09-Directors & Officers PDF

CHAPTER 9
DIRECTORS, TRUSTEES,
AND OFFICERS
Nature of Power and Authority of Board

Rationale of “Centralized Management”
Primary Objective of Board
Source of Power of Board
Theory of Original Power
Theory of Delegated Power
Peculiar Agency Role of Board
The Business Judgment Rule
Theoretical Basis of the Rule
Coverage of Rule
Requirement that the Board Must Act as a Body
Executive Committee
Qualifications and Disqualification of Directors and Trustees
Qualifications
Rule on Corporate Stockholders
Rule on Board of Directors of Banks
Disqualifications
Additional Qualifications and Disqualifications
Election of Board of Directors
Cumulative Voting
Classic Formula
Glasser Itiretative Procedure
D’Hondt Remainders Table
Election of Board of Trustees
Non-Permanency of Seat in Board
Alien Membership in Board of Directors
Vacancy in Board
Report on Election of Directors, Trustees and Officers
Term of Office; Hold-over Principle
Meetings of Directors and Trustees
Kinds of Meetings
Requisites for a Valid Board Meeting
Modes of Attendance of Board Members
Attendance by Stockholders of Board Meetings
Compensation of Directors and Officers
CORPORATE OFFICERS
Theory on Power of Board to Delegate Authority to Corporate Officers
Two Levels of Discussions on Corporate Officership
Theory on Power of Board to Appoint/Terminate Corporate Officers
Two Disciplines Diverging in Corporate Officership Issue
Election or Appointment of Officers
President
Corporate Secretary
Corporate Treasurer
Corporate “Agents” for Service of Summons Upon Corporation
Common Law Nature of Duties and Obligations of Directors, Trustees and Officers
General Rule on the Duties and Liabilities of Directors, Trustees and Officers
Duty of Obedience
Duty of Diligence
Duty of Loyalty; Corporate Opportunity Doctrine
Dealings of Directors, Trustees or Officers with Corporation
Contracts Between Corporations with Interlocking Directors
Liability of Officers
General Rule on Liability of Corporate Officers
Different Strain in Labor Law
Duty of Directors to Corporate Creditors
ELECTION AND REMOVAL OF DIRECTORS, TRUSTEES AND OFFICERS
Removal of Directors and Trustees
What Constitutes “Cause”
Rationale of RTC Jurisdiction Over Matters Covering Officers
Who Are "Officers" and "Managers" Within the Jurisdiction of RTC?
Positions Created Pursuant to Enabling By-law Provisions
Branching Officership Test
Stockholder-Officer Combination
"Extent" by Which Regular Courts Can Adjudicate under Section 5(c)?
RTC Jurisdiction Even on Damages
Procedural Rules on Suits Brought
Addressing Constitutional Issue
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This chapter covers the discussions on the power and authority, duties
and functions, and the obligations of directors, trustees, officers and other
representatives of corporations. Discussions on the binding effect of acts and
contracts entered into in behalf of corporations by unauthorized officers or
representatives are covered in the third type of ultra vires acts found in Chapter 5
on Corporate Contract Law.
NATURE OF POWER AND AUTHORITY OF BOARD

Section 23 of the Corporation Code clearly states that, unless otherwise
provided in the Code, the powers of a corporation formed shall be exercised, all
business conducted, and all property of such corporation controlled and held, by
the board of directors or trustees to be elected from among the holders of stocks,
or where there are no stocks, from among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualified.
The Supreme Court has characterized the power of the board of directors
as follows:
Under the Corporation Code, unless otherwise provided

by said Code, corporate powers, such as the power to enter
into contracts, are exercised by the Board of Directors.
However, the Board may delegate such powers to either an
executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for
specific purposes. The delegation to officers makes the latter
agents of the corporation; accordingly, the general rules of
agency as to the binding effects of their acts would apply. For
such officers to be deemed fully clothed by the corporation to
exercise a power of the Board, the latter must specially
authorize them to do so.1
In another case,2 the Court was emphatic in saying that in the absence of
an authority from the board of directors, no person, not even the officers of the
corporation, can validly bind the corporation. It held that in the absence of any
board resolution authorizing the filing of a suit for the corporation, then any suit
filed on behalf of the corporation should be dismissed, since the power of the
corporation to sue and be sued in any court is lodged with the board of directors
that exercises its corporate powers.3
1. Rationale of “Centalized Management”

One of the advantageous features of the corporation is that it acts in the
business world through a centralized management, which promotes efficiency
and prevents confusions arising from diffused corporate powers. Investors and
creditors of the corporation, as well as those who deal with it, can rely upon the
law-directed fact that the corporation shall be bound only through its board of
directors or Trustees, or representatives duly authorized by the board. In any
organizational set-up, the congruence of authority and responsibility in the same
person, committee, or board always promotes efficiency. This is the rationale for
the business judgment rule.
The Board of a corporation has sole authority to determine policy and
conduct the ordinary business of the corporation within the scope of its charter.
As long as the board acts honestly and the contract does not defraud or abuse
the rights of the minority, the courts will not interfere in their judgments and
transactions. The minority members of the board and the minority stockholders
cannot come to court upon allegations of want of judgment or lack of efficiency
on the part of the majority and change the course of the administration of
corporate affairs.
1
ABS-CBN Broadcasting Corporation v. Court of Appeals, 301 SCRA 572 (1999).
2
Premium Marble Resources v. Court of Appeals, 264 SCRA 11, 76 SCAD 9 (1996).
3
Ibid.
Corporate elections furnish one of the primary remedies for internal
dissentions, as the majority must rule so long as it keeps within the powers
conferred by the corporate charter. The common law principles on duties of
obedience, diligence and loyalty, which have been incorporated as specific
provisions in the Corporation Code, provide for the other corporate features to
prevent abuse on the part of the corporate managers.
2. Primary Objective for Board

Although no specific clause is found in the Corporation Code directly on
the matter, the Supreme Court has held that the primary obligation of the
directors of a corporation is "to seek the maximum amount of profits for the
corporation," and characterized the position as a "position of trust" and that in
case a director’s interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit.4 The fiduciary or trust
relationship "is not a matter of statutory or technical law. It springs from the fact
that directors have the control and guidance of corporate affairs and property and
hence of the property interest of the stockholders."5
SOURCE OF POWER OF BOARD

There are two theories on the source of power of the board: the theory of
original power and the theory of delegated power.
1. Theory of Original Power

Under the theory of original power, the source of power of the board
comes directly from the law,6 and that the board is originally and directly granted
corporate power as the embodiment of the corporation. This theory has no
democratic notions, but actually is more akin to the principles of autocracy. It
recognizes that one of the attractive features of the corporate vehicle for the
efficient and economical management of corporate affairs is promoted by
centralization of control in a small group of decision-makers, which is the board
of directors or Trustees.
The theory finds support in Section 23 of the Corporation Code which
clearly vests corporate powers in the board, and only limits such power in narrow
situations when "otherwise provided in the Code."
Ramirez v. The Orientalist Co.,7 held that "[b]oth upon principle and
authority it is clear that any action or resolution of the stockholders on corporate
matters should be ignored. The functions of the stockholders of a corporation, it
must be remembered, are of limited nature. The theory of a corporation is that
4
Prime White Cement Corp. v. Intermediate Appellate Court, 220 SCRA 103, 110 (1993).
5
Ibid, quoting from Gokongwei v. Securities and Exchange Commission, 89 SCRA 336
(1979).
6
Sec. 23, Corporation Code.
7
38 Phil. 634 (1918).
the stockholders may have all the profits but shall turn over the complete
management of the enterprise to their representatives and agents, called
directors. Accordingly there is little for the stockholders to do beyond electing
directors, making by-laws, and exercising certain other special powers defined by
law. In conformity with this idea it is settled that contracts between a corporation
and third persons must be made by the directors and not by the stockholders.
The corporation, in such matters, is represented by the former and not by the
latter.8 This conclusion is entirely accordant with the provisions of section 28 of
our Corporation Law [now Section 23 of the Corporation Code]."9
2. Theory of Delegated Power

Under the theory of delegated power, the authority exercised by the Board
is viewed as derived or delegated authority, delegated to them by stockholders or
members of the corporation. Under such theory, the source of primary theory can
override the decisions of its delegates. Such theory promotes the notion of
"democracy" in the corporate set-up, where the real source of power are the
stockholders or members, and the representatives thereof would be the board. It
is also consistent with notions in Property Laws that recognizes that as a general
rule the owners exercises ultimate power and disposition over the subject matter
to which he holds title.
Under this view, a corporation has a personality separate and distinct from
the individuals that compose it, but the fact remains that it cannot act without the
medium of human beings. The corporate powers should belong to the
stockholders or members who form the corporation, and who contribute the
corporate assets. The stockholders or members are the real owners of the
corporation, and to them the corporate powers must belong, and that the board
of directors or Trustees merely act as their agents or representatives.
Angeles v. Santos,10 upholds the theory that the power of the board of
directors emanates from the stockholders or members of the corporation. In that
case the Court held that: "The board of directors of a corporation is a creation of
the stockholders and controls and directs the affairs of the corporation by
delegation of the stockholders. But the board of directors, or majority thereof, in
drawing themselves the powers of the corporation, occupies a position of
trusteeship in relation to the minority of the stock in the sense that the board
should exercise good faith, care and diligence in the administration of the affairs
of the corporation and should protect not only the affairs of the majority but also
those of the minority of the stock. Where a majority of the board of directors
wastes or dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the exercise of its equity
jurisdiction, and upon showing that intracorporate remedy is unavailing, will
entertain a suit filed by the minority members of the board of directors, for and in
behalf of the corporation, to prevent waste and dissipation and the commission of
8
Citing COOK ON CORPORATION, Sixth Ed., Secs. 708 and 709.
9
Supra, at p. 654.
10
64 Phil. 697, 706 (1937).
a illegal acts and otherwise redress the injuries of the minority stockholders
against the wrong-doings of the majority."
Angeles therefore recognizes that the source of the common law rights of
stockholders and members to bring a derivative suit on behalf of the corporation
is based on the recognition that the powers of the board is delegated to them by
the stockholders or members.
PECULIAR AGENCY ROLE OF THE BOARD

Under Section 23 of the Corporation Code, the board is the main agency
by which all corporate powers and authority are exercised, and strictly speaking
any other officer appointed to represent the corporation, is a mere appointee of
the board.
In a manner of speaking, the board acts as an agent of the corporation,
and is bound by the rules applying to agency relationship. In an ordinary agency
relationship, the principal has the right to preempt the agent in matters relating to
the agency, to countermand the decision of the agent, and even to terminate at
will the agency relationship.
In the corporate setting, although the board is an agent of the corporation,
since the principal is a mere juridical concept, it realistically is not in a position to
countermand the decisions of its agent, the board. In fact, unlike in an ordinary
principal-agent relationship, the corporate principal does not really have its own
mind to allow it to decide matters for itself. Under Section 23, the mind of the
corporation is principally its own agent, the board. Therefore, the determination of
the board is practically and legally the determination of the principal corporation
itself.
This line of discussion brings us therefore to the logical cross-road that
provides that although legally the board is the agent of the principal corporation,
since the principal does not have real existence or a mind of its own to make
decisions, the board is by its own exercise of business judgment, the very
principal speaking and acting in the commercial world. In a manner of speaking,
the board stands both as an agent of the corporation, and the very
personification of the corporation in the commercial and legal world, and
practically stands almost as the principal for corporate powers and affairs, and
that the officers and representatives that it appoints are its own agents.
The danger of abuses being committed under such peculiar principal-
agent relationship has under common law lead to institution of the remedy of
derivative suit to be placed in the hands of stockholders and members as a
means to check negligence, fraud and abuses by the board.
THE BUSINESS JUDGMENT RULE

The corporate principle recognizing corporate power and competence to
be lodged primarily with the board of directors is embodied in the "business
judgment rule." A resolution or transaction pursued within the corporate powers
and business operations of the corporation, and passed in good faith by the
board of directors, is valid and binding, and generally the courts have no
authority to review the same or substitute their own judgment, even when the
exercise of such power may cause losses to the corporation or decrease the
profits of a department.
Montelibano v. Bacolod-Murcia Milling Co., Inc.,11 had earlier established
the principle that when a resolution is “passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no authority to review them,"12
adding that "[i]t is a well-known rule of law that questions of policy or
management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment [for that]
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."13
Gamboa v. Victoriano,14 held that courts cannot supplant the discretion of
the board on administrative matters as to which they have legitimate power of
action, and contracts which are intra vires entered into by the board are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton destruction of rights of
the minority.
One author15 has discussed how the laissez faire doctrine has influenced
the development of business judgment rule in Corporate Law:
This legal concept of a private corporation must have

been based on the nineteenth century economic doctrine of
laissez faire. So, the early decisions of the courts, influenced
by this doctrine, held that a business corporation exists solely
for the benefit of those who had invested their capital in it.
Thus, in the case of Dodge v. Ford Motor Co. [204 Mich. 507,
170 N.W. 684 (1919)], Mr. Ford, desiring to plow back the
profits of the business to the corporation to enable him to sell
cheaper cars for the benefit of the buying public, decided not
to make further declaration of cash dividends. The minority
stockholders complained, claiming that Mr. Ford had no
business of making business for the benefit of strangers. The
court sustained the contention of the minority stockholders,
holding that:
"Under a legal system based on private
ownership and freedom of contract, he (Mr. Ford) has
no duty to conduct his business to any extent for the
11
5 SCRA 36 (1962).
12
Ibid, at p. 42.
13
Ibid, quoting from 2 FLETCHER ON CORP., at p. 390.
14
90 SCRA 40 (1979).
15
Guevarra, The Social Function of Private Corporations, 34 PHIL. L.J. 464, 466 (1959).
benefit of strangers; he conducts it solely for his own
private gain and never to those with whom he deals
only the duty of carrying out such bargains as he may
make with them. . .
“A business corporation is organized and carried
on primarily for the benefit of the stockholders, and that
the directors cannot conduct the affairs of a corporation
for the merely incidental benefit of shareholders and for
the primary purpose of benefiting others."
1. Theoretical Basis of Rule

Fletcher has summed up the business judgment rule as an integral part of
the role of the board of directors: "They hold such office charged with the duty to
act for the corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of such duty.
Whether the business of the corporation should be operated at a loss during
depression, or closed down at a smaller loss, is a purely business and economic
problem, to be determined by the directors of a corporation and not by the courts.
It is a well-known rule of law that questions of policy or of management are left
solely to the honest decisions of officers and directors of a corporation, and the
other court is without authority to substitute its judgment of the board of directors;
the board is the business manager of the corporation, and so long as its acts in
good faith its orders are not reviewable by the courts."16
Philippine Stock Exchange, Inc. v. Court of Appeals,17 also seems to
establish another theoretical basis for the business judgment rule based on the
recognition of the corporation merely as an association of individuals who
thereby do not give up through the medium of the corporation their management
prerogatives on business matters, thus:
A corporation is but an association of individuals, allowed

to transact under an assumed corporate name, and with a
distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites
appropriate to such a body. As to its corporate management
decision, therefore, the state will generally not interfere with
the same. Questions of policy and of management are left to
the honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute
their judgment for the judgment of the board of directors. The
board is the business manager of the corporation, and so long
as its acts in good faith, its orders are not reviewable by the
courts.
16
2 FLETCHER ON CORP., at p. 390.
17
281 SCRA 232, 88 SCAD 589 (1997).
In Philippine Stock Exchange, the Supreme Court upheld the management
prerogatives of the Board of Directors of the Philippine Stock Exchange as
against the control of the SEC, through the reiteration of the business judgment
rule, thus:
Questions of policy and of management are left to the

honest decision of the officers and directors of a corporation,
and the courts are without authority to substitute their
judgment for 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 reviewable by the courts.
The SEC is the entity with the primary say as to whether
or not securities, including shares of stock of a corporation,
may be traded or not in the stock exchange. This is in line with
the SEC’s mission to ensure proper compliance with the laws,
such as the Revised Securities Act and to regulate the sale
and disposition of securities in the country. . .
In reaching the decision to deny the application of listing
of PALI, the PSE considered important facts, which, in the
general scheme, bring to serious question the qualification of
PALI to sell it shares to the public through the stock exchange.
PSE was in the right when it refused application of PALI,
for a contrary ruling was not to the best interest of the general
public. The purpose of the Revised Securities Act, after all, is
to give adequate and effective protection to the investing
public against fraudulent representations, or false promises,
and the imposition of worthless ventures.
Also, as the primary market for securities, the PSE has
established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable standard of
propriety in the entities who chose to transact through its
facilities. It was reasonable for the PSE, therefore, to exercise
its judgment in the manner it deems appropriate for its
business identity, as long as no rights are trampled upon, and
public welfare is safeguarded.
2. Coverage of Rule
From the foregoing, it can be seen that the business judgment rule
actually has two (2) applications, namely:
(a) Resolutions and transactions entered into by the Board of

Directors within the powers of the corporation cannot be
reversed by the courts not even on the behest of the
stockholders of the corporation; and
(b) Directors and officers acting within such business judgment
cannot be held personally liable for the consequences of
such acts.
Courts and other administrative bodies having jurisdiction over

corporations generally would not interfere in the judgment or business decisions
of the board, nor will they substitute their wisdom for that of the board. Under
Section 23, the contract of the State with the corporation, its investors and the
public at large who must deal with the corporation, is that the "corporate powers"
are vested in the board, and generally courts or other government agencies
would not overturn nor interfere with the judgment and decisions of the board.
Courts and other tribunals are wont to override the business judgment of the
board mainly because, courts are not in the business of business, and the laissez
faire rule or the free enterprise system prevailing in our social and economic set-
up dictates that it is better for the State and its organs to leave business to the
businessmen; especially so, when courts are ill-equipped to make business
decisions; and more importantly, the social contract in the corporate family to
decide the course of the corporate business has been vested in the board and
not with the courts.
The business judgment rule is not only a substantial rule of law, but also a
rule on evidence. Whenever any action is brought to question the validity of a
board resolution or corporate transaction approved by the board, the general rule
is once it has been entered into by the board by virtue of the exercise of its
judgment, and it will be presumed to be valid.
The other branch of the business judgment rule is that corporate officers
cannot be held personally liable for corporate debts or obligations incurred in the
exercise of the business judgment. However, when directors or trustees violate
their duties, the can be held personally liable, thus:
(a) When the director willfully and knowingly vote for patently
unlawful acts of the corporation;18
(b) When he is guilty of gross negligence or bad faith in directing
the affairs of the corporation;19 and
(c) When he acquires any personal or pecuniary interest in
conflict with his duty as such directors.20
Likewise, the above-enumerated exceptions when directors, trustees and

corporate officers may be held personally liable for corporate acts, provide also
the three (3) instances when courts are authorized to supplant the decision of the
board, which is deemed to be biased and may prove detrimental to the
corporation.
18
19
Ibid.
20
Secs. 31 and 34, Corporation Code.
Philippine Stock Exchange defined the meaning and coverage of “bad
faith” on the part of the board of directors of a corporation as to warrant an
exemption from the business judgment rule, thus: “bad faith does not simply
connote bad judgment or negligence, but ‘imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means a breach of a known duty
through some motive or interest of ill will, partaking of the nature of fraud.’”
REQUIREMENT THAT BOARD MUST ACT AS A BODY

Under Section 25 of the Corporation Code, "a majority of the number of
directors or trustees as fixed by the articles of incorporation shall constitute a
quorum for the transaction of the corporate business, and every decision of at
least a majority of the directors or trustees present at a meeting at which there is
a quorum shall be valid as a corporate act."
The grant of corporate power is to the board as a body, and not to the
individual members thereof, and that the corporation can be bound only by the
collective act of the board. The rationale for this rule is the public policy, that it
makes better management practice for the board to sit down, to discuss
corporate affairs, and decide on the basis of their consensus.21
It must be noted however, that the principle that the corporation can be
bound only by the collective act or will of the board sets only the general rule. As
will be seen, a corporation can be bound even by the act of its officers, but
always because of the act or default of the board.
In Lopez Realty v. Fontecha,22 the Supreme Court held that the general
rule is that a corporation, through its board of directors, should act in the manner
and within the formalities, if any, prescribed by its charter or by the general law.
Thus, directors must act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be questioned by
any objecting director or shareholder. However, it pointed out that nevertheless
jurisprudence provides that an action of the board of directors during a meeting,
which was illegal for lack of notice, may be ratified either expressly, by the action
of the directors in subsequent legal meeting, or impliedly, by the corporation's
subsequent course of conduct.
In Ramirez v. The Orientalist Co.,23 the director-treasurer of the
corporation entered into transactions for the leases of films without prior board
authorization. Although the articles of incorporation of the company authorized it
to manufacture, buy, or otherwise obtain all accessories necessary for
conducting the business of maintaining and conducting theaters, the Court
21
The SEC has opined that directors and trustees can only exercise their power as a board,
not individually. They shall meet and counsel each other and any determination affecting the
corporation shall be arrived at only after 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.
22
247 SCRA 183, 63 SCAD 494 (1995).
23
38 Phil. 634 (1918).
nevertheless held that a treasurer has no independent authority to bind the
corporation by signing its name to the documents; and that under then Section
28 of the Corporation Law (now Section 23 of the Corporation Code) all
corporate powers shall be exercised and all corporate business conducted by the
board of directors. The by-laws of the corporation even provided that the power
to make contracts shall be vested in the board of directors. Although the by-laws
provided that the president shall have the power, and it shall be his duty, to sign
contracts, the Court nevertheless construed this provision to refer to the formality
of reducing to proper form the contracts which are authorized by the board and is
not intended to confer an independent power to make contracts binding on the
corporation.
Nonetheless, the Court held that the fact that the power to make corporate
contracts is vested in the board of directors does not signify that a formal vote of
the board must always be taken before contractual liability can be fixed upon a
corporation; for the board can create liability, like an individual, by other means
than by a formal expression of its will.24 The Court held that when the corporation
acts through its officers, certain things are presumed, and by virtue of business
and commercial customs, the officer is presumed to have power, and that he acts
with the board's authority. "The authority of the subordinate agent of a
corporation often depends upon the course of dealings which the company or its
directors have sanctioned. It may be established sometimes without reference to
official record of the proceedings of the board, by proof of the usage which the
company had permitted to grow up in the business, and of the acquiescence of
the board charged with the duty of supervising and controlling the company's
business."25
The implication is clear from Ramirez in reference to outsiders dealing
with the corporation, that not all corporate actions need formal board approval.
The board need not come together and act as a body to perform a corporate act.
In many cases no act is required of the members of the board in order to bind the
corporation; the fact that they know of a particular corporate transaction or
contract, and they stayed silent about it, or worse, they allowed the corporation to
gain by the transaction or contract, would already bind the corporation.
Ramirez also discussed the principal in procedural law as it pertained to
corporations, that when an actionable document is used as the basis in a suit
against the corporation, it becomes incumbent upon the corporation, if it desires
to question the authority of the purported agent who signed the document, to
deny the due execution of said contract under oath. The failure of a corporation
to deny the genuineness and due execution of an actionable document would be
an admission not only of the signature of the corporate officer therein, but also of
his authority to make the contract in behalf of the corporation, and of the power of
24
Ibid, at pp. 648-649.
25
Ibid, at pp. 649-650 quoting from Robert Gair Co. v. Columbia Rice Packing Co., 124 La.,
194.
the corporation to enter into such contract.26 Ramirez rationale for the doctrine
was as follows:
In dealing with corporations the public at large is bound

to rely to a large extent upon outward appearances. If a man is
found acting for a corporation with the external indicia of
authority, any person, not having notice of want of authority,
may usually rely upon those appearances; and if it be found
that the directors had permitted the agent to exercise that
authority and thereby held him out as an person competent to
bind the corporation, or had acquiesced in a contract and
retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority
may never have been granted. The public is not supposed nor
required to know the transaction which happen around the
table where the corporate board of directors or the
stockholders are from time to time convoked. Whether a
particular officer actually possesses the authority which he
assumes to exercise is frequently known to very few, and the
proof of it usually is not readily accessible to the stranger who
deals with the corporation on the faith of the ostensible
authority exercised by some of the corporate officers. It is
therefore reasonable, in a case where an officer of a
corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is
apprised of the fact that the agent's authority is contested; and
he is given an opportunity to adduce evidence showing either
that the authority existed or that the contract was ratified or
approved.27
Ramirez held that "[t]he integrity of commercial transactions can only be

maintained by holding the corporation strictly to the liability fixed upon it by its
agents in accordance with law. . . As already observed, it is familiar doctrine that
if a corporation knowingly permits one of its officers, or any other agent, to do
acts within the scope of an apparent authority, and thus holds him out to the
public as possessing power to do those acts, the corporation will, as against any
one who has in good faith dealt with the corporation through such agent, be
estopped from denying his authority; and where it is said ìf the corporation
permits' this means the same as ìf the thing is permitted by the directing power
of the corporation.'"28
Board of Liquidators v. Heirs of Maximo Kalaw,29 held that it is possible for
an express provision of the by-law to be violated and the board may, in certain
corporate actions, bind the corporation in spite of the fact that it is contrary to the
26
Ibid, at pp. 641-642.
27
Ibid, at pp. 645-646.
28
Ibid, at pp. 654-655.
29
20 SCRA 987 (1967).
by-law provision. It held that there are two ways by which corporate actions may
come about through the corporation's board of directors, either the board may
empower or authorize the act or contract, or it can be ratificatory act on the part
of the board. As long as there is a corporate approval through the board of
directors, whether implied or express, it is valid to bind the corporation.
Acuña v. Batac Producers Corporative Marketing Association,30 held that
between the act of the board as a body in beforehand affirming, although
informally, to the other party the perfection of a contract, on one hand, and a
subsequent express resolution formally taken at the board meeting which
resolution then proceeds to "disapprove and/or rescind" the said contract, the
former must prevail. The Court held that "[t]here is abundant authority in support
of the proposition that the ratification may be express or implied, and that implied
ratification may take diverse forms, such as by silence or acquiescence; by acts
showing approval or adoption of the contract; or by acceptance and retention of
benefits flowing therefrom."31
EXECUTIVE COMMITTEE
Under Section 35 of the Corporation Code, the by-laws of a corporation
may create an executive committee, composed of not less than three (3)
members of the board, to be appointed by the board. The executive 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, except with respect to:
(a) Approval of any action for which shareholders' approval is

also required;
(b) The filing of vacancies in the board;
(c) The amendment or repeal of by-laws or the adoption of new
by-laws;
(d) The amendment or repeal of any resolution of the board
which by its express terms is not so amendable or
repealable; and
(e) Distribution of cash dividends to the shareholders.
The executive committee can do any act because the power of the board
to delegate certain specific acts is unlimited. However, by the language of
Section 35 of the Corporation Code, ultimate power must remain with the board
of directors, and it would be against corporate principle to empower the executive
committee with authority that the board itself cannot countermand.
30
20 SCRA 526 (1967).
31
Ibid, at p. 533.
Nothing in the Corporation Code prevents the creation of an executive
committee by board resolution, even in the absence of an enabling clause in the
by-laws. The creation of such executive committee would be in line with full
authority of the board to appoint agents and delegates. But taking the cue from
Section 35 of the Code, such executive committee, its composition and powers,
would be subject to the same limitations provided for by the Code, since the
board by mere resolution cannot create an executive committee that will have
greater powers than one sanctioned by law.
The SEC, however, in an opinion held that by virtue of Section 35 of the
Corporation Code, an executive committee can only be created by virtue of a
provision in the by-laws and that in the absence of such by-law provision, the
board of directors cannot simply create or appoint an executive committee to
perform some of its functions.32
QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS AND TRUSTEES

1. Qualifications
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation. No person shall be elected as trustee unless he is a
member of the corporation.33
Any director who ceases to be the owner of at least one (1) share of the
stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority
of the directors or trustees of all corporations organized under this Code must be
residents of the Philippines.
The fact that a director is only holding the share as a nominee of another
person does no disqualify him as a director. What the law requires is that he has
legal title to the share. Under the old Corporation Law it was required that every
director must own "in his own right" at least one share of the capital stock of the
corporation. Under the present Section 23 of the Corporation Code, it requires
only that the share of a director "shall stand in his name on the books of the
corporation."
Lee v. Court of Appeals,34 held that under the old law, "the eligibility of a
director, strictly speaking, cannot be adversely affected by the simple act of such
director being a party to a voting trust agreement inasmuch as he remains owner
(although beneficial or equitable only) of the shares subject of the voting trust
agreement pursuant to which a transfer of the stockholder's shares in favor of the
32
SEC Opinion, dated 27 September 1993, XXVIII SEC QUARTERLY BULLETIN 12 (No. 1,
March 1994).
33
34
205 SCRA 752 (1992).
trustee is required. . . No disqualification arises by virtue of the phrase ìn his own
right' provided under the old Corporation Code (sic)."35
Lee therefore concluded that with the omission of the phrase "in his own
right" under the present Corporation Code, the election of trustees and other
persons who in fact are not the beneficial owners of the shares registered in their
names on the books of the corporation becomes formally legalized and therefore,
is a clear indication that in order to be eligible as a director, what is material is the
legal title to, not the beneficial ownership of, the stock as appearing on the books
of the corporation.36
Lee held that the disposition by a director of all of the shares in the
corporation, through a voting trust agreement, had the legal effect of him ceasing
to be a director of the corporation and creating a vacancy in the board, since as a
consequence of the execution of the voting trust agreement, such director
ceased to own at least one share standing in his name in the books of the
corporation.
a. Rule on Corporate Stockholders

In cases of corporate stockholders or corporate members of a corporation,
such entities cannot be qualified to be elected as such to the board of the
corporation. A corporation cannot act by itself but only through its officers and
agents, and as such a corporation cannot attend personally board meetings of
the corporation wherein it is elected as a director, but only through representative
or a proxy, which would contravene the established rule that a director may not
be represented by a proxy at a meeting of the board.37 In addition such corporate
stockholders or members of the corporation cannot also designate an individual
representative to be voted into the board of the corporation since the
representative would not be a stockholder of record nor a member himself, which
is a minimum requirement to be qualified to be voted into the board of the
corporation.38
Therefore, in the case of corporate stockholders or corporate members,
their representation in the board can be achieved by making their individual
representatives trustees of the shares or membership, which would then make
them stockholders or members of record, and thereby qualified to be elected to
the board, but at the same time maintaining legal responsibility of trustees to the
corporate stockholder or members.
b. Rules on Board of Directors of Banks and Listed Companies
35
Ibid, at p. 761.
36
Ibid, citing 2 FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS, sec. 300, p.
92 (1969), citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051.
37
38
See SEC Opinion, 2 June 1986, XX SEC QUARTERLY BULLETIN (Nos. 1 & 2, March &
June, 1986); SEC Opinion, 16 July 1985, SEC ANNUAL OPINIONS 1985, at p. 125; SEC Opinion,
26 June 1969, SEC FOLIO 1960-1976, at p. 381.
The board of directors of a bank shall have at least two (2) “independent
directors,” which shall be persons other than an officer or employee of the bank,
its subsidiaries or affiliates or related interests.39
Listed and public companies and those with registered securities shall
have at least two (2) independent directors or they shall constitute at least twenty
percent (20%) of such board, whichever is lesser, which shall mean a person
other than an officer or employee of the corporation, its parent or subsidiaries, or
any other individual having a relationship with the corporation, which would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.40
2. Disqualifications
A directors must not have been convicted of an offense punishable by
imprisonment of exceeding six (6) years or has not committed any violation of
Corporation Code within five (5) years prior to his election.41
Under Section 19 of the General Banking Law of 2000, except for rural
banks, no appointive or elective public official, whether full-time or part-time shall
at the same time serve as officer of any private bank, save in cases where such
service is incident to financial assistance provided by the government or a
government-owned or controlled corporation to the bank or unless otherwise
provided under existing laws.
3. Additional Qualifications and Disqualifications

The by-laws of the corporation can provide other qualifications and
disqualifications in addition to those provided in the Corporation Code.
Gokongwei v. Securities and Exchange Commission,42 held that a
stockholder has no vested right to be elected to the Board of Directors. The Court
held that any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders and
that he impliedly contracts that the will of the majority shall govern in all matters
within the limits of the act if incorporation and lawfully enacted by-laws and not
forbidden by law." To this extent, therefore, the stockholder may be considered to
have "parted with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation and
surrendered it to the will of the majority or his fellow incorporators. It can not
therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed by any act of the corporation which
is authorized by a majority.43
39
Sec. 15, The General Banking Law of 2000 (RA 8791).
40
Sec. 38, The Securities Regulation Code (RA 8799).
41
42
89 SCRA 336 (1979).
43
Ibid.
ELECTION OF BOARD OF DIRECTORS
Under Section 24 of the Corporation Code, at all elections of directors or
trustees, there must be present, either in person or by representatives authorized
to act by written proxy, the owners of the majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members entitled to vote.
The election must be by ballot if requested by any voting stockholder
entitled to vote shall have the right to vote in person or by proxy the number of
shares of stock standing, at the time fixed in the by-laws, in his own name on the
stock books of the corporation, or where the by-laws are silent, at the time of the
election. No delinquent stock shall be voted.
Any meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or indefinitely if, for
any reason, no election is held, or if there are no present or represented by
proxy, at the meeting, the owners of a majority of the outstanding capital stock, or
if there be no capital stock, a majority of the members entitled to vote.
CUMULATIVE VOTING
Section 24 of the Corporation Code expressly provides for cumulative
voting in the election of the directors of stock corporations. The provisions for
cumulative voting are mandatory.
Under that section, at all elections of directors, a stockholder may vote
such number of shares for as many persons as there are directors to be elected
or he may cumulate said shares and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall
equal, or he may distribute them on the same principle among as many
candidates as he shall see fit, provided that the total number of votes cast by him
shall not exceed the number of shares owned by him as shown in the books of
the corporation multiplied by the whole numbers of directors to be elected.
Cumulative voting therefore is a voting procedure wherein a stockholder is
allowed to concentrate his votes and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall
equal. The policy of cumulative voting is to allow minority stockholders the
capacity to be able to elect representatives to the board of directors.44 No
exception is provided for in Section 24 so that the articles may not provide for
restriction or suppression of the principle of cumulative voting in stock
corporations.
In contrast to cumulative voting, which allows for an opportunity for
minority representation in the board, straight voting allows a simple majority of
the shareholders to elect the entire board of directors leaving the minority
44
Glazer, Glazer, & Grofman, Cumulative Voting In Corporate Elections: Introducing
Strategy into the Equation, 35 S. CAROLINA L. REV. 295 (1934).
shareholders unrepresented. Under straight voting, each shareholder simply
votes the number of shares he owns for each director nominated.
Cumulative voting is reckoned to be equitable since it allows stockholders
the opportunity for representation on the board of directors in proportion to their
holdings. Such minority representation is believed not to interfere with the
principle of majority rule since the number of directors elected by each group will
vary with its proportion of ownership. It is also believed that minority interests
have a voice on the board since stockholders and management often have
different goals. Finally, it is believed that since corporate and securities laws
generally create a balance of power in favor of insiders and controlling interest,
some counterveilling power in the hands of outside minority interest is
desirable.45
On the other hand, the system of cumulative voting has been criticized by
other sectors because in tends to partisan representation in the board, which is
inconsistent with the notion that a director properly represents all interest groups
in the corporate setting. It is said to breed disharmony in the board which
dissipates the energies of management and leads to an atmosphere of
uncertainty at the top level. Often, cumulative voting is used by persons who are
motivated by narrow, selfish interests.46
1. Classic Formula
The formula that has become popular in many corporate literature
applying the cumulative voting system is credited to Cole,47 which is as follows:
S x D1
S1 = ______ + 1
D+1
Where,
S1 = Number of shares owned by some shareholders or group
of shareholders [Bloc I]
S = Total number of shares voting at the meeting
D1 = Number of directors Bloc I desires to elect
D = Total number of directors to be elected at the meeting
In cases where S1 includes a fractional term (e.g., 51/4), Cole provides

that S1 should be taken to be the largest whole number, less than that given by
the formula (e.g., 5).48
45
Williams, Cumulative Voting, 33 HARV. BUS. REV., May-June 1955, at 108, 111.
46
Ibid. See also Glazer, Glazer, & Geofman, Cumulative Voting in Corporate Elections:
Introducing Strategy into the Equation, supra.
47
Cole, Legal and Mathematical Aspects of Cumulative Voting, 2 S.C.L.Q. 225 (1954).
For example, Mr. Cruz owns 66 shares of stock of ABC Corp. If there are
5 directors to be chosen, Mr. Cruz is entitled to 330 votes obtained by multiplying
66 by 5. Mr. Cruz is at liberty to distribute any or all of the votes he is entitled to
cast among any of the candidates.
In a situation where ABC Corporation has 100 outstanding capital stock,
using the Cole Formula, Mr. Cruz would be assured to electing 4 members
thereof computed as follows:
500 x D1
330 = ________ + 1
5+1
500 x D1
330 - 1 = ________
6
6 x (330-1) = 500 x D1
1,974
________ = D1
500
D1 = 2.9 or 4
In a seminal paper collaborated into by an economist, a lawyer and a

political science professor,49 the group was able to show that the Cole Formula
suffers from three basic flaws: (a) It occasionally yields erroneous results in
situations involving only two competing blocs of shareholders; (b) The formula
addresses only the question of how many directors a bloc can be assured of
electing, and ignores the possibility that a bloc's optimal strategy may be to vote
for more candidates than it is certain of electing; and (c) The formula may yield
erroneous results in situations involving more than two competing blocs of
shareholders.50
2. Glasser Itiretative Procedure

Another formula was also discussed in the article called the Glasser
Formula, which applied the game theoretic notions to cumulative voting.51
48
Ibid at 230.
49
Glazer, Glazer and Geofman, Cumulative Voting in Corporate Elections: Introducing
Strategy into the Equation, 35 S. CAROLINA L. REV. 295 (1984).
50
Ibid, at p. 299.
51
Glasser, Game Theory and Cumulative Voting, 5 Mgmt. Sci. 151 (1959).
D x S1 D x S11
Integer _______ is greater than Integer __________
D1 D + 1 - D1
The Glasser Formula which uses the iterative procedure illustrates an

important feature of cumulative voting: the number of directors a bloc can be
certain of electing depends not only upon the proportion of total shares which its
owns, but also upon the absolute number of shares it owns.52 Nevertheless,
although the Glasser Formula yielded more accurate results than the Cole
Formula in determining the assured number of directors that a group can elect, it
still did not define the optimum manner of voting.
3. D'Hondt Remainders Table53

The formula "offers a simple method for determining the number of
candidates for whom a bloc should vote."54 The D'Hondt Remainders Table is
constructed by dividing the number of votes each bloc can cast by the integers 1
through D (i.e., the total number of directors to be elected), which will indicate the
number of shares controlled and the number of candidates for whom votes are
cast.55
"D'Hondt Remainders Table is first used to determine the number of
directors each block is certain of electing. The largest entries in the table are
circled, indicating D, the number of directors to be elected."56
Using the same ABC Corp. illustration above, with Mr. Cruz being Bloc I,
the D'Hondt Remainders Table should appear as follows:57
1 2 3 4 5
1/2
Bloc I 330 165 110 82 66
2/3 1/2
Bloc II 170 85 56 42 34
52
Glazer, Glazer and Geofman, supra, at p. 302. "The discrepancy should remind corporate
management and its counsel that the absolute number of shares to be issued to each
shareholders group as well as the relative proportional interests of each such group are important
in planning a corporation's shareholders structure." at p. 303.
53
B. Grofman, A Review of Macro-Election Systems, German Political Yearbook (R.
Wildenmann ed. 1975); Balinski and Young, Stability, Coalitions, and Schisms in Proportional
Representation Systems, 72 Am. Pl. Sci. Rev. 848 (1978).
54
Ibid, at p. 305.
55
Ibid.
56
Ibid, at pp. 305-306.
57
Ibid, at p. 305.
The article goes on to say: "The smallest circle entry in the top row
appears in column 3, whi ch means that Row 1 can guarantee itself three seats.
The smallest circled entry in the bottom row appears in column 2, indicating that
Bloc II can guarantee itself two seats. Each bloc should always nominate at least
the number of candidates it is certain in electing. . . In this case, however, Bloc I
can safely nominate more than three candidates. That is, the fourth entry in the
top row, 82½ , is larger than the first uncircled entry in the bottom row, 56-2/3.
Hence, Bloc I can safely nominate four candidates. But should Bloc I nominate
more than four candidates? Yes. The fifth entry in the top row, 66, is greater
than the first uncircled number in the bottom row. Therefore, Bloc I should
nominate five candidates, the same result obtained earlier through a somewhat
different line of reasoning. If Bloc I divides its votes for two candidates, Bloc I will
still elect three candidates since Bloc II will exhaust its votes on its two
candidates. If Bloc II divides its votes among three candidates instead of two,
Bloc I will elect all five of its candidates since Bloc I can give 66 votes to each of
its five while Bloc II can only give 56-2/3 votes to its three candidates. Bloc I
cannot lose and may achieve a significant gain. . . Generally, a bloc can safely
vote for a directors if the at entry in that bloc's row in the table is greater than the
first uncircled entry in the competing bloc's row."58
In a three-cornered battle, the article gives the following illustrative table:59
1 2 3 4 5
2/3
Bloc I 200 100 66 50 40
1/2 2/3 1/4

Bloc II 125 62 41 31 25
1/2 1/2 1/4

Bloc III 125 62 41 31 5
The article compares the accuracy of the D'Hondt Remainder Table with
the Cole Formula, thus: "Consider the following election. There are three blocs, I,
II, and III. The blocs shareholdings are SI = 40, SII = 25, SIII = 25, so that S = 90
and D the number of directors to be elected) 5. According to Cole's formula, the
maximum number of seats Bloc I is certain of winning in two.
As long as Bloc II and III do not join forces to vote for the
same candidates, Bloc I can elect more candidates by dividing
its votes among three candidates, giving each one (5)(40)/3 =
662/3 votes. Since this number is less than 662/3 (the number
of votes cast for each of Bloc I's three candidates). Bloc I is as
58
Ibid.
59
Ibid, at p. 307.
assured of filing three seats, rather than two, contrary to the
outcome given by Cole's formula. . .
Once again the D'Hondt Reminders Table gives the
correct answer. Table 2 is generated by dividing the number of
votes which can be cast by Blocs I, II, and III (i.e. 200,125, and
125) by the integers 1 through D (i.e, 1 through 5). Again, the
five largest entries in the table are circled. This process
indicates that Bloc I is guaranteed of electing three directors if
each of the blocs votes for a different set of candidates.
Similarly, Blocs II and III are assured of electing one director
each.
As stated previously, the D'Hondt Reminders Table
indicates the number of directors a bloc is certain of electing
as well as the number of directors for whom it should vote.
The number in the fourth column of the top row, 50, is smaller
than the largest of the uncircled entries in the other rows,
621/2. Thus, Bloc I should not vote for four directors.
Similarly, the number in the fifth column of the top row, 40, is
less than the largest of the circled entries in the other rows,
125, so that Bloc 1 should not vote for five directors. Instead, it
should spread its votes evenly among three candidates, the
number it is certain of electing. Following the same procedure
for Bloc II, the first uncircled entry in the middle row, 621/2 is
not greater than the largest uncircled entry in the other rows,
621/2 Bloc II and III should vote therefore for one candidates.60
ELECTION OF BOARD OF TRUSTEES

Non-stock or special corporations may, through their articles of
incorporation or their by-laws, designate their governing boards by any name
than as “Board of Trustees.”61
Under Section 92 of the Corporation Code, unless otherwise provided in
the articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be fixed in
their articles of incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees shall be held annually and
trustees so elected shall have a term of three (3) years. Trustees thereafter
elected to fill vacancies occurring before the expiration of a particular term shall
hold office only for unexpired period.
Under Section 24 of the Corporation Code, "unless otherwise provided in
the articles of incorporation, or in the by-laws," members of corporations which
have no capital stock may cast as many votes as there are trustees to be elected
60
Ibid, at pp. 35-36.
61
but may not cast more than one vote for one candidate. Candidates receiving the
highest number of votes shall be declared elected.
In non-stock corporations, the default rule in the election of trustees is
straight voting. Unlike the mandatory rule for cumulative voting for stock
corporations, in non-stock corporations, it is possible to provide for other types of
voting in either the articles of incorporation or the by-laws of the corporation.
NON-PERMANENCY OF SEAT IN BOARD

The Supreme Court has already held unlawful any attempt to grant to any
person a permanent seat in the board of a corporation, thus:” Any provision in the
by-laws or the practice of the corporation giving a stockholder a permanent seat
in the Board of Directors of the corporation would be against the provision of
Sections 28 and 29 of the Corporation Code which requires member of the board
of corporations to be elected. In addition, Section 23 of the Corporation Code
which provides for the powers of the Board of Directors or Trustees expressly
requires them “to be elected from among the holders of stock, or where there is
no stock, from among the members of the corporation.”62
ALIEN MEMBERSHIP IN BOARD OF DIRECTORS

Commonwealth Act No. 108, otherwise known as the Anti-Dummy Law,
penalizes the intervention of aliens in the management, operation, administration
or control of a nationalized enterprise or activity. Nevertheless, Pres. Decree 715
has settled the issue of alien membership in the board of directors of nationalized
enterprises, when it provided that "election of aliens as members of the board of
directors of governing body of corporations or associations engaging in partially
nationalized activity shall be allowed in proportion to their allowable participation
or share in the capital of such entities."
Under Section 15 of the General Banking Law of 2000, non-Filipino
citizens may become members of the board of directors of a bank to the extent of
the foreign participation in the equity of said bank.
VACANCY IN BOARD
Under Section 29 of the Corporation Code, any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office.
62
Grace Christian High School v. Court of Appeals, 281 SCRA 133, 88 SCAD 499 (1997).
Any position in the board to be filled by reason of an increase in the
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 same meeting authorizing the increase of directors or trustees if so stated in
the notice of the meeting.63
Therefore, vacancies in the board other than by removal or expiration of
term may be filled by the vote of majority of remaining directors or trustees, if
there is quorum; if there is no quorum, it may be filled by stockholders or
members in a regular or special meeting called for that purpose.
Vacancy by reason of an increase in members of the board can be filled-
up only by election of the stockholders or members of the corporation.
REPORT ON ELECTION OF DIRECTORS, TRUSTEES AND OFFICERS

Under Section 26 of the Corporation Code, within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the secretary, or
any other officer of the corporation, shall submit to the SEC, the names,
nationalities and residences of the directors, trustees and officers elected. Should
a director, trustee or officer or officers die, resign or in any manner cease to hold
office, his heirs in case of his death, the secretary, or any other officer of the
corporation, or the director, trustee or officer himself, shall immediately report
such fact to the SEC.
The provisions of Section 26 of the Corporation Code are deemed to be
mandatory and jurisdictional. And the determination of who are the legal directors
and officers of the corporation is conditioned upon the reports submitted to the
SEC pursuant to said section.
In Premium Marble Resources v. Court of Appeals,64 the Supreme Court
confirmed that "[b]y the express mandate of the Corporation Code (Section 26),
all corporations duly organized pursuant thereto are required to submit within the
period therein stated (30 days) to the SEC the names, nationalities and
residences of the directors, trustees and officers elected." In that case, the Court
explained the importance of the requirement of the law: "Evidently the objective
sought to be achieved by Section 26 is to give the public information, under
sanction of oath of responsible officers, of the nature of business, financial
condition and operational status of the company together with information on its
key officers or managers so that those dealing with it and those who intend to do
business with it may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility."
Premium Marble Resources held that only the directors and officers of the
corporation whose name appears in the report submitted to the SEC are deemed
63
64
264 SCRA 11, 76 SCAD 9 (1996).
legally constituted to bind the corporation in bringing of any suit in behalf of the
corporation.
TERM OF OFFICE; HOLD-OVER PRINCIPLE

The term of office of the members of the board in a stock corporation shall
be one (1) year and until their successors are elected and qualified.65
In the event no new board is elected and qualified after the original one-
year term of the board of directors, then under the hold-over principle, the
existing board, if still constituting a quorum, is still a legitimate board with full
authority to bind the corporation.66
Ponce v. Encarnacion,67 held that where no meeting is called by the board
for the stockholders to elect a new set of directors, one may be called by the
stockholders by a petition filed in the courts and the remedy for calling a
stockholders' meeting is similar to a preliminary injunction--it is possible for the
courts to set it as an ex-parte hearing for granting it and there is no denial of due
process.
MEETINGS OF DIRECTORS OR TRUSTEES

1. Kinds of Meeting
There are two types of meeting of the board: the regular meeting, which
are held by the board monthly, unless the by-laws provide otherwise; and the
special meetings, those held by the board at any time upon the call of the
president, or as provided in the by-laws. Special meetings may be held at any
time upon call be held anywhere in and outside the Philippines, unless the by-law
provide otherwise.68
The president shall preside at all meetings of the board.69
The quorum in the meeting of the board shall be the presence of a
majority of the number of directors as fixed in the articles of incorporation.70
The required vote to pass a resolution shall be a majority vote of the
directors present at such meeting where quorum is achieved.71
65
66
The Corporation Code does not require the taking of an oath of office to qualify the
elected directors and officers. Election alone does not make the person elected, a director but
there must be an acceptance, either express or implied, although he is rebuttably presumed to
accept upon notification, or enters upon the duties of an office after his election or appointment.
SEC Opinion, 21 January 1986, XX SEC QUARTERLY BULLETIN (Nos. 1 & 2, March & June, 1986).
67
94 Phil. 81 (1953).
68
69
Ibid.
70
Ibid.
71
Ibid.
In the election of officers, however, the vote of the majority of all the
members of the board is necessary.72
2. Requisites for a Valid Board Meeting

The following therefore are the requisites of a valid board meeting:
(a) Meeting of the directors or trustees duly assembled as a

board, at the place, time and manner provided in the by-
laws;
(b) Presence of the required quorum; and
(c) Decision of the majority of the quorum or, in other cases, a
majority of the entire board.
On account of their responsibility to the corporation, directors or trustees

cannot validly act by proxy.73 They must attend meetings of the board and act in
person and as a body. Each director or trustee is required by law to exercise his
personal judgment and he cannot delegate his powers or assign his duties.
In case of abstention during a board meeting on a vote taken on any
issue, the general rule is that an abstention is counted in favor of the issue that
won the majority vote; since by their act of abstention, the abstaining directors
are deem to abide by the rule of the majority.74
3. Mode of Attendance of Board Members

A director or trustee cannot attend nor be represented in a board meeting
by proxy. Since the board is the governing body of the corporation upon whom all
corporate powers are vested by law, each elected member are supposed to
exercise their judgment and discretion in running the affairs of the corporation.
The each have been elected by the stockholders or members on the basis of
their personal qualifications and capabilities with full expectations that they would
discharge their duties and functions personally.75
SEC Memorandum Circular No. 15, series of 2001, pursuant to the terms
of the Code of Commerce, embodies the guidelines for the conduct of
teleconferencing and videoconferencing (i.e., conferences or meetings through
electronic medium or telecommunications where the participants who are not
physically present are located at different local or international places) of board of
directors, providing for safeguards to ensure the integrity of the meeting, the
72
Ibid.
73
Sec. 26, Corporation Code; SEC Opinion, 22 May 1998, XXXII SEC QUARTERLY BULLETIN
13 (No. 1, June 1998).
74
Lopez v. Ericta, 45 SCRA 539 (1972).
75
See SEC Opinion, 7 February 1994,XXVIII SEC QUARTERLY BULLETIN 4 (No. 3, March
1994).
proper recording of the minutes thereof and the safekeeping of the electronic
recording mechanism as part of the records of the corporation.76
4. Attendance by Stockholders of Board Meetings

The SEC has opined that the Corporation Code does not confer upon any
stockholder the right to attend board meeting and that the allowance of
stockholders to attend board meeting is upon the discretion of the board itself.77
COMPENSATION OF DIRECTORS AND OFFICERS

Under Section 30 of the Corporation Code, in the absence of any
provision in the by-laws fixing their compensation, the directors shall not receive
any compensation, as each directors, except for reasonable per diems.78
However, the section also provides that such compensation, other than per
diems, may be granted to directors by the vote of the stockholders representing
at least a majority of the outstanding capital stock at a regular or special
stockholders' meeting.
In no case shall the total yearly compensation of directors, as such
directors, exceed ten percent (10%) of the net income before income tax of the
corporation during the preceding year.79
When it comes to officers, no specific prohibition is found in the
Corporation Code. In Rogers v. Hill,80 there appeared a provision in the by-laws
of the corporation, which set a formula has been set by which to determine other
than the per diem, the compensation of directors. The compensation is usually
tied up with a certain percentage of the net income. For example 1% of net
income is reasonable enough. But in multi-million corporations like San Miguel,
even the 1% of net income as salary of the directors will go by the millions
already. Therefore, when the amount becomes huge and unreasonable, at that
point the courts may go in and in fact suspend the enforcement of the by-law
provision. What does this mean? The general rule is that the courts of law will
not meddle into business determination, one of which is the salary scale of
people. Except when it comes to the area of compensation of directors. The
courts have and will continue to come in on this area. If they find that the
compensation is unreasonable, then the courts will invalidate or render
unenforceable such a determination.
76
Likewise, Section 15 of the General Banking Law of 2000 provides that the meeting of the
board of directors of banks may be conducted through modern technologies such as, but not
limited to, teleconferencing and videoconferencing.
77
SEC Opinion, 21 January 1992, XXVI SEC QUARTERLY BULLETIN 6 (No. 2, June 1992).
78
The SEC has opined that nothing in the Corporation Code authorizes the corporation to
pay stockholders or members per diem for attendance in meetings, and that Section 47 of the
Code provides compensation to directors and trustees to the exclusion of stockholders and
members since the latter do not render service but attend meetings in the exercise of their
personal rights. SEC Opinion, 30 June 1971, SEC FOLIO 1960-1976, at p. 477.
79
80
289 U.S. 582.
Generally, dividends and compensation policies represent areas of
conflicts-of-interests. In cases where there is a danger of conflict situation, and
the Board will be in a position to choose between their personal interests and
those of the corporation, and other persons, namely the corporate creditors, it
grants courts jurisdiction to intervene in the exercise of judicial powers, in order
to make sure that the members of the board will not abuse the powers granted to
them. Conflicts-of-interests situations are clearly an exception to the business
judgment rule.
The law therefore draws a clear distinction between the functions of
directors and trustees, on the one hand, and the officers on the other hand. In
Western Institute of Technology, Inc. v. Salas,81 the Court held that “[d]irectors
and trustees are not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office, founded on the
presumption that directors and trustees render service gratuitously, and that the
return upon their shares adequately furnishes the motives for service, without
compensation.”82 It held that under Section 30 of the Corporation Code, there are
two (2) ways by which members of the board can be granted compensation apart
from reasonable per diems: (a) when there is a provision in the by-laws fixing
their compensation; and (b) when the stockholders representing a majority of the
outstanding capital stock at a regular or special meeting agree to give them
compensation, and concluded that “[f]rom the language of Section 30, it may also
be deduced that members of the board may also receive compensation, when
they render services to the corporation in a capacity other than as directors or
trustees of the corporation.”
The Court then held in Western Institute of Technology that position of
being Chairman and Vice-Chairman, like that of Treasurer and Secretary, were
considered by the officers as not mere directorship position, but officership
position that would entitle the occupants to compensation. Likewise, the limitation
placed under Section 30 of the Corporation Code that directors cannot receive
compensation exceeding 10% of the net income of the corporation, would not
apply to the compensation given to such positions since it is being given in their
capacity as officers of the corporation and not as board members.
CORPORATE OFFICERS
1. Theory on the Power of Board to Delegate its
Authority to Corporate Officers
Although Section 23 of the Corporation Code provides that 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, nevertheless, just as a
natural person may authorize another to do certain acts for and on his behalf, the
81
278 SCRA 216, 86 SCAD 315 (1997).
82
Ibid, at 223, citing AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE COMMERCIAL
LAWS OF THE PHILIPPINES, Vol. 3, 1988 ed., p. 259.
board of directors may validly delegate some of its functions and powers to
officers, committees or agents.83 The authority of such individuals to bind the
corporation is generally derived from law, corporate by-laws, and authorizations
from the board, either expressly or impliedly by habit, custom or acquiescence in
the general course of business.84
Consequently, the general principles of agency govern the relation
between the corporation and its officers or agents, subject to the articles of
incorporation, by-laws, or relevant provisions of law. The Supreme Court has
therefore held: “A corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that the authority to do
so has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that it
has conferred.”85
2. Two Levels of Discussions of Corporate Officership

In Corporate Law, there are two levels of discussions when it comes to the
coverage of "corporate officers". The first level, relates to the power of the board
of directors to hire and terminate officers in the exercise of business judgment, as
contrasted from non-officers who are protected by the security of tenure policy
under Labor Law, a policy embodied in the Constitution. As will be discussed
hereunder, the test of "officers" under first level is based on an arbitrary formula,
and does not necessarily go into the nature or importance of the position held;
and that the nature of the office is not essential in determining such type of
"officership."
The second level of determination of who are corporate officers deals on
the distinction of corporate officers from non-officers to determine who are bound
by the duties of loyalty and diligence. Under Section 31 of the Corporation Code,
both directors and officers are jointly and severally liable for assenting to patently
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
interest in conflict with their duty as such directors or officers. Non-officers
therefore are not generally imposed any duty of loyalty or diligence. The
differentiation of such "officers" from non-officers must necessarily lie on the
nature of the office held by them.
83
People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 297 SCRA 170, 182,
99 SCAD 482, 495 (1998).
84
Ibid.
85
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645,
99 SCAD 281, 294 (1998); also BA Finance Corporation v. Court of Appeals, 211 SCRA 112
(1992).
3. Theory on Power of Board to Appointment/
Terminate Corporate Officers
Officers of the corporation are within the business judgment of the board
of directors to terminate in the absence of a specific period of employments
provided in their contracts or in the by-laws. It has been held by the Supreme
Court that “[a] corporate officer’s dismissal is always a corporate act, or an intra-
corporate controversy, and the nature is not altered by the reason or wisdom with
which the Board of Directors may have in taking such action.86
In Mita Pardo de Tavera v. Philippine Tuberculosis Society, Inc.,87 it was
held that since the letter of appointment as Executive Secretary to the Board of
the officer did not contain a fixed term, the implication is that appointee held an
appointment at the pleasure of the appointing power, which in essence was
temporary in nature, and co-extensive with the desire of the board of directors.
When the board opted to replace the incumbent, technically there was no
removal but only an expiration of the term and in an expiration of term, there is
no need of prior notice, due hearing or sufficient grounds before the incumbent
can be separated from office.
The ruling in De Tavera case was founded on the fact that the disputed
position of Executive Secretary was also provided for in the Code of By-Laws of
the Philippine Tuberculosis Society, Inc.
a. Two Disciplines Diverging in Corporate

Officership Issues
In strict corporate sense, the terms of corporate officers is co-terminous
with that of the board. It can even be said that corporate officers serve at the
pleasure of the board. This is a fundamental doctrine in Corporate Law because
the ability of the board to hire and terminate officers lies at the very heart of the
operations of the corporation; it is part of the exercise of the business judgment
of the board.
On the other, under Labor Laws, corporate officers are also looked upon
as employees, and the corporation as the employer. Consequently, the protective
policies of the Labor Code, as well as the Constitution (e.g., due process and
security of tenure) are also made to apply to corporate officers.
It is the divergence of policies and principles in Corporate Law and Labor
Law that creates jurisprudential tension, and has spun several clarificatory
doctrines on the matter.
86
Tabang v. NLRC, 266 SCRA 462, 78 SCAD 174 (1997); Fortune Cement Corporation v.
NLRC, 193 SCRA 258 (1991). Tabang also held: “An ‘office’ is created by the charter of the
corporation and the officer is elected by the directors or stockholders (2 Fletcher Cyc. Corp. Ch.
II, Sec. 266). On the other hand, an “employee” usually occupies no office and generally is
employed not by action of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such employee.”
87
112 SCRA 243 (1982).
The issue of who are corporate officers was essential in determining who
had proper jurisdiction in cases involving officers, whether it was the SEC under
Section 5 of Pres. Decree 902-A or the NLRC. Pursuant to Section 5.2 of the
Securities Regulation Code,88 the quasi-judicial jurisdiction of the SEC under
Section 5 of the Decree has been transferred to the Regional Trial Courts (RTC).
The issue therefore as to who are properly the officers of a corporation would still
be relevant as to determining whether it is the RTC or the NLRC which would
have proper jurisdiction over cases involving the appointment and termination of
corporate officers.
4. Election or Appointment of Officers

Under Section 25 of the Corporation Code, immediately after their
election, the directors of a corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or may not be a director,
a secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two 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.
The reason for the prohibition of the President also occupying the position
of treasurer or secretary at the same time is to prevent an abuse of power and
discretion, and to provide a system of check and balance between such sensitive
positions. It is not hard to imagine the temptations allayed to a President, if he
could certify unauthorized expenditures, if he is also treasurer, or to issue a
Secretary's Certificate over power or authority over which the board had not
granted him.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation.
In a stock corporation, the appointment of an officer is solely within the
power of the board of directors. In a non-stock corporation, unless otherwise
provided for in the articles of incorporation or the by-laws, officers of a non-stock
corporation may be elected by the members.89
5. President
People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals,90
discussed the nature of the position of the President and the powers vested in
him by reason of such position, thus:
Inasmuch as a corporate president is often given general

supervision and control over corporate operations, the strict
rule that said officer has no inherent power to act for the
88
Rep. Act No. 8799.
89
90
297 SCRA 170, 99 SCAD 482 (1998).
corporation is slowly giving way to the realization that such
officer has certain limited powers in transactions of the usual
and ordinary business of the corporation. In the absence of a
charter or bylaw provision to the contrary, the president is
presumed to have the authority to act within the domain of the
general objectives of the corporation’s business and within the
scope of his or her usual duties. Hence, it has been ruled in
other jurisdiction that the president of the corporation
possesses the power to enter into a contract for the
corporation, when the “conduct on the part of both the
president and the corporation [shows] that he had been in the
habit of acting in similar matters on behalf of the company and
that the company had authorized him so to act and had
recognized, approved and ratified his former and similar
actions. Furthermore, a party dealing with the president of a
corporation is entitled to assume that he has the authority to
enter, on behalf of the corporation, into contracts that are
within the scope of the powers of said corporation and that do
not violate any statute or rule on public policy.91
6. Corporate Secretary
Torres, Jr. v. Court of Appeals,92 had held that in the absence of
provisions to the contrary, the corporate secretary is the custodian of corporate
records—he keeps the stock and transfer book and makes proper and necessary
entries therein. It is the duty and obligation of the corporate secretary to register
valid transfers of stock in the books of the corporation; and in the event he
refuses to comply with such duty, the transferor-stockholder may rightfully bring
suit to compel performance.
When a Secretary’s Certificate is regular on its face, it can be relied upon
by a third party who does not have to investigate the truths of the facts contained
in such certification; otherwise business transactions of corporations would
become tortuously slow and unnecessarily hampered.93
7. Corporate Treasurer
A corporate treasurer’s function have generally been described as “to
receive and keeps funds of the corporation, and to disburse them in accordance
with the authority given him by the board or the properly authorized officers.”
Unless duly authorized, a treasurer, whose power are limited, cannot bind
the corporation in a sale of its assets. Selling is obviously foreign to a corporate
treasurer’s function. When the corporation categorically denies ever having
authorized its treasurer to sell the subject parcel of land, the buyer had the
91
Ibid, at pp. 185-186.
92
278 SCRA 793, 86 SCAD 812 (1997).
93
Esguerra v. Court of Appeals, 267 SCRA 380, 78 SCAD 741 (1997).
burden of proving that the treasurer was in fact authorized to represent and bind
the allegedly selling corporation in the transaction. And failing to discharge such
burden, and failing to show any provision of the articles of incorporation, bylaws
or board resolution to prove that the treasurer possessed such power, the sale is
void and not binding on the alleged selling corporation.94
8. Corporate “Agents” for Purposes of Service

of Summons upon Corporation
The Supreme Court in Pabon v. NLRC,95 also discussed the extent of
coverage of the term “corporate agents,” relying upon the Black’s Law Dictionary
which defines an “agent” as “a business representative, whose function is to
bring about, modify, affect, accept performance of, or terminate contractual
obligations between principal and third persons.” To this extent, an “agent” may
also be shown to represent his principal in some one or more of his relations to
others, even though he may not have the power to enter into contracts. The rules
on service of process make service on “agent” sufficient. It does not in any way
distinguish whether the “agent” be general or special, but is complied with even
by a service upon an agent having limited authority to represent his principal. As
such, it does not necessarily connote an officer of the corporation. However,
though this may include employees other than officers of a corporation, this does
not include employees whose duties are not so integrated to the business that
their absence or presence will not toll the entire operation of the business.
Pabon held that for purposes of determining proper service of summons to
a corporation in a quasi-judicial proceeding before the NLRC, a bookkeeper can
be considered as an agent of the corporation within the purview of the Rules of
Court. The rationale of all rules with respect to service of process on a
corporation is that such service must be made to an agent or a representative so
integrated with the corporation sued as to make it a priori supposable that he will
realize his responsibilities and know what he should do with any legal papers
served on him. The bookkeeper’s task is one under consideration that his regular
recording of the corporation’s “business accounts” and “essential facts about the
transactions of a business or enterprise” safeguards the corporation from
possible fraud being committed adverse to its own corporate interest.
Section 11, Rule 14 of the 1997 Rules of Civil Procedure has now
removed “agent” from those enumerated officers authorized to receive summons
for a corporate defendant. Consequently, the case-law on the matter may no
longer apply.
E.B. Villarosa & Partners Co., Ltd. v. Benito,96 has clearly reversed the
previous rulings on service of summons to “agents” of the corporate defendant.
Consequently, the following doctrines no longer apply: service of summons upon
94
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645,
99 SCAD 281, 295 (1998).
95
296 SCRA 7, 98 SCAD 665 (1998).
96
312 SCRA 65, 71-72 (1999).
a construction project manager;97 a corporation’s assistant manager;98 ordinary
clerk of a corporation;99 private secretary of corporate executives;100 retained
counsel;101 officials who had charge or control of the operations of the
corporation, like the assistant general manager;102 or the corporation’s Chief
Finance and Administrative Officer.103
COMMON LAW NATURE OF DUTIES OF

DIRECTORS, TRUSTEES AND OFFICERS
In Philippine setting, the three-fold duties of directors, trustees and officers
are the duty of obedience, duty of diligence, and the duty of loyalty.
The present Corporation Code contains specific provisions governing the
duties and liabilities of directors, trustees and officers of the corporation, under
Sections 31, 32, 33 and 34. Those sections are new in the Code, and have no
counterpart in the old Corporation Law. Nevertheless, even under the old
Corporation Law, the three-fold duties of directors, trustees and officers were
well-recognized.
Palting v. San Jose Petroleum, Inc.,104 considered provisions in the by-
laws of a corporation seeking to have its securities registered and distributed in
the Philippines. The Supreme Court held:
These provisions are in direct opposition to our

corporation law and corporate practices in this country. These
provisions alone, would outlaw any corporation locally
organized or doing business in this jurisdiction. Considering
the unique and unusual provision that no contract or
transaction between the company and any other association or
corporation shall be affected except in case of fraud, by the
fact that any of the directors or officers of the company may be
interested in or are directors or officers of such other
associations or corporation; and that none of such contracts or
transactions of this company with any person or persons,
firms, associations or corporation shall be affected by the fact
that any director or officer of this company is a party to or has
an interest in such contract or transaction or has any
connection with such person or persons. firms, associations or
corporations; and that any and all persons who may become
97
Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).
98
Gesulgon v. NLRC, 219 SCRA 561 (1993).
99
Golden Country Farms, Inc. v. Sanvar Development Corporation, 214 SCRA 295 (1992);
G & G Trading Corporation v. Court of Appeals, 158 SCRA 466 (1988).
100
Summit Trading and Development Corporation v. Avendaño, 135 SCRA 397 (1985).
101
Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966).
102
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978).
103
Far Corporation v. Francisco, 146 SCRA 197 (1986). See also Filoil Marketing Corp. vs.
Marine Development Corp. of the Philippines, 177 SCRA 86 (1982).
104
18 SCRA 924 (1966).
directors or officers of this company are hereby relieved of all
responsibility which they would otherwise incur by reason of
any contract entered into which this company either for their
own benefit, or for the benefit of any person, firm, association
or corporation in which they may be interested.105
In that case the Court held: "The impact of these provisions upon the
traditional fiduciary relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are called upon to
protect the interest of investors. The directors and officers of the company can do
anything, short of actual fraud, with the affairs of the corporation, even to benefit
themselves directly and other persons or entities in which they are interested,
and with immunity because of the advance condonation or relief from
responsibility by reason of such acts. This and the other provisions which
authorized the election of non-stockholders as directors, completely disassociate
the stockholders from the government and management of the business in which
they have invested."106
Prime White Cement Corp. v. Intermediate Appellate Court,107 also
recognized that the fiduciary obligations of the directors and trustees of a
corporation, as they are now set out in the Corporation Code, merely incorporate
well-settled principles in Corporate Law.108
It is clear therefore that the duties and obligations of directors, trustees
and officers of the corporation have their bases in common law, derived from the
nature and relationships created in the corporate setting and the fiduciary nature
of the positions held by such persons. Therefore, the attempt under the
Corporation Code to define in statutory form the nature of the duties and
obligations of directors, trustees and officers can only be construed as an attempt
to cover most of the such situations, but cannot be considered as to exclude
other forms of violations of such duties as to be outside of corporate sanction.
For example, the violation of the duty of loyalty found in Sections 33 and
34 of the Corporation Code where a conflict of interest is present either in direct
dealings of an officer with the corporation or in dealings between corporations
having interlocking directors. In a situation where there would still be conflict of
interests that may work injustice to a corporation by a director or trustee who is in
a conflict situation, but that the circumstances do not squarely fall within the
coverage of Sections 33 and 34 of the Corporation Code, nevertheless a cause
of action would still arise in favor of the corporation to annul such a contract
entered into its name.
105
Ibid, at pp. 942-943.
106
Ibid.
107
220 SCRA 103 (1993).
108
Ibid, at p. 112.
GENERAL RULE ON DUTIES AND LIABILITIES OF
DIRECTORS, TRUSTEES AND OFFICERS
The general rule is that members of the board and officers of a corporation
who purport to act for and in behalf of the corporation, keep within the lawful
scope of their authority in so acting, and act in good faith, do not become liable,
whether civilly or otherwise, for the consequences of their acts. Those acts, when
they are such a nature and are done under such circumstances, are properly
attributed to the corporation alone and no personal liability is incurred by such
officers and Board members.109
Even in a situation where a contract was entered into with the corporation
and it specified that it was signed in consideration of the President of the
corporation and that if the latter should cease to be the manager of the
corporation that the contract would terminate, did not make the President liable
personally under the contract since the Supreme Court considered it as
"elementary that a corporation has a personality separate and distinct from the
persons composing it," and nothing in the contract provided that the President
would be bound in his personal capacity.110
A corporate officer cannot be held personally liable for a corporate debt
simply because he had executed the contract for and in behalf of the corporation.
It held that when a corporate officer acts in behalf of a corporation pursuant to his
authority, is "a corporate act for which only the corporation should be made liable
for any obligations arising from them."111
The President and General Manager of a corporation who entered into
and signed a contract in his official capacity cannot be made liable thereunder in
his individual capacity in the absence of stipulation to that effect due to the
personality of the corporation being separate and distinct from the persons
composing it.112
The proper appreciation of the director's role and function would require
that although a director may have been voted into office by a block of
shareholders, it is the director's duty to vote according to his own independent
judgment and his own conscience as to what is in the best interests of the
corporation.113
DUTY OF OBEDIENCE
Since the Corporation Code still adheres to the ultra vires doctrine,114 then
the Board of Directors or Trustees of a corporation are bound to observe the duty
109
Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55, 63 (1992).
110
Banque Generale Belge v. Walter Bull & Co., Inc., 84 Phil. 164, 167 (1949).
111
Western Agro Industrial Corporation v. Court of Appeals, 188 SCRA 709 (1990).
112
Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992), citing Banque Generale
Belge v. Walter Bull and Co., 84 Phil. 164 (1949).
113
San Miguel Corp. v. Kahn, 176 SCRA 447, 463 (1989).
114
of obedience, which means that they will direct the affairs of the corporation only
in accordance with the purposes for which it was organized. Section 26 of the
Corporation Code expressly provides that “directors or trustees and officers to be
elected shall perform the duties enjoined on them by law and by the by-laws of
the corporation.”
As one author has said: "Although the corporate powers of private
corporations organized under the Corporation Law are exercised and controlled
by a board of directors, yet these powers of the board are necessarily limited,
because all the limitations imposed by law on private corporation are necessarily
imposed also on the board of directors who act in behalf of the corporation. In
other words, what is ultra vires or beyond the power on the part of the
corporation must also be ultra vires or beyond the power on the part of its board
of directors."115
DUTY OF DILIGENCE
Under Section 31 of the Corporation Code, directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation, shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members and
other persons.
The liability of guilty directors shall be jointly and severally; the solidary
obligation is availabe not only to the corporation but also to stockholders and
others who might suffer from such wrongful act.
The liability is such that a director need to have voted for in order to be
liable, but mere assent to a wrongful act or contract would make him liable.
Therefore, when an unlawful act or contract is for decision of the board, it is not
enough that the director abstains from voting; i is important to cast a negative
vote and allow such to be placed of record in order to escape liability.
Benguet Electric Cooperative, Inc. v. NLRC,116 held that Section 31 of the
Corporation Code applies even to government-owned and -controlled
corporations, pursuant to the provisions of Section 4 of the Code that renders the
provisions of the Corporation Code applicable in a supplementary manner to all
corporations, including those with special or individual charters so long as those
provisions are not inconsistent with such charters.
Benguet Electric Cooperative also held "[t]he dismissal of an officer or
employee in bad faith, without lawful cause and without procedural due process,
is an act that is contract legem. It cannot be supposed that members of the
boards of directors derive any authority to violate the express mandates of law or
the clear legal rights of their officers and employees by simply purporting to act
115
116
for the corporation they control."117 In addition, it held that the corporation would
then have a right to be reimbursed from the board of directors for any amounts
that the corporation is adjudged to have to pay to a third party claimant by reason
of the unlawful decision of the board of directors. "Such right of reimbursement is
essential if the innocent members [of the corporation] are not to be penalized for
the acts of respondent Board members which were both done in bad faith and
ultra vires. The liability-generating acts here are the personal and individual acts
of respondents Board members, and are not properly attributed to [the
corporation] itself."118
When it comes to the acts and contracts of the board of directors and
officers of the corporation, Board of Liquidators v. Kalaw,119 defined the meaning
and coverage of "bad faith," thus:
Rightfully had it been said that bad faith does not simply
connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru some motive or
interest or ill will; it partakes of the nature of fraud. Applying
this precept to the given facts herein, we find that there was no
"dishonest purpose," or "some moral obliquity," or "conscious
doing of wrong," or "breach of a known duty," or "some motive
or interest or ill will:” that "partakes of the nature of fraud.”
Nor was it even intimated here that the NACOCO
directors acted for personal reasons, or to serve their own
private interests, or to pocket money at the expense of the
corporation. We have had occasion to affirm that bad faith
contemplates a "state of mind affirmatively operating with
future design or with some motive of self-interest or ill will or
for ulterior purpose,"120 . . ."Upon a close examination of the
reported cases although there are many dicta no easily
reconcilable, yet I have found no judgment or decree which
has held directors to account, except when they have
themselves been personally guilty of some fraud on the
corporation, or have known and connived at some fraud in
others, or where such fraud might have been prevented had
they given ordinary attention to their duties. . ."121 Plaintiff did
not even dare charge its defendant-directors with any of these
malevolent acts.122
117
Ibid, at p. 66.
118
Ibid.
119
20 SCRA 986, 1006-1007 (1967)
120
Citing Air France v. Carascoso, 18 SCRA 155 (1966).
121
Briggs v. Spaulding, 141 U.S. 132, 148-149, 35 L.Ed. 662, 669, quotes with approval
from Judge Sherwood in Sperings Appl., 71 Pa. 11.
122
Ibid.
The general rule however that mere ownership of majority of the shares of
stock in a corporation, or mere officership itself does not make one personally
liable:
It is well known that a corporation is an artificial being

invested by law with a personality of its own, separate and
distinct from that of its stockholders and from that of its officers
who manage and rum its affairs. The mere fact that its
personality is owing to a legal fiction and that it necessarily has
to act through its agents, does not make the latter personally
liable on a contract duly entered into, or for an act lawfully
performed, by them for and in its behalf. The legal fiction by
which the personality of a corporation is created is a practical
reality and necessity. Without it no corporate entities may exist
and no corporate business may be transacted. Such legal
fiction may be disregarded only when an attempt is made to
use it as a cloak to hide an unlawful or fraudulent purpose. No
such thing has been alleged or proven in this case. It has not
been alleged nor even intimated that Vazquez personally
benefitted by the contract of sale in question and that he is
merely invoking the legal fiction to avoid personal liability.
Neither is it contended that he entered into said contract for
the corporation in bad faith and with intent to defraud the
plaintiff. We find no legal and factual basis upon which to hold
him liable on the contract either principally or subsidiarily.
. . . The fact that the corporation, acting through
Vazquez as its manager, was guilty of negligence in the
fulfillment of the contract, did not make Vazquez principally or
even subsidiarily liable for such negligence. Since it was the
corporation's contract, its nonfulfillment, whether due to
negligence or fault or to any other cause, made the
corporation and not its agent liable.123
Even under the old Corporation Law, which unlike the present Corporation
Code, did not have specific provisions governing the liabilities of directors,
trustees, or officers, nevertheless the duties of diligence and loyalty were clearly
recognized to exist.
An example of violation of the duty of diligence covering a conflict-of-
interests situation is found in Steinberg v. Velasco.124 In that case, the directors
of the corporation were held personally liable for causing the corporation to
purchase their own shares of stock and declaring dividends, which because of
the failure to take into consideration of worthless receivables, worked to the
detriment of the creditors. The Supreme Court held that the directors did not act
with diligence in taking the word of their chairman and not making an informed
123
Vazquez v. Borja, 74 Phil. 560, 566-568 (1944).
124
52 Phil. 953 (1929).
decision based on the facts then available to them and on not relying on other
documents available to them.
DUTY OF LOYALTY; CORPORATE OPPORTUNITY DOCTRINE

Under Section 31 of the Corporation Code, directors or trustees who
acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other
persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence, as to which equity imposes
a liability upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued
to the corporation.
On the other hand, under Section 34, where a director, by virtue of his
office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits which should belong to the corporation, he
must "account to the latter for all such profits by refunding the same, unless his
act has been ratified by a vote of the "stockholders" owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked his own funds in the
venture.
The differences between the second paragraph of Section 31 and Section
34 are therefore as follows:
(a) While they both cover the same subject matter which is
business opportunity but they concern different personalities;
Section 34 is only applicable to directors and not to officers,
while Section 31, is applicable to directors, trustees and
officers;
(b) Section 34 allows a ratification of a transaction by a self-
dealing director by the vote of stockholders representing
two-thirds (2/3) of the outstanding capital stock; Section 31
does not cover ratification, and even if 99% of the
stockholders affirm the transactions, the remaining minority
shareholders can still oppose such a self-dealing transaction
and file a derivative suit for and in behalf of the corporation.
Why is it that the self-dealing transaction entered into by a director can be

ratified while that entered by an officer cannot be ratified?
One theory that has been offered is that directors and trustees are the
direct elected representatives of the stockholders or members. Under the theory
of delegated power, directors and trustees are responsible directly to the
stockholders and members. Consequently, when they breach their duty of
obedience, power has been granted to their principle to waive any cause of
action on their delegates.
On the other hand, officers are not generally elected by the stockholders
or members, but actually appointed by the board. Therefore, the board as mere
delegates of the stockholders and members, cannot waive the officer's
misfeasance.
The other theory is that officers are mandated to have a greater degree of
loyalty to the corporation than the directors since officers spend more time with
the affairs of the corporation, getting salary from the corporation and working day
to day for the corporation; whereas directors usually meet only once a month and
have other business aside from their being directors. Therefore, the closeness to
corporate operations and secrets imposes upon corporate officers a higher
degree of liability in case of breach of the duty of loyalty to which the law does
not grant a reprieve, not even by way of ratification by the stockholders or
members.
In a situation where violation of the duty of loyalty on the part of the
majority stockholder who also acted as officer of the corporation warranted his
removal or seeking dissolution on the part of the minority stockholder, the Court
in Chase v. Buencamino, Sr.,125 held: "The removal of a stockholder (in this case
a majority stockholder) from the management of the corporation and/or the
dissolution of a corporation in a suit filed by a minority stockholder is a drastic
measure. It should be resorted to only when the necessity is clear which is not
the situation in the case at bar."
The Court approved the mechanism provided by the trial court whereby
instead of the appointment of a receiver, the minority stockholder was given a
veto right, appealable to the court, on all decisions of management.
Chase also characterized the obligation of the officer who violates his duty
of loyalty to reimburse the corporation for profits earned based on the principles
of trust: "He willingly benefited therefrom, that was a fraud upon Amparts and on
the broad of principle of agency and trust, 1455, 1891, New Civil Code, he should
surrender thereon, his gains."
DEALINGS OF DIRECTORS, TRUSTEES

OR OFFICERS WITH CORPORATION
Under Section 35 of the Corporation Code, a contract of the corporation
with one or more of its directors or trustees or officers is voidable at the option of
such corporation, unless all the following conditions are present that:
125
136 SCRA 365, 385 (1983).
(a) The presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
(b) The vote of such director or trustee was not necessary for
the approval of the contract;
(c) The contract is fair and reasonable under the circumstances;
and
(d) In the case of an officer, the contract with the officer has
been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph
is absent, in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock, or of two-thirds (2/3) of the members, as the case
may be, in a meeting called for the purpose. However, in order that such
ratificatory vote would be valid, it is required that there be full disclosure of the
adverse interest of the directors or trustees involved is made.
In Mead v. McCullough,126 it was held that while a corporation remains
solvent, there is no no reason "why a director or officer, by the authority of a
majority of the stockholders or board of managers, may not deal with the
corporation, loan it money or buy property from it, in like manner as a stranger.
So long as a purely private corporation remains solvent, its directors are agents
or trustees for the stockholders. They owe no duties or obligations to others. But
the moment such a corporation becomes insolvent, its directors are trustees of all
the creditors, whether they are members of the corporation or not, and must
manage its property and assets with strict regard to their interest; and if they are
themselves creditors while the insolvent corporation is under their management,
they will not be permitted to secure to themselves by purchasing the corporate
property or otherwise any personal advantage over the other creditors.
Nevertheless, a director or officer may in good faith and for an adequate
consideration purchase from a majority of the directors or stockholders the
property even of an insolvent corporation, and a sale thus made to him is valid
and binding upon the minority."127
Mead held that where a director in a corporation accepts a position in
which his duties are incompatible with those as such director it is presumed that
he has abandoned his office as director of the corporation.
Prime White Cement Corp. v. Intermediate Appellate Court,128 recognizing
that the provisions of Section 31 of the Corporation Code on self-dealing merely
incorporated well-established principles in Corporate Law, applied the procedure
required therein for determining the validity of a contract entered into by the
corporation with its director.
126
21 Phil. 95 (1911).
127
Ibid, at pp. 113-114.
128
220 SCRA 103 (1993).
The facts in that case showed that a director entered into a Dealership
Agreement with the corporation, signed by its chairman and president, for the
corporation to supply 20,000 bags of white cement per month for five years at a
fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the
contract unless new conditions are accepted providing for new price formula. The
dealing director sued for specific performance on the contract. The Court held
that although the general rule when it comes to President entering into a contract
for the corporation is that when the contract is in the ordinary course of business,
provided the same is reasonable under the circumstances, the contract binds the
corporation, nevertheless the rule does not apply when the contract is entered
into with a director or officer of the corporation itself. A director holds a position of
trust and as such, he owes a duty of loyalty to his corporation, and his contracts
with the corporation must always be at reasonable terms, otherwise the contract
is void or voidable at the option of the corporation.
The Court found that the terms of the Dealership Agreement were
unreasonable for the corporation. It held that the dealing director was a
businessman himself and must have known, or at least must be presumed to
know, that at that time, prices of commodities in general, and white cement in
particular, were not stable and were expected to rise. "At the time of the contract,
petitioner corporation had not even commenced the manufacture of white
cement, the reason why delivery was not to begin until 14 months later. . . no
provision was made in the `dealership agreement' to allow for an increase in
price mutually acceptable to the parties." It held that the unfairness in the
contract is also a basis which renders a contract entered into by the President,
without authority from the Board of Directors, void or voidable, although it may
have been in the ordinary course of business. Finally, it noted that there was no
showing that the stockholders had ratified the agreement or that they were fully
aware of its provisions.
CONTRACTS BETWEEN CORPORATIONS

WITH INTERLOCKING DIRECTORS
Under Section 33 of the Corporation, except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall not be
invalidated on that ground alone. However, if the interest of the interlocking
directors in one corporation or corporations is merely nominal, he shall be subject
to the same ratificatory vote required from stockholders and members, as in the
case of dealings of directors, trustees and officers with their corporation.
Stockholdings exceeding twenty percent (20%) of the outstanding capital
stock shall be considered substantial for purpose of interlocking directors.
LIABILITY OF OFFICERS129
1. General Rule on Liability of Officers
The general rule is laid down in Palay, Inc. v. Clave,130 that unless
"sufficient proof exists on record" that an officer (in that case, a President and
controlling stockholder) has "used the corporation to defraud private respondent"
he cannot be made personally liable "just because he ‘appears to be the
controlling stockholder.'"131 "Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate corporate personality."132
Pabalan v. NLRC,133 held that "[t]he settled rule is that the corporation is
vested by law with a personality separate and distinct from the persons
composing it, including its officers as well as from that of any other entity to which
it may be related . . . [and an officer] acting in good faith within the scope of his
authority . . . cannot be held personally liable for damages."134
Pabalan refused to hold the officers of the corporation personally liable for
corporate obligations on employees' wages, since "[i]n this particular case
complainants did not allege or show that petitioners, as officers of the corporation
deliberately and maliciously designed to evade the financial obligation of the
corporation to its employees, or used the transfer of the employees as a means
to perpetrate an illegal act or as a vehicle for evasion of existing obligation, the
circumvention of statutes, or to confuse the legitimate issues."135
In R.F. Sugay v. Reyes,136 an attempt by the corporation to avoid liability
by distancing itself from the acts of the its President was struck down with the
Court holding that a corporation may not distance itself from the acts of a senior
officer: "the dual roles of Romulo F. Sugay should not be allowed to confuse the
facts."137
To the same effect is the ruling in Paradise Sauna Massage Corporation
v. Ng,138 where it was held that an officer-stockholder who is a party signing in
behalf of the corporation to a fraudulent contract cannot claim the benefit of
separate juridical entity: "Thus, being a party to a simulated contract of
management, petitioner Uy cannot be permitted to escape liability under the said
129
This section originally appeared as part of the article Restatement of the Doctrine of
Piercing the Veil of Corporate Fiction, published in 37 ATENEO L. J. 19 (Number 2, June, 1993).
130
124 SCRA 638 (1983).
131
Ibid, at pp. 648-649.
132
Ibid, at p. 649.
133
184 SCRA 495 (1990).
134
Ibid, at p. 499.
135
Ibid, at p. 500.
136
12 SCRA 700 (1964).
137
Ibid, at p. 705.
138
181 SCRA 719 (1990).
contract by using the corporate entity theory. This is one instance when the veil
of corporate entity has to be pierced to avoid injustice and inequity."139
Tramat Mercantile, Inc. v. Court of Appeals,140 holds that personal liability
of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:
(a) He assents (i) to a patently unlawful act of the corporation, or

(ii) for bad faith or gross negligence in directing its affairs, or
(iii) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons (Section 31,
Corporation Code);
(b) He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto (Section 65,
Corporation Code);
(c) He agrees to hold himself personally and solidarily liable with
the corporation (De Asis & Co., Inc. v. Court of Appeals, 136
SCRA 599 [1985]);
(d) He is made, by a specific provision of law, to personally
answer for his corporate action (Exemplified in Section 144,
Corporation Code; also Section 13, Pres. Decree No. 115, or
the Trust Receipts Law).141
In addition, jurisprudence has also held that the officer of the corporation
can be held solidarily liable with the corporation for simulated or fraudulent
contracts entered into in behalf of the corporation.142
National Power Corp. v. Court of Appeals,143 held that the finding of
solidarily liable among the corporation and its officers and members of the Board
of Directors would be patently baseless when the decision of the trial court
contains no such allegation, finding or conclusion regarding particular acts
committed by said officers and directors that show them to have individually
guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings
with an entity which dealt with their corporation; and that in fact it was only in the
dispositive portion of the decision of the trial court that solidary liability as such
was first mentioned. It also ruled that when the corporate officers and directors
are sued merely as nominal parties in their official capacities as such, by that
reason alone they cannot be made personally liable for the judgment against the
corporation.
139
Ibid, at p. 729.
140
238 SCRA 14, 56 SCAD 450 (1994).
141
The listing was reiterated in Santos v. NLRC, 254 SCRA 673, 682, 69 SCAD 390, 398
(1996); Uichico v. NLRC, 273 SCRA 35, 83 SCAD 31 (1997).
142
Paradise Sauna v. Ng, 181 SCRA 719 (1990).
143
273 SCRA 419 (1997).
2. Different Strain in Labor Law
In the field of labor, however, liability of corporate officers for corporate
obligations to employees seems to have taken two different strains.
In A.C. Ransom Labor Union-CCLU v. NLRC,144 the Court in interpreting
the Labor Code held that since a corporate employer is an artificial person, it
must have an officer who can be presumed to be the employer, being the
"person acting in the interest of (the) employer" as provided in the Labor Code.145
Therefore, A.C. Ransom held that "the responsible officer of the employer
corporation can be held personally, not to say even criminally, liable for non-
payment of backwages; and that in the absence of definite proof as to the identity
of an officer or officers of the corporation directly liable for failure to pay
backwages, the responsible officer is the president of the corporation jointly and
severally with other presidents of the same corporation."
In effect, A.C. Ransom would hold a corporate officer liable for corporate
obligations by the mere fact that he is the highest officer even when there is no
proof that he acted in the particular matter for the corporation.
Later, in Chua v. NLRC,146 the vice-president of the company was made
personally liable also for being the highest and most ranking official of the
corporation next to the President who was dismissed, for the latter's claim for
unpaid wages.
In Del Rosario v. NLRC,147 the Court (stating that the doctrine in A.C.
Ransom inapplicable without further explanation) refused to allow a writ of
execution against the properties of officers and stockholders for a judgment
rendered against the corporation which was later found without assets on the
ground that "[b]ut for the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established. It
cannot be presumed." In addition, it was held that "[t]he distinguishing marks of
fraud were therefore clearly apparent in A.C. Ransom. A new corporation was
created, owned by the same family, engaging in the same business and
operating in the same compound."
In short, Del Rosario re-affirmed the original doctrine before A.C. Ransom
pronouncement that in order for a corporate officer or stockholder to be held
liable for corporate debts it must clearly be shown that he had participated in the
fraudulent or unlawful act.
The principle was reinforced in Western Agro Industrial Corporation v.
Court of Appeals,148 which held that a corporate officer cannot be held personally
liable for a corporate debt simply because he had executed the contract for and
144
142 SCRA 269 (1986).
145
The decision interpreted the meaning of the word "employer" from Art. 212(c) of the
Labor Code, which provided: "(c) Èmployer' includes any person acting in the interest of an
employer, directly or indirectly. . ." Ibid, at p. 273.
146
182 SCRA 353 (1990).
147
187 SCRA 777 (1990).
148
188 SCRA 709 (1990).
in behalf of the corporation. It held that when a corporate officer acts in behalf of
a corporation pursuant to his authority, is "a corporate act for which only the
corporation should be made liable for any obligations arising from them."149
Two months after Del Rosario, the Court in Maglutac v. NLRC,150 held a
corporate officer liable for the claims against the corporation, relying upon the
A.C. Ransom ruling but only with respect to the doctrine that the responsible
officer of a corporation who had a hand in illegally dismissing an employee
should be held personally liable for the corporate obligations arising from such
act.
Prior to A.C. Ransom, the ruling of the Supreme Court in Garcia v.
NLRC,151 is that personal liability of corporate officers to dismissed employees
depends on whether such officer acted with evident malice and bad faith, and
when no evidence is adduced to show any of these circumstances, even the
acting officer dismissing the employees cannot be held personally liable. This
ruling was reiterated recently in Seaborne Carriers Corporation v. NLRC.152
Recently in Santos v. NLRC,153 clarified that Article 289 of the Labor
Code154 cannot be applied to hold the President of the corporation liable
personally because the provisions refers only to the imposition of penalties under
the Code." It held that when the termination of an officer is due , collectively, to
the need to further mtigiation of losses, the onset of the rainy season, the
insurgency problem in the area and the lack of funds to further support the
mining operations of the corporation, then the provision of Article 289 do not
apply.
The Court held that that the A.C. Ransom and Chua cases, which involved
holding the President and Vice-President, respectively, liable personally in the
absence of clear identification of the officer directly responsble for failure to pay
backwages, applied only because in both cases involved family-owned
corporations and rightfully applied the doctrined of piercing the veil of corporation
fiction.155 The Court upheld the basic rule enunciated in Sunio that "It is basic that
a corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal entity to
which it may be related. Mere ownership by a single stockholder or by another
corporation of all or nealry all of the capital stock of a corporation is not of itself
149
Ibid, at p. 718.
150
189 SCRA 767 (1990).
151
153 SCRA 639 (1987).
152
237 SCRA 343, 55 SCAD 842 (1994).
153
254 SCRA 673, 69 SCAD 390 (1996).
154
Art. 289 of the Labor Code reads: "ART. 289. Who are liable when committed by other
than natural person.--If the offense is committed by a corporation, trust, firm, partnership,
association or any other entity, the penalty shall be imposed upon the guilty officer or officers of
such corporation, trust, firm, partnership, association or entity."
155
254 SCRA 673, 683-684.
sufficient ground for isregarding the separate corporate personality," and that
"the Sunio doctrine still prevails."156
Reahs Corporation v. NLRC,157 reviewed the A.C. Ransom doctrine of
imposing solidarily liability on the highest officers of the corporation for judgment
on labor claims rendered against the corporation pursuant to Article 283 of the
Labor Code, and reviewed its application in subsequent cases of Maglutac,
Chua, Gudez and Pabalan. It reiterated the main doctrine of separate personality
of a corporation which should remain as the guiding rule in determining corporate
liability to its employees, and that at the very least, to justify solidary liability,
“there must be an allegation or showing that the officers of the corporation
deliberately or maliciously designed to evade the financial obligation of the
corporation to its employees,” or a showing that the officers indiscriminately
stopped its business to perpetuate an illegal act, as a vehicle for the evasion of
existing obligations, in circumvention of statutes, and to confuse legitimate
issues.
In Reahs the Supreme Court held that while there was no sufficient
evidence to conclude that the officers have indiscriminately stopped the entity’s
business, at the same time, they have opted to abstain from presenting sufficent
evidence to establish the serious and adverse financial condition of the company.
The Court held:
This uncaring attitude on the part of the officers of

Reahs’ gives credence to the supposition that they simply
ignored the side of the workers who, more or less, were only
demanding what is due them in accordance with law. In fine,
these officers were conscious that they corporation was
violating labor standard provisions but they did not act to
correct these violations; instead, they abruptly closed
business. Neither did they offer separation pay to the
employees as they conveniently resorted to a lame excuse
that they suffered serious business losses, knowing fully well
that they had no substantial proof in their hands to prove such
losses.
A review of the recent decisions of the Supreme Court clearly indicates that
the highest court of the land still has not figured out yet which doctrine it shall
uphold in Labor Laws.
Gudez v. NLRC,158 held that the President of a corporation that has closed
its business even upon the order of the Philippine Constabulary which
necessitated the termination of the employees was made jointly and solidary
liable for the termination benefits due to the separated employees, the Court
holding: “Thus, where the employer corporation is no longer existing and unable
156
Ibid, at pp. 684-685.
157
271 SCRA 247, 81 SCAD 634 (1997).
158
183 SCRA 644 (1990).
to satisfy the judgment in favor of the employee, the officers should be held liable
for acting on behalf of the corporation.”
Similarly in Carmelcraft Corporation v. NLRC,159 the Court rejected the
contention of the officer that she cannot be held personally liable for the labor
claims of employees of the corporate employer since it "is a distinct and separate
entity with a legal personality of its own . . . [and she] was only an agent of the
company carrying out the decisions of its board of directors.” The Court affirmed
the joint and soidary liable of the officer with the corporate employer especially
when it was found that she was “in fact and legal effect the corporation, being not
only its president and general manager but also its owner.”
In Valderrama v. NLRC,160 the Court reiterated that since a “corporation
can only act through its officers and agents . . . that any decision against the
company can be enforced against the officers in their personal capacities should
the corporation fail to satisfy the judgment against it . . . where the employer
corporation is no longer existing and unable to satisfy the judgment in favor of the
employee, the officer should be held liable for acting on behalf of the
corporation.”
AHS/Philippines v. Court of Appeals,161 held that corporate officers are not
personally liable for money claims of discharged employees unless they acted
with evident malice and bad faith in terminating their employment.
Uichico v. NLRC,162 held that in labor cases, particularly, corporate
directors and officers are solidarily liable with the corporation for the termination
of employment of corporate employees done with malice or in bad faith. In that
case, it is undisputed that the corporate officers have a direct hand in the illegal
dismissal of the employees. They were the one, who as high-ranking officers and
directors of the corporation, signed the Board Resolution retrenching the
employees on the feigned ground of serious business losses that had no basis
apart from an unsigned and unaudited Profit and Loss Statement which, to
repeat, had no evidentiary value whatsoever. This is indicating of bad faith on the
part of the corporate officers for which they can be held jointly and severally
liable with the Corporation for all the money claims of the illegally terminated
employees.
In Asionics Philippines, Inc. v. NLRC,163 the Court reiterated that when
there is nothing on record to indicate that the President and the majority
stockholder of a corporation acted in bad faith or with malice in carrying out the
retrenchment program of the company, he cannot be held solidarily and
personally liable with the corporation.
159
186 SCRA 393 (1990).
160
256 SCRA 466, 70 SCAD 382 (1996).
161
257 SCRA 319, 71 SCAD 99 (1996).
162
273 SCRA 35, 83 SCAD 31 (1997).
163
290 SCRA 164, 94 SCAD 351 (1998).
Brent Hospital, Inc. v. NLRC,164 held that a corporation, being a juridical
entity, may act only through its directors, officers and employees and obligations
incurred by them, acting as corporate agents, are not theirs but the direct
accountabilities of the corporation they represent.
In Nicario v. NLRC,165 the Supreme Court held that the manager of a
corporation are not personally liable for their official acts unless it is shown that
they have exceeded their authority. There is nothing on record to show that the
manager deliberately and maliciously evaded the corporation’s financial
obligation to the employee; hence, there appearing to be no evidence on record
that the manager acted maliciously or deliberately in the non-payment of benefits
to the employee, the manager cannot be held jointly and severally liable with the
corporate employers. A reading of the decision in Nicario would show that there
was a determination of whether the corporate employer had no assets with which
to pay the claims of the employee.
Nevertheless, in Restuarante Las Conchas v. Llego,166 the Supreme Court
had apparently returned to the A.C. Ransom principle that “[a]lthough as a rule,
the officers and members of a corporation are not personally liable for acts done
in the performance of their duties, this rule admits of exceptions, one of which is
when the employer corporation is no longer existing and is unable to satisfy the
judgment in favor of the employee, the officers should be held liable for acting on
behalf of the corporation.” In that case, the restaurant business had to be closed
down because possession of the premises had been lost through an adverse
decision in an ejectment case. The Court held: “In the present case, the
employees can no longer claim their separation benefits and 13th month pay from
the corporation because it had already ceased operation. To require them to do
so would render illusory the separation and 13tj month pay awarded to them by
the NLRC. Their only recourse is to satisfy their claim from the officers of the
corporation who were, in effect, acting in behalf of the corporation.”
DUTY OF DIRECTORS TO CREDITORS

There is no express duty of directors or trustees to the corporate creditors
under principles of Corporate Law. The relationship of corporate creditors with
the corporation is one based mainly on Contract Law.
However, it has been established that upon insolvency of the corporation,
the board of directors of a corporation are duty bound to hold the assets of the
corporation primarily first for the payment of the corporation's liabilities.
Under Section 65 of the Corporation Code, any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its
par or issued value or for a consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge thereof, does not forthwith
164
292 SCRA 304, 96 SCAD 34 (1998).
165
295 SCRA 619, 98 SCAD 545 (1998).
166
314 SCRA 24 (1999).
express his objection in writing and file the same with the corporate secretary,
shall be solidarily liable with the stockholder concerned to the corporation and its
creditors for the difference between the fair value received at the time of
issuance of the stock and the par or issued value of the same.
REMOVAL OF DIRECTORS, TRUSTEES AND OFFICERS167

1. Removal of Directors and Trustees
Under Section 28 of the Corporation Code, any director or trustee of a
corporation may be removed from office by a vote of the stockholders holding or
representing two-thirds (2/3) of the outstanding capital stock, or if the corporation
be a non-stock corporation, by a vote of two-thirds (2/3) of the members entitled
to vote: Provided, That such removal shall take place either at a regular meeting
of the corporation or at a special meeting called for the purpose of removal of
directors or trustees, or any of them, must be called by the secretary on order of
the president or on the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock, or, if it be a non-stock
corporation, on the written demand of a majority of the members by any
stockholder or member of the corporation signing the demand.
Notice of the time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by written notice as
prescribed in the Corporation Code.168
The vacancy resulting from removal may be filled by election at the same
meeting without further notice, or at any regular or at any special meeting called
for the purpose, after giving notice as prescribed in the Code.169 Removal may be
with or without cause; however, removal without cause cannot be used to deprive
minority stockholders or members of the right of representation to which they
may be entitled under Section 24 of the Corporation Code requiring cumulative
voting.
The general rule therefore is that any director may be removed from office
by a vote of the stockholders holding or representing two-thirds (2/3) of the
outstanding capital stock. When removal is for cause, the two-thirds (2/3) vote is
the minimum requirement to remove a director.
When removal is without cause, the two-thirds (2/3) vote is also enough to
remove a director. The exception is that when the director is elected by the
167
This section is based on a section taken from the article Jurisprudential Analyses of SEC
Jurisdiction in Intra-Corporate Disputes, and Investments Devices and Schemes, the original
version of which was published in THE LAWYERS REVIEW , Vol. VI, (No. 10, Oct. 1992). The article
had been updated and included as Appendix to the 1998 edition of the book. The Appendix no
longer appears in this edition of the book due to the removal of quasi-judicial powers of the SEC
under Section 5.2 of the Securities Regulation Code.
168
169
Ibid.
minority through cumulative voting, he may not be removed without cause even if
there is two-thirds (2/3) vote.
a. What Constitutes "Cause"?

The law does not define the "cause" that can be a legal basis for removal
of a member of the Board. What is clear is that "for cause" goes into the three
duties of a director and officer—loyalty, obedience and diligence. Whenever
these three duties are violated, certainly they will constitute sufficient "cause" for
removal.
When the Corporation Code says that a certain action has to be done
either by the board or stockholders, and it says that notice has to be given, it is
more than directory, it is mandatory. So that in the removal of members of the
Board, it cannot be done in any meeting whether special or regular. It can only be
done in a meeting where previously notice has been given and such notice must
specify that one of the things that will be discussed is the removal of director.
Even if it is within the competence of those who attend the meetings, the
resolution for the removal of director would not be voidable, it will be void, in spite
of the compliance of the two-thirds (2/3) required by law.170
2. Rationale of RTC Jurisdiction over Matters Covering Officers

Under the original version of Section 5(c) of Pres. Decree 902-A, the SEC,
and not the NLRC, would have proper jurisdiction to hear matters relating to
appointment of corporate officers. As held in Fortune Cement Corp. v. NLRC,171
"a corporate officer's dismissal is always a corporate act and/or intra-corporate
controversy and that nature is not altered by the reason or wisdom which the
Board of Directors may have in taking such action."172
Section 5(c) of Pres. Decree 902-A granted original and exclusive
jurisdiction to the SEC on "election or appointments of directors, trustees, officers
or managers of such corporations". However, Section 5.2, Chapter II of the
Securities Code173 transferred the jurisdiction over all cases under Section 5 from
the SEC to the Regional Trial Courts (RTC), which includes issues involving the
election and appointments of directors, trustees, and officers.
Nevertheless, the rulings of the Supreme Court under Section 5(c) of
Pres. Decree 902-A, as they pertained to SEC jurisdiction, would still be
applicable in cases of similar nature that now fall within the jurisdiction of the
RTC because the issue on conflicting jurisdiction with the NLRCwould still
prevail.
170
Roxas v. de la Rosa, 49 Phil. 609 (1926). Curiously in that case the Supreme Court held
that because only a majority called the meeting for removal of the director, they cannot still
successfully oust a director since 2/3 vote is required. This is erroneous. Even if a majority is
needed to call a meeting, it does not mean that only the majority will attend. The majority may, in
that meeting, gather the required two-thirds (2/3) vote in order to successfully oust a director.
171
193 SCRA 258 (1991).
172
Also Lozon v. NLRC, 240 SCRA 1 (1995).
173
Rep. Act No. 8799.
There are basically two (2) controversies arising from the application of
Section 5(c) as to the SEC, and now with the RTC:
(a) The issue of who are deemed to be "officers" and

"managers" within the jurisdiction of the RTC vis-à-vis the
jurisdiction of NLRC with respect to officers-employees of
corporate employers;
(b) Even when the controversy is within the original and
exclusive jurisdiction of the RTC, what is the "extent" by
which the power of the regular courts can adjudicate,
especially as to matters pertaining to backwages and
remunerations, which are inherently labor laws issues not
within the competence of trial judges.
3. Who Are "Officers" and "Managers"

Within the Jurisdiction of RTC?
In the case of Gurrea v. Lezama,174 it was held by the Supreme Court that
the term "corporate officer" refers only to officers of a corporation who are given
that character either by the then Corporation Law, or by the corporation's by-
laws.
The SEC itself in its opinions has held that even when the intention of the
board of a corporation is to make the "General Financial Secretary" an officer
thereof, he cannot be classified as such where the by-laws of the corporation
discloses that the position is not one of the offices provided therein.175 In another
opinion, the SEC has held that if the by-laws enumerate the officers to be elected
by the board, the provision is conclusive, and the board is without power to
create new offices without amending the by-laws.176
Under Section 25 of the Corporation Code, the President, Secretary and
Treasurer are specifically mentioned as officers of the corporation. In addition the
same section provides that the board of directors may elect "such other officers
as may be provided for in the by-laws." The Code therefore has continued the
principle that corporate officers shall include in addition only such positions as
are provided for in the by-laws of the corporation.
In interpreting SEC (now the RTC) jurisdiction under Section 5(c) of Pres.
Decree 902-A, the Supreme Court has also narrowed its coverage following the
foregoing formula of determining who are corporate officers.
In the case of Mita Pardo de Tavera v. Philippine Tuberculosis Society,
Inc.,177 it was held that since the letter of appointment Pardo de Tavera as
Executive Secretary to the Board did not contain a fixed term, the implication is
174
103 Phil. 553 (1958).
175
SEC Opinion, 15 May 1969, SEC FOLIO 1960-1976, at p. 377.
176
SEC Opinion, 19 October 1971, SEC FOLIO 1960-1976, at p. 498.
177
112 SCRA 243 (1982).
that appointee held an appointment at the pleasure of the appointing power and
was in essence temporary in nature, co-extensive with the desire of the Board of
Directors. When the Board opted to replace the incumbent, technically there is no
removal but only an expiration of the term and there is no need of prior notice,
due hearing or sufficient grounds before the incumbent can be separated from
office. The Supreme Court took note in Tavera that the disputed position of
Executive Secretary was also provided for in the Code of By-Laws of the
Philippine Tuberculosis Society, Inc.
In PSBA v. Leaño,178 the Court, in holding that the SEC (now RTC) has
jurisdiction over the ouster of the Executive Vice-President, took note that said
position was provided for in the corporate by-laws.
However, it is interesting to note that in PSBA, Justice Melencio-Herrera
concluded her ratiocination with the cryptic denouement: "The matter of whom to
elect is a prerogative that belongs to the Board, and involves the exercise of
deliberate choice and the faculty of discriminative selection. Generally speaking,
the relationship of a person to a corporation, whether as officer or as agent or
employee, is not determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist."179
The ponente cited the American case of Bruce v. Travelers Ins. Co.,180
which reiterated the doctrine in common law jurisdiction that the distinction
between an agent or employee and an officer is not determined by the nature of
the work performed, but by the nature of the relationship of the particular
individual to the corporation:
. . . One distinction between officers and agents or

employees of a corporation lies in the manner of their creation.
An Office is created usually by the charter or by-laws of the
corporation, while an agency or employment is created usually
by the officers. A further distinction may thus be drawn
between an officer and an employee of a private corporation in
that the latter is subordinate to the officers and under their
control and direction . . . It is clear that the two terms officers
and agents are by no means interchangeable. . .181
The evolving test of the Supreme Court in determining who are corporate
officers therefore follows closely the American doctrine on the matter.
So also in the case of Dy v. NLRC,182 where the board of directors ousted
by non-election the bank manager, the Supreme Court took note that the position
is an elective position provided for in the by-laws of the corporation.
178
127 SCRA 778, 781 (1984).
179
Ibid, at p. 783; emphasis supplied.
180
266 F2d 781.
181
266 F2d 781, at pp. 784-785.
182
145 SCRA 211 (1986),
Espino v. NLRC,183 reiterated the ruling that the SEC (now the RTC) and
not the NLRC "has original and exclusive jurisdiction over cases involving the
removal from employment of corporate officers." In that case, in controversy was
the position of Executive Vice President-Chief Operating Officer of the Philippine
Airlines, which position was provided for in the by-laws of the airline company.
Pearson & George, (S.E. Asia), Inc. v. NLRC,184 held that "[a]ny question
relating or incident to the election of the new Board of Directors, the non-
reelection of Llorente as a Director, his loss of the position of Managing Director,
or the abolition of the said office are intra-corporate matters. Disputes arising
therefrom are intra-corporate disputes which, if unresolved within the corporate
structure of the [corporation], may be resolved in an appropriate action only by
the SEC [now the RCT] pursuant to its authority under paragraph (c) and (d),
Section 5 of P.D. No. 902-A."185
The Court also held that the reliance on LEP International Philippines, Inc.
v. NLRC, was misplaced since what was challenged in that case was not the
jurisdiction of the SEC (now the RTC) but its act of upholding the validity of the
dismissal of LEP's Chief Executive, who was not a stockholder, much less a
director, of LEP but was merely a managerial employee of the said company.186
The foregoing rulings are still relevant in determining the proper
jurisdiction of the RTC over disputes involving officers and directors under
Section 5(c) of Pres. Decree 902-A.
4. Positions Created Pursuant to Enabling By-Law Provisions

What has not clearly been ruled upon by the Supreme Court is a situation
where the position is created by board resolution pursuant to an enabling
provision in the by-laws of the corporation.
An example would be the obiter in Tabang v. NLRC,187 where the
Supreme Court held:
The president, vice-president, secretary and treasurer

are commonly regarded as the principal or executive officers
of a corporation, and modern corporation statutes usually
designate them as the officers of the corporation. However,
other offices are sometimes created by the charter or by-laws
of a corporation, or the board of directors may be empowered
183
240 SCRA 52, 58 SCAD 46 (1995).
184
253 SCRA 136, 67 SCAD 698 (1996).
185
Ibid, at pp. 142-143.
186
Ibid, at p. 145.
187
266 SCRA 462 (1997).
under the by-laws of a corporation to create additional offices
as may be necessary.188
The ruling with respect to the clause “and such other officers” was obiter
because the position in controversy was that of Medical Director which was
specifically provided for in the quoted by-law provision, thus “[t]o appoint a
Medical Director, Comptroller/Administrator, Chiefs of Services and such other
officers as it may deem necessary and prescribe their powers and duties.” On the
basis of the quoted by-law provision, the Court held that “such specifically
designated positions should be considered ‘corporate officers’ position, and the
determination of the rights and the concomitant liability arising from any ouster
from such positions, would be intra-corporate controversy subject to the
jurisdiction of the SEC,” which now falls within the jurisdiction of the RCT.
Section 25 of the Corporation Code defines a position to be an officer
position “as may be provided for in the by-laws,” and seems to imply that an
officership position becomes such only when the by-laws so provide for them,
and would rule out creation of the position by virtue of a by-law enabling
provision. This position seems sensible because an enabling provision in the by-
law does not really create a power that was not with the Board of Directors; even
without such enabling by-law provision, the Board of any corporation is always
considered to have the power to appoint “officers” as part of the corporate
powers under Section 23 of the Corporation Code, and therefore, when any such
position is created it would be an “employee” position that would be governed by
the provisions of the Labor Code.
The employment of an enabling clause in the by-laws to create an “officer”
position could also lead to absurd ends where by simply providing for such
clause in the by-laws of the corporation, the Board of Directors are able to
periodically and by means of a resolution to “create and appoint” officers to any
position in the organization, who would not be protected by the security tenure
clause.
Ongkingco v. NLRC,189 held that the dismissal or non-appointment of a
corporate officer is clearly an intra-corporate matter and jurisdiction properly
belonged to the SEC (now the RTC). Section 5(c) of Pres. Decree 902-A
expressly covers both election and appointment of corporate directors, trustees,
officers and managers, and that jurisdiction pertains to the SEC (now the RTC)
even if the complaint by a corporate officer includes money claims since such
claims are actually part of the perquisites of his position, and therefore interlinked
with his relations with the corporation.
188
Tabang v. NLRC, 266 SCRA 462 (1997), citing SEC Opinion, 25 March 1983; J.
CAMPOS, JR., THE CORPORATION CODE, COMMENTS, NOTES AND SELECTED CASES, Vol. I, 383-384.
189
270 SCRA 613, 81 SCAD 252 (1997).
5. Branching the Officership Test
In Dy v. NLRC,190 where the board of directors ousted by non-election the
bank manager, the Supreme Court took note that the position is an elective
position provided for in the by-laws of the corporation. However, the Supreme
Court in sustaining that the SEC (now the RTC) had jurisdiction over the
controversy held that:
. . . The question of remuneration, involving as it does, a

person who is not a mere employee but a stockholder and
officer, an integral part, it might be said, of the corporation, is
not a simple labor problem but a matter that comes within the
area of corporate affairs and management, and is in fact a
corporate controversy in contemplation of the Corporation
Code.191
The aforequoted portion of the decision in Dy seems to imply that if the

controversy in intertwined with management matters by persons who have
special relations to the corporation, such as being a stockholder, the controversy
is essentially corporate, by virtue of Section 3 or Section 5(b) on intra-corporate
disputes. This therefore seems to create two (2) branches of SEC (now the RTC)
jurisdiction when it comes to corporate officers. The first are those who are
strictly "officers" because their positions are provided for either by law or in the
by-laws of the corporation. Any controversy arising from such relationship is now
within the original and exclusive jurisdiction of the regular courts by virtue of
Section 5(c) of Pres. Decree 902-A in relation to Section 5.2 of the Securities
Regulation Code.
The other corporate "officers" whose positions are not provided for in the
by-laws, who therefore are strictly mere employees of the corporation, when they
are at the same time stockholders or members of the corporation, and seem to
occupy such employment positions by virtue of such relationship to the
corporation, the controversies arising therefrom are within the jurisdiction of the
SEC by virtue of the expanded coverage of Section 5(b) in Union Glass. In both
instances, the emphasis of the Supreme Court has always been that the
controversies involved primarily a corporate matter, with the right and power of a
board to terminate corporate officers.
In Gregorio Araneta University Foundation v. Teodoro,192 although the
respondent interposed illegal dismissal and sought recovery of separation pay,
retirement benefits and other monetary claims with the NLRC arising from the
"non-extension" of his appointment as Vice President and concurrently, as
Treasurer of the corporation, the Court denied the contention of the petitioning
corporation that jurisdiction over the case should be with the SEC (now the RTC)
since respondent was undoubtedly a corporate officer. In denying the petitioner's
190
145 SCRA 211 (1986).
191
Ibid, at p. 222.
192
167 SCRA 79 (1988).
contention, and distinguishing it from PSBA and Dy, the Court held that the
complaint was filed by the respondent with the NLRC not questioning the validity
of the board of directors' meetings wherein the corporate officers involved were
not reelected, resulting in the termination of their services. Therefore, no issue
which was intra-corporate in nature was necessary to be resolved which would
necessitate the vesting of the controversy with the jurisdiction of the SEC, now
the RTC.
The SEC then, and now the RTC, rather than the NLRC, should have
jurisdiction to hear matters relating to appointment and removal of corporate
officers. As held in Fortune Cement Corp. v. NLRC,193 "a corporate officer's
dismissal is always a corporate act and/or intra-corporate controversy and that
nature is not altered by the reason or wisdom which the Board of Directors may
have in taking such action."194
6. Stockholder-Officer Combination
A special relationship has been placed upon officers of the corporation
being stockholders at the same time to vest jurisdiction over an illegal dismissal
suit with the SEC, now a matter falling within the jurisdiction of the RTC.
In Paguio v. NLRC,195 the Supreme Court put much weight on relationship
of being stockholders of the corporation and at the same time being officers. It
held that the NLRC has no jurisdiction over case where the petitioners are
stockholders and officers of respondent corporation. "They filed a complaint
against private respondent for illegal dismissal. Such being the case, it is the
Securities and Exchange Commission (SEC) that has jurisdiction over the case
as will be expansively discussed hereinafter. It is no hindrance to SEC's
jurisdiction that a person raises in his complaint the issues that he was illegally
dismissed and asks for remuneration where, as in this case, complainant is not a
mere employee but a stockholder and officer of the corporation."196
7. "Extent" by Which Regular Courts Can

Adjudicate Under Section 5(c)
In resolving SEC (now RTC) jurisdiction, over intra-corporate
controversies under Section 5(b), the Supreme Court in Union Glass & Container
Corporation v. Securities and Exchange Commission,197 was careful to point out
that when the enumerated intra-corporate relationships were not present as to
some parties, then the issues pertaining to such corporate outsiders must be
brought to, and resolved by, the regular courts since the same did not involve
corporate matters and are therefore within the competence of regular courts to
decide upon. The issue no longer applies today, since regular courts may
193
193 SCRA 258 (1991).
194
Also Lozon v. NLRC, 240 SCRA 1 (1995); Espino v. NLRC, 240 SCRA 52 (1995).
195
253 SCRA 166, 67 SCAD 337 (1996).
196
Ibid, at pp. 171.
197
126 SCRA 31 (1983).
exercise proper jurisdiction over any party, even when he does not fall within the
intra-corporate relationship.
In PSBA v. Leaño,198 Tan, who was one of the principal stockholders of
PSBA, was also elected director and the Executive Vice-President enjoying
salaries and allowances. The PSBA board at its regular meeting declared all
corporate positions vacant, except those of the President and Chairman, and at
the same time elected a new set of officers, with Tan not being re-elected as
Executive Vice-President. Tan filed with the NLRC a complaint for illegal
dismissal, with prayer for full payment of backwages and without loss of other
benefits. In upholding the jurisdiction of the SEC (now the RTC) on the ground
that the matter was essentially intra-corporate controversy, and ordering the
dismissal of the case pending with the NLRC, the Supreme Court impliedly held
that even as to issues pertaining to backwages and employments benefits, the
same would be within the power of the SEC to rule upon, as part and parcel of
the main controversy of whether the corporation, through its board directors, had
authority to remove Tan from his corporate office.
In Dy v. NLRC,199 Vailoces who was a manager of the corporate rural
bank, as well as director and stockholder thereof, was, by board resolution of a
newly constituted board, removed as bank manager. Vailoces filed an action for
illegal dismissal with the labor arbiter, with prayer for damages. A judgment was
rendered by the labor arbiter declaring that Vailoces was illegally dismissed and
ordering the petitioners to pay salary differentials, cost of living allowances, back
wages from date of dismissal up to the date of reinstatement. The judgment was
affirmed by the NLRC. On petition to the Supreme Court, the Court found that the
controversy came under Section 5(c) and was within the original and exclusive
jurisdiction of the SEC, and thereupon annulled and declared void the awards of
the arbiter. In ruling so, the Court held:
. . . It is of no moment that Vailoces, in his amended

complaint, seeks other relief (sic) which would seemingly fall
under the jurisdiction of the Labor Arbiter, because a closer
look at these--underpayment of salary and non-payment of
living allowance--shows that they are actually part of the
perquisites of his elective position, hence, intimately linked
with his relations with the corporation. The question of
remuneration, involving as it does, a person who is not a mere
employee but a stockholder and officer, an integral part, it
might be said, of the corporation, is not a simple labor problem
but a matter that comes within the area of corporate affairs
and management, and is in fact a corporate controversy in
contemplation of the Corporation Code.200
198
127 SCRA 778 (1984)
199
145 SCRA 211 (1986).
200
Ibid, at p. 222.
So also in Cagayan de Oro Coliseum, Inc. v. Office of the MOLE,201 the
Supreme Court, in determining which agency had jurisdiction over a case filed by
the President for non-payment of wages and other benefits, the ruling in Dy was
affirmed:
Although the reliefs sought by Chaves appear to fall

under the jurisdiction of the labor arbiter as they are claims for
unpaid salaries and other remunerations for services
rendered, a close scrutiny thereof shows that said claims are
actually part of the perquisites of his position in, and therefore
interlinked with his relations with the corporation. . .202
The Dy doctrine therefore compelled the SEC, now the RTC, to be

competent not only in the field of corporate and securities law, but also in the
field of labor laws, but this was unavoidable in cases covered by Section 5(c),
where the complaining officer or manager should win his claims against the
corporation and/or the board of directors for unlawful removal from office. For this
task, the SEC was ill-equipped to do, and there seems to be no real advantage
attained nor any efficient system installed by compelling SEC, now the RTC, to
attain such competence in the specialized field of Labor Laws.
While it would seem that the Supreme Court would allow the SEC to
assume jurisdiction over the main intra-corporate controversy, together with the
issue of damages and employment benefits, it does not allow NLRC to decide on
matters inherently corporate in nature, even when the main controversy is within
the jurisdiction of the said agency.
In Apodaca v. NLRC,203 the Court set aside the judgment of the NLRC
which held that a stockholder who fails to pay his unpaid subscription on call
becomes a debtor of the corporation and that the set-off of said obligation against
the wages and other benefits due to him. The stockholder was also President
and General Manager of the corporation but resigned prior to filing a case with
the labor arbiter for the payment of his unpaid wages, his cost of living allowance,
the balance of his representation expenses and his bonus compensation. No
intra-corporate dispute related to his former positions as an officer of the
corporation since he resigned therefrom voluntarily.
Although the main controversy was within the jurisdiction of the NLRC, the
Court held that "the NLRC had no jurisdiction to determine such intra-corporate
dispute between the stockholder and the corporation as in the matter of unpaid
subscription. This controversy was deemed to be within the exclusive jurisdiction
of the Securities and Exchange Commission."204
201
192 SCRA 315 (1990).
202
Ibid, at p. 319. The Dy doctrine was also affirmed in Fortune Cement Corporation v.
NLRC, 193 SCRA 258 (1991).
203
172 SCRA 442 (1989).
204
Ibid, at p. 445.
Lately, Lozon v. NLRC,205 reiterated Dy when it held that the renumeration
being asserted by an officer of a corportion is "not a simple labor problem but a
matter that comes within the area of corporate affairs and managment, and is in
fact, a corporate controversy in contemplation of the Corporation Code."
8. RTC Jurisdiction Even on Damages

Recently, in Andaya v. Abadia,206 where the main issue was the removal
of the President and General Manager of a savings association, even the claims
for damages arising from alleged violation of the provisions of the Civil Code on
human relations, would not exclude the case from the jurisdiction of the SEC,
"considering that his rights thereto either depends on, or is inextricably linked
with, the resolution of the corporate controversies."207 The Court held that the
allegations of violations of the provisions of the Civil Code on human relations do
not necessarily call for the application of the provisions of the Civil Code in place
of the association's by-laws. The Court further held that the determination of the
rights of the petitioner arising from the alleged illegal convening of the meeting of
the association's board of directors and his subsequent ouster from corporate
offices as a result of the voting for the reorganization of management are
obviously intra-corporate controversies, within the competence of the SEC (now
the RTC) to decide upon.
The ruling in Andaya was also reiterated in Lozon, where the Court held
that "indeed, controversies within the purview of Section 5 of P.D. No. 902-A
must not be so constricted as to deny to the SEC [now the RTC] the sound
exercise of its expertise and competence in resolving all closely related aspects
of such corporate disputes."
The issue of SEC competence on matters of damages is now moot, since
RTC have appropriate competence to determine issues of damages.
9. Procedural Rules on Suits Brought

The specific rules governing suits “election contests in stock and non-
stock corporations” are now provided for under Rule 6 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies.
An “election contest” refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the validation of
proxies, the manner and validity of elections, and the qualifications candidates,
including the proclamation of winners, to the office of director, trustee or other
officer directly elected by the stockholders in a close corporation or by members
of a non-stock corporation where the articles of incorporation or by-laws so
provide.208
205
240 SCRA 1, 58 SCAD 1 (1995).
206
228 SCRA 705, 46 SCAD 1036 (1993).
207
Ibid, at p. 712.
208
Sec. 2, Rule 6, Interim Rules.
The complaint in an election contest must be filed within fifteen (15) days
from the date of the election if the by-laws of the corporation do not provide for a
procedure of resolution of the controversy, or within fifteen (15) days from the
resolution of the controversy by the corporation as provided in its by-laws.209 In
addition, it is required that the plaintiff should have exhausted all intra-corporate
remedies in election cases as provided for in the by-laws of the corporation.210
Election contest suits are summary in nature, with the trial courts
mandated within two (2) days from the filing of the complaint, upon a
consideration of the allegations thereof, to dismiss the complaint outright if it is
not sufficient in form and substance, or, if it is sufficient, order the issuance of
summons which shall be served, together with a copy of the complaint, on the
defendant within two (2) days from its issuance;211 and the defendant having a
period of ten (10) days within which to file an answer.212 The parties are
mandated to attach to their pleadings the affidavits of witnesses, documentary
and other evidence in support thereof.213 The courts are required to render a
decision based on the pleadings, affidavits and documentary and other evidence
within fifteen (15) days from receipt of the last pleading, or from the date of the
last hearing as the case may be;214 and the decisions are immediately
executory.215
10. Addressing the Constitutional Issue

The business judgment doctrine that it is within the legal competence of
the Board of Directors to terminate at the exercise of their discretion corporate
officers literally runs contrary to the security of tenure clause embodied in Article
279 of the Labor Code, and more importantly, would be contrary to the provisions
of Sec. 3(2), Article XIII of the 1987 Constitution, which provides:
. . . The State shall afford full protection to labor, local

and overseas, organized and unorganized, and promote
full employment and equality of employment opportunities
to all.
It shall guarantee the rights of all workers to security
of tenure, humane conditions of work, and a living wage.
They shall also participate in policy and decision-making
processes affecting their rights and benefits as may be
provided by law.216
209
Sec. 3(1), Rule 6, Interim Rules.
210
Sec. 3(2), Rule 6, Interim Rules.
211
212
213
214
215
216
Emphasis supplied.
The constitutional language on the right of “all workers” to security of
tenure provides for no exception. The Labor Code and case-law on the matter
clearly recognize two (2) levels of “employees,” the managerial and supervisory
employees and the rank-and-file employees,217 both of which are recognized to
enjoy security of tenure afforded to all workers.218
The close proximity of the powers and functions of managerial employees
to the business endeavors and management powers necessarily has given rise
to varying treatment as contrasted to rank-and-file employees. For example, by
law managerial employees are prohibited from joining, assisting, or forming any
labor union,219 and can be removed for loss of confidence provided there is
substantial proof and observance of due process.220
And yet the standing jurisprudential ruling when it comes to corporate
officers, although Labor Law would clearly consider them as employees enjoying
security of tenure, is that they enjoy no such security of tenure and their
incumbency is within the business judgment discretion of the board of directors
or trustees. The only conclusion that can be drawn from this is that in spite of the
clear language of the Constitution which provides for no exception, corporate
officers do not enjoy the constitutional guarantee to security of tenure, which can
be justified on the following grounds:
Firstly, the prerogative of management to hire and fire all employees was
the original prevailing doctrine that encompassed all employees of a business
enterprise; and the notion of security of tenure of employees was considered
contrary to the rights of ownership.221 In fact, the absolute right of management to
hire and fire employees was then still the prevailing doctrine at the time Gurrea v.
Lezama222 was decided, which was actually the first reported decision in
corporate law on the matter.
When the security of tenure clause did appear in the 1973 Constitution, it
was merely a declaration of principle that “The State shall assure the rights of
workers to self-organization, collectively bargaining and security of tenure,” which
found statutory implementation under the Labor Code. But even then the
interpretation of the statutory rule on security of tenure under the Labor Code
217
Art. 212(m), Labor Code of the Philippines. Managerial employees are defined as those
who are vested with the power and prerogatives to lay down and execute management policies to
hire, transfer, suspend, lay off, recall, discharge, assign or discipline employees; while
supervisory employees are those who, in the interest of the employer, effectively recommend
such managerial actions if the exercise of such actions is merely routine or clerical in naturebut
requires the use of independent judgment. All other employees who do not fall within the
managerial or supervisory levels are considered rank-and-file employees.
218
Dosch v. NLRC, 123 SCRA 296 (1983); De Leon v. NLRC, 100 SCRA 691 (1980);
Maglutac v. NLRC, 189 SCRA 767 (1990); Estiva v. NLRC, 225 SCRA 170 (1993).
219
Art. 245, Labor Code of the Philippines.
220
Estiva v. NLRC, 225 SCRA 170 (1993).
221
Gutierrez v. Bachrach Motor Co., Inc., 105 Phil. 9 (1959); Amador Capiral v. Manila
Electric Company Co., Inc., 9 SCRA 804 (1963).
222
103 Phil. 553 (1958).
exempted expressly under case-law corporate officers whose term of office were
deemed to be within the business judgment of the Board of Directors or Trustees.
Therefore, when the 1987 Constitution elevated the security of tenure
clause from mere declaration of principles to self-enforcing provisions, it must be
understood that the constitutional precept embodied the same nuances that
pertained to it and interpreted by the Supreme Court under the 1973 Constitution,
which includes an exemption therefrom of corporate officers.
Secondly, the non-coverage of corporate officers from the security of
tenure clause under the Constitution is now well-established principle by
numerous decisions upholding such doctrine under aegis of the 1987
Constitution223 in the face of contemporary decisions of the same Supreme Court
likewise confirming that “security of tenure covers all employees or workers
including managerial employees”224
Thirdly, the decisions of the Supreme Court upholding the business
judgment prerogatives of the board of directors on the termination of corporate
officers clearly would recognize that the essential legal relationship prevailing is
that of Agency, that corporate officers essentially are appointed as agents of the
corporation, and necessarily since trust imbues is such relationship, they are
essentially revocable. This is in stark contrast to the security of tenure clause
where the relationship sought to be governed is that essentially of employer-
employee, and seeks to safeguard the right to livelihood.
Finally, just as the security of tenure clause under the civil service system
provides for exemption for positions that are policy-determining, highly
confidential or highly technical employees,225 the Supreme Court has now began
to fashion similar exemptions applicable to the security of tenure clause for
private employees.
The only problem with such analogy is that under the civil service system,
the nature, duties and functions of the position are critical in determining whether
such office is not within the coverage of the security of tenure clause;226 whereas,
in the case of corporate officers, the Supreme Court has employed the
peremptory test under Gurrea (i.e., that only those officers who are declared
such under the law or provided for in the by-laws are within Board’s business
judgment prerogative to terminate at its discretion) and has in fact held in
Philippine School of Business Administration that “the relationship of a person to
a corporation, whether as officer or as agent or employee, is not determined by
the nature of the services performed, but by the incidents of the relationship as
they actually exist."227
223
Ongkingco v. NLRC, 270 SCRA 612, 81 SCAD 252 (1997); Tabang v. NLRC, 266 SCRA
464, 78 SCAD 174 (1987).
224
Maglutac v. NLRC, 189 SCRA 767 (1990)
225
Sec. 2(3), Art. IX-B, 1987 Constitution.
226
Laurel v. Civil Service Commission, 203 SCRA 195 (1991).
227
Ibid, at p. 783; emphasis supplied.
There is no decision yet rendered by the Supreme Court where the
constitutional issue has clearly been put at issue, and it should be expected that
once the constitutional issue is pushed further before the Supreme Court’s
determination, rulings would be issued to the effect that the nature of the position
of an officer should also be determinative of whether it should be exempted from
the coverage of the security of tenure clause.
—oOo—
CORP. MANUSCRIPT\09-DIRECTORS & OFFICERS\08-02-2002

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CHAPTER 9

Nature of Power and Authority of Board

NATURE OF POWER AND AUTHORITY OF BOARD

Under the Corporation Code, unless otherwise provided

1. Rationale of “Centalized Management”

2. Primary Objective for Board

SOURCE OF POWER OF BOARD

1. Theory of Original Power

2. Theory of Delegated Power

PECULIAR AGENCY ROLE OF THE BOARD

THE BUSINESS JUDGMENT RULE

This legal concept of a private corporation must have

1. Theoretical Basis of Rule

A corporation is but an association of individuals, allowed

Questions of policy and of management are left to the

(a) Resolutions and transactions entered into by the Board of

Courts and other administrative bodies having jurisdiction over

Likewise, the above-enumerated exceptions when directors, trustees and

REQUIREMENT THAT BOARD MUST ACT AS A BODY

In dealing with corporations the public at large is bound

Ramirez held that "[t]he integrity of commercial transactions can only be

(a) Approval of any action for which shareholders' approval is

QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS AND TRUSTEES

a. Rule on Corporate Stockholders

b. Rules on Board of Directors of Banks and Listed Companies

3. Additional Qualifications and Disqualifications

In cases where S1 includes a fractional term (e.g., 51/4), Cole provides

In a seminal paper collaborated into by an economist, a lawyer and a

2. Glasser Itiretative Procedure

The Glasser Formula which uses the iterative procedure illustrates an

3. D'Hondt Remainders Table53

1/2 2/3 1/4

1/2 1/2 1/4

ELECTION OF BOARD OF TRUSTEES

NON-PERMANENCY OF SEAT IN BOARD

ALIEN MEMBERSHIP IN BOARD OF DIRECTORS

REPORT ON ELECTION OF DIRECTORS, TRUSTEES AND OFFICERS

TERM OF OFFICE; HOLD-OVER PRINCIPLE

MEETINGS OF DIRECTORS OR TRUSTEES

2. Requisites for a Valid Board Meeting

(a) Meeting of the directors or trustees duly assembled as a

On account of their responsibility to the corporation, directors or trustees

3. Mode of Attendance of Board Members

4. Attendance by Stockholders of Board Meetings

COMPENSATION OF DIRECTORS AND OFFICERS

2. Two Levels of Discussions of Corporate Officership

a. Two Disciplines Diverging in Corporate

4. Election or Appointment of Officers

Inasmuch as a corporate president is often given general

8. Corporate “Agents” for Purposes of Service

COMMON LAW NATURE OF DUTIES OF

These provisions are in direct opposition to our

It is well known that a corporation is an artificial being

DUTY OF LOYALTY; CORPORATE OPPORTUNITY DOCTRINE

Why is it that the self-dealing transaction entered into by a director can be

DEALINGS OF DIRECTORS, TRUSTEES

CONTRACTS BETWEEN CORPORATIONS

(a) He assents (i) to a patently unlawful act of the corporation, or

This uncaring attitude on the part of the officers of

DUTY OF DIRECTORS TO CREDITORS

REMOVAL OF DIRECTORS, TRUSTEES AND OFFICERS167

a. What Constitutes "Cause"?