   (2)   or   more  
positions  may  be  held  concurrently  by  the  same  person,  except  that  no                                                                                                                  
1
one  shall  act  as  president  and  secretary  or  as  president  and  treasurer    The  SEC  has  opined  that  directors  and  trustees  can  only  exercise  their  power  
at  the  same  time.   as   a   board,   not   individually.   They   shall   meet   and   counsel   each   other   and   any  
determination   affecting   the   corporation   shall   be   arrived   at   only   after  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
• Exception:   A   corporation   can   be   bound   even   by   the   act   of   its   • A   Director-­‐Treasurer   has   no   power   to   bind   the   company   even   in  
officers,   but   always   because   of   the   act   or   default   of,   or   as   an   transactions   that   are   pursuant   to   the   primary   purpose   its  
implied  authority  coming  from  the  Board.   corporation,   especially   when   the   by-­‐laws   specifically   provided  
1. Directors   or   Trustees   Cannot   Act   Individually   to   Bind   the   that   the   acts   entered   into   can   only   be   done   by   the   Board   of  
Corporation   Directors.  Ramirez  v.  Orientalist  Co.,  38  Phil.  634  (1918).  
• Contracts   or   acts   of   corporation   must   be   made   either   by   the   o The   implication   is   clear   in   reference   to   outsiders   dealing  
Board   of   Directors   or   by   a   corporate   agent   duly   authorized   by   with   the   corporation,   that   not   all   corporate   actions  
the   Board.   Absent   such   valid   delegation,   the   rule   is   that   the   need  formal  board  approval.  The  board  need  not  come  
declaration   of   an   individual   director   relating   to   the   affairs   of   the   together  and  act  as  a  body  to  perform  a  corporate  act.  
corporation,   but   not   in   the   course   of,   or   connected   with   the   In  many  cases  no  act  is  required  of  the  members  of  the  
performance  of  authorized  duties  of  such  director,  are  held  not   board   in   order   to   bind   the   corporation;   the   fact   that  
binding  on  the  corporation.1   they   know   of   a   particular   corporate   transaction   or  
2. Ratification  by  the  Board  does  not  need  formal  meeting   contract,  and  they  stayed  silent  about  it,  or  worse,  they  
• A  corporation,  through  its  Board  of  Directors,  should  act  in  the   allowed   the   corporation   to   gain   by   the   transaction   or  
manner   and   within   the   formalities   prescribed   by   its   charter   or   contract,  would  already  bind  the  corporation.2  
by   the   general   law.   Thus,   directors   must   act   as   a   body   in   a   • Between   the   act   of   the   Board   as   a   body   affirming   informally   the  
meeting   called   pursuant,   otherwise,   any   action   taken   therein   perfection   of   a   contract   entered   into   in   behalf   of   the  
may   be   questioned   by   any   objecting   director   or   shareholder.  Be   corporation   by   a   senior   officer,   and   the   subsequent   formal  
that   as   it   may,   jurisprudence   tells   us   that   an   action   of   the   Board   board   resolution   rejecting   the   same   contract,   the   former   must  
of   Directors   during   a   meeting,   which   was   illegal   for   lack   of   prevail   under   the   doctrine   of   estoppel.   Acuña   v.   Batac  
notice,   may   be   ratified   either   expressly,   by   the   action   of   the   Producers  Cooperative  Marketing  Assn.,  20  SCRA  526  [1967]).  
directors   in   subsequent   legal   meeting,   or   impliedly,   by   the   • Exercise  of  the  powers  of  the  Board  of  Directors  may  either  be  
corporation's   subsequent   course   of   conduct.   Lopez   Realty   v.   express  and  formal  through  the  adoption  of  a  board  resolution  
Fontecha,  247  SCRA  183  (1995).   in  a  meeting  called  for  the  purpose,  or  it  may  be  implied  where  
the   Board   collectively   and   knowingly   allows   the   President   to  
enter  into  important  contracts  in  the  pursuit  of  the  business  of  
                                                                                                                                                                                                                                                       
consultation   at   a   meeting   of   the   board   attended   by   at   least   a   quorum.   SEC  
Opinion,  10  March  1972,  SEC  FOLIO  1960-­‐1976,  at  p.  526.                                                                                                                  
1 2
 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.    Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.  
(2013  ed.).  Manila,  Philippines:  Rex  Book  Store.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
the   corporation.   Board   of   Liquidators   v.   Heirs   of   Maximo   M.   2. Ratification  from  the  board  
Kalaw,  20  SCRA  987  (1967).    
  3. Directors  or  Trustees  cannot  bind  the  Board  in  a  Stockholders’  
Board  of  Liquidators  v.  Heirs  of  Maximo  M.  Kalaw   or  Members’  Meeting  
  • See  Tan  v.  Sycip,  499  SCRA  216  (2006).  
Facts:   National   Coconut   Corporation   (NACOCO)   through   its   Kalaw   4. Directors   or   Trustees   Cannot   Attend   or   Act   by   Proxy   or  
entered   into   several   contracts   involving   copra   trading   activities   which   Alternate1  
became   unprofitable.   NACOCO   suffered   losses   NACOCO   herein   alleges   • On  account  of  their  responsibility  to  the  corporation,  and  by  the  
that  under  the  by-­‐laws  of  the  corporation,  the  general  manager  only  has   fact   that   they   were   elected   into   the   Board   based   on   their  
the   power   to   perform   or   execute   on   behalf   of   the   corporation   upon   personal   qualifications,   business   acumen   and   background,  
prior  approval  of  the  Board  all  contracts  necessary  and  essential  to  the   directors  or  trustees  cannot  validly  act  by  proxy.  
proper  accomplishment  for  which  the  Corporation  was  organized.   • The   SEC   has   ruled   that   alternate   directors   are   not   allowed   by  
  law,  since  directors  are  required  to  exercise  their  judgment  and  
Issue:   Whether   or   not   Kalaw   and   the   rest   of   the   board   were   guilty   discretion   in   running   the   affairs   of   the   corporation   and   cannot  
negligence  and  bad  faith  and/or  breach  of  trust  for  having  entered  into   be   substituted   by   others   because   their   position   is   one   of   trust  
the  unprofitable  contracts   and  confidence.2  
   
Held:   NO.   Under   the   circumstances,   Kalaw’s   acts   were   valid   corporate   D.   Effects   of   “Bogus”   Board:  The  acts  or  contracts  effected  by  a  bogus  
acts.  Evidence  shows  that  it  was  the  practice  of  the  corporation  to  allow   board  would  be  void  pursuant  to  Article  1318  of  Civil  Code3  because  of  
its  general  manager  to  negotiate  contracts,  in  its  copra  trading  for  and   the  lack  of  “consent”.  Islamic  Directorate  of  the  Philippines  v.  Court  of  
in  NACOCO’s  behalf,  without  prior  board  approval.  The  Court  ruled  that   Appeals,  272  SCRA  454  (1997).  
“if   the   by-­‐laws   were   to   be   literally   followed,   the   board   should   give   its    
stamp   of   prior   approval   on   all   corporate   contracts.   But   [in   this   case]   the  
                                                                                                               
board  itself,  by  its  acts  and  through  acquiescence,  practically  laid  aside   1
 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.  
the  by-­‐law  requirement  of  prior  approval”   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  
2
   SEC   Opinions,   dated   27   May   1970   and   25   April   2985,   addressed   to  
Polyphosphates,  Inc.  
Doctrine:  There  are  2  ways  by  which  corporate  actions  may  come  about   3
 Article  1318.  There  is  no  contract  unless  the  following  requisites  concur:  
through  its  Board  of  Directors:   (1)  Consent  of  the  contracting  parties;  
1. The  board  may  empower  or  authorize  the  act  or  contract   (2)  Object  certain  which  is  the  subject  matter  of  the  contract;  
(3)  Cause  of  the  obligation  which  is  established.  (1261)  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)