TITLE III

BOARD OF DIRECTORS/TRUSTEE AND OFFICERS

SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. – Unless
otherwise provided in this Code, the board of directors or trustees shall exercise the corporate powers,
conduct all business, and control all properties of the corporation. Directors shall be elected for a term
of one (1) year from among the holders of stocks registered in the corporation’s books, while trustees
shall be elected for a term not exceeding three (3) years from among the members of the corporation.
Each director and trustee shall hold office until the successor is elected and qualified. A director who
ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the corporation
shall cease to be such.

The board of the following corporations vested with public interest shall have independent directors
constituting at least twenty percent (20%) of such board:

a. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The Securities
Regulation Code”, namely those whose securities are registered with the Commission, corporations
listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) and having two
hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of
its equity shares;

b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business,
pre-need, trust and insurance companies, and other financial intermediaries; and

c. Other corporations engaged in business vested with public interest similar to the above, as may be
determined by the Commission, after taking into account relevant factors which are germane to the
objective and purpose of requiring the election of an independent director, such as the extent of minority
ownership, type of financial products or securities issued or offered to investors, public interest involved
in the nature of business operations, and other analogous factors.

An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship which
could, or could reasonably be perceived to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director.

Independent directors must be elected by the shareholders present or entitled to vote in absentia during
the election of directors. Independent directors shall be subject to rules and regulations governing their
qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number
of board memberships and other requirements that the Commission will prescribe to strengthen their
independence and align with international best practices

DISCUSSION:

What is a Board of Directors?

A board of directors is essentially a panel of people who are elected to
represent shareholders of a stock corporation The board is responsible for protecting
shareholders’ interests, establishing policies for management, oversight of
the corporation, and making decisions about important issues a company or
organization faces. i
In line with their roles within the company, the board of directors must always
act in good faith. The board of directors must protect the interests of the corporation
and its stockholders. Members of the board cannot make decisions for their individual
benefit. The board of directors must also sure that the company follows legal and
accounting requirements. ii

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Functions of a Board of Directors
In a broad sense, a corporate board of directors (BOD) act as the elected
representatives of the shareholders. Under the RCC, the BOD exercises the
corporate powers, conduct all business, and control all properties of the corporation.
Generally, the exercise of corporate powers includes:
1. Creating dividend policies
2. Hiring and firing of senior executives (especially the CEO)
3. Establishing compensation for executives
4. Supporting executives and their teams
5. Maintaining company resources
6. Setting general company goals
7. Making sure that the company is equipped with the tools it needs to be managed
welliii

Term
The directors shall be elected for a term of 1 year or in the case of non-stock
corporations, the trustees shall be elected for a term not exceeding 3 years. Note that
the is silent as to when the election of the Board of Directors shall take place. That is
because, the election of the BOD is to be determined by the stockholders themselves
as stated in the by-laws of the corporation. It is also a continuing requirement that a
director must own at least one share of stock otherwise he/she cease to be a
director.

Is it a possible for a director to hold such position for more than 1 year?
Yes. If he/she gets re-elected again as a director. Although technically and legally
speaking that is not an extended term but rather a new term of one year. The other
way a stockholder may continue holding the position of a director is in a holdover
capacity. The holdover period is implied in Section 22 when it states therein that each
director and trustee shall hold office until the successor is elected and qualified. In
other words, if a successor is not elect or even if elected is disqualified, the director
whose term has already expired shall remain as director in a holdover capacity.

Term is not the same as tenure

The holdover period is not part of the term of office of a member of the board of
directors

The word "term" has acquired a definite meaning in jurisprudence. In several cases,
we have defined "term" as the time during which the officer may claim to hold the office
as of right and fixes the interval after which the several incumbents shall succeed one
another. The term of office is not affected by the holdover. The term is fixed by statute
and it does not change simply because the office may have become vacant, nor
because the incumbent holds over in office beyond the end of the term due to the fact
that a successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officer's "tenure" represents the term
during which the incumbent holds office. The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons within or beyond the power of the
incumbent.

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Based on the above discussion, when Section 23 of the Corporation Code declares
that "the board of directors 'shall hold office for one (1) year until their successors are
elected and qualified," we construe the provision to mean that the term of the members
of the board of directors shall be only for one year; their term expires one year after
election to the office. The holdover period - that time from the lapse of one year from a
member's election to the Board and until his successor's election and qualification - is
not part of the director's original term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. Corollary, when an incumbent member of the
board of directors continues to serve in a holdover capacity, it implies that the office
has a fixed term, which has expired, and the incumbent is holding the succeeding term.

Independent Director

The term independent director is a new introduction to the RCC. In the old corporation
code, you will not find the term independent director. But the term independent director
is not entirely new. In fact, even prior to the revision of the corporation code, the SEC
already issued Memorandum Circular (MC) no. 16, series of 2002 otherwise known as
the GUIDELINES ON THE NOMINATION AND ELECTION OF INDEPENDENT
DIRECTORS. This is because under Republic Act 8799 otherwise known as the
Securities and Regulations Code (SRC), any corporation with a class of equity
securities listed for trading on an Exchange or with assets in excess of Fifty million
pesos (P50,000,000.00) and having two hundred (200) or more holders, at least of two
hundred (200) of which are holding at least one hundred (100) shares of a class of its
equity securities or which has sold a class of equity securities to the public pursuant to
an effective registration statement in compliance with Section 12 hereof shall have at
least two (2) independent directors or such independent directors shall constitute at
least twenty percent (20%) of the members of such board, whichever is the lesser.

Subsequent to the passage of the RCC, the SEC then issued Memorandum Circular
(MC) No. 20 series of 2020 otherwise known as SEC RULES ON THE NUMBER OF
INDEPENDENT DIRECTORS AND SECTORAL REPRESENTATIVES OF
EXCHANGES and OTHER ORGANIZED MARKETS.
Under SEC MC No. 20 series of 2020 an independent director as a person who,
apart from his or her fees and shareholdings, is independent of management
and free from any business or other relationship which could, or could reasonably
be perceived to, materially interfere with his or her exercise of independent judgment
in carrying out his or her responsibilities as a director and includes, among others, any
person who:
a). Is not a director or officer of the covered company or of its related companies
or any of its substantial shareholders except when the same shall be an independent
director of any of the foregoing;

b) Does not own more than two percent (2%) of the shares of the covered company
and/or its related companies or any of its substantial shareholders;

c). Is not related to any director, officer or substantial shareholder of the covered
company, any of its related companies or any of its substantial shareholders.
For this purpose, relatives include spouse, parent, child, brother, sister, and the
spouse of such child, brother or sister;

d). Is not acting as a nominee or representative of any director or substantial

shareholder of the covered company, and/or any of its related companies
and/or any of its substantial shareholders, pursuant to a Deed of Trust or under any
contract or arrangement;

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e). Has not been employed in any executive capacity by the covered company,
any of its related companies and/or by any of its substantial shareholders
within the last two (2) years;

f). Is not retained, either personally or through his or her firm or any similar entity, as
professional adviser, by that covered company, any of its related companies
and/or any of its substantial shareholders, within the last two (2) years; or

g). Has not engaged and does not engage in any transaction with the covered company
and/or with any of its related companies and/or with any of its substantial
shareholders, whether by himself/herself and/or with other persons and/or through
a firm of which he or she is a partner and/or a company of which he or she is a director
or substantial shareholder, other than transactions which are conducted at arm’s
length and are immaterial, within the last two (2) years.

What is the role of and independent director?

Independent directors act as a guide to the company. Their roles broadly include
improving corporate credibility and governance standards functioning as a watchdog,
and playing a vital role in risk management. Independent directors play an active role
in various committees set up by company to ensure good governance. SEC rules
requires independent directors to have a role in various committees of the corporation
to ensure good governance such as the audit committee, nomination committee and
compensation or remuneration committee.

The RCC states that the Independent directors shall be subject to rules and regulations
governing their qualifications, disqualifications, voting requirements, duration of term
and term limit, maximum number of board memberships and other requirements that
the Commission will prescribe to strengthen their independence and align with
international best practices. This requirement is an affirmation and confirmation of the
role of SEC under the Securities and Regulations Code. Under (MC) no. 16, series of
2002, the SEC issued the GUIDELINES ON THE NOMINATION AND ELECTION OF
INDEPENDENT DIRECTORS.

Mandatory 20% composition of Independent Directors in the Board

a. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known
as “The Securities Regulation Code”, namely those whose securities are registered
with the Commission, corporations listed with an exchange or with assets of at least
Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders of
shares, each holding at least one hundred (100) shares of a class of its equity shares;

b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money

service business, pre-need, trust and insurance companies, and other financial
intermediaries; and

c. Other corporations engaged in business vested with public interest similar to the
above, as may be determined by the Commission, after taking into account relevant
factors which are germane to the objective and purpose of requiring the election of an
independent director, such as the extent of minority ownership, type of financial
products or securities issued or offered to investors, public interest involved in the
nature of business operations, and other analogous factors

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 - Under SEC MC No. 20 series of 2020, exchanges such as your Philippine Stock
Exchange (PSE) and other organized markets are required to have Independent
Directors constituting at least one third (1/30) of the members of the BOD.

A. All companies are encouraged to have independent directors. However, issuers of

registered securities and public companies are required to have at least two (2)
independent directors or at least 20% of its board size, whichever is the lesser.
Provided further that said companies may choose to have more independent directors
in their boards than as above required.

B. The Exchange/s are required to have at least three (3) independent directors and
an independent director-President. To effectively carry out the provisions of Section
33.2(g) of the Securities Regulation Code, the independent directors must not be
allowed to solicit votes for himself or for others or be subject to election by the
stockholders until the shares are listed, or Exchange's outstanding capital stock are no
longer majority owned by the brokers.

SEC. 23. Election of Directors or Trustees. – Except when the exclusive right is reserved for holders of
founders’ shares under Section 7 of this Code, each stockholder or member shall have the right to
nominate any director or trustee who possesses all of the qualifications and none of the disqualifications
set forth in this Code. At all elections of directors or trustees, there must be present, either in person or
through a representative authorized to act by written proxy, the owners of majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. When so
authorized in the bylaws or by a majority of the board of directors, the stockholders or members may
also vote through remote communication or in absentia: Provided, That the right to vote through such
modes may be exercised in corporations vested with public interest, notwithstanding the absence of a
provision in the by-laws of such corporations.

A stockholder or member who participates through remote communication or in absentia, shall be

deemed present for purposes of quorum.

The election must be by ballot if requested by any voting stockholder or member.

In stock corporations, stockholders entitled to vote shall have the right to vote the number of shares of
stock standing in their own names in the stock books of the corporation at the time fixed in the bylaws
or where the bylaws are silent, at the time of the election. The said stockholder may: (a) vote such
number of shares for as many persons as there are directors to be elected; (b) cumulate said shares
and give one (1) candidate as many votes as the number of directors to be elected multiplied by the
number of the shares owned; or (c) distribute them on the same principle among as many candidates
as may be seen fit: Provided, That the total number of votes cast shall not exceed the number of shares
owned by the stockholders as shown in the books of the corporation multiplied by the whole number of
directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the bylaws, members of nonstock corporations may cast
as many votes as there are trustees to be elected but may not cast more than one (1) vote for one (1)
candidate. Nominees for directors or trustees receiving the highest number of votes shall be declared
elected.

If no election is held, or the owners of majority of the outstanding capital stock or majority of the
members entitled to vote are not present in person, by proxy, or through remote communication or not
voting in absentia at the meeting, such meeting may be adjourned and the corporation shall proceed in
accordance with Section 25 of this Code. The directors or trustees elected shall perform their duties as
prescribed by law, rules of good corporate governance, and by-laws of the corporation.

Discussions:

Quorum

For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the
number of outstanding voting stocks. For nonstock corporations, only those who are actual, living
members with voting rights shall be counted in determining the existence of a quorum during members’
meetings. Dead members shall not be counted. (TAN et al vs. Sycip, G.R. No. 153468 )

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The term ‘outstanding capital stock’ as used in RCC, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid,
except treasury shares.

The Right to Vote in Stock Corporations

The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt
a certain measure or act. Only stock actually issued and outstanding may be voted. Under Section 6
of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles
of incorporation or declared delinquent under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that have never passed to
the ownership of stockholders; or, having so passed, have again been purchased by the
corporation. These shares are not to be taken into consideration in determining majorities. When the
law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed from the
corporation, and that may be voted

Majority of the outstanding capital stock

Owners of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute
a quorum. Majority simply means simple majority that is 50% plus 1. So, if there are 100 voting shares,
to constitute a quorum, the owners of at least 51 voting shares must be present.

Manner of voting

The rule is that, the voting must be done either in person or through a representative authorized to act
by written proxy. Meaning, the person must be physically present at the designated voting place of the
corporation.

When so authorized in the bylaws or by most of the board of directors, the stockholders or members
may also vote through remote communication or in absentia. At there are several means of remote
communication. Such as but not limited to video conferences and online platforms such as google meet
or Microsoft teams. Voting in absentia is similar in concept to your absentee voting, wherein the
stockholders are still able to vote although not physically present or represented by a proxy in the
designated voting place. Traditionally, voting in absentia is done by giving in advance a written/printed
form to the prospective voters for the latter to fill in their choice/s. At present there are far more
convenient and faster ways of voting in absentia. For example BPI has an Electronic Voting in Absentia
System in their website www.bpi.ayala-asm.com

Delinquent Stock

Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if
any, shall be made on the date specified in the contract of subscription or on the date stated in the call
made by the board. A stockholder becomes a delinquent stockholder if he fails to pay within 30 days
from the date specified in the contract of subscription or on the date stated in the call.

A delinquent stock cannot vote or be voted upon. Earlier in our discussions, we’ve mentioned the types
of stocks that may be deprived of voting rights. For delinquent stocks, the prohibition to vote or be voted
upon is absolute.

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Section 24. Corporate Officers. - Immediately after their election, the directors of a corporation must
formally organize an elect: (a) a president, who must be a director; (b) a treasurer, who must be a
resident of the Philippines; and (d) such other officers as may be provided in the bylaws. If the
corporation is vested with public interest, the board shall also elect compliance officer. The same person
may hold two (2) or more positions concurrently, except that no one shall act as president and secretary
or as president and treasurer at the same time, unless otherwise allowed in this Code.

The officers shall manage the corporation and perform such duties as may be provided in the bylaws
and/or as resolved by the board of directors.

Discussion:

The President and Treasurer are corporate officers which the RCC requires as mandatory. So, every
corporation must have a president and a treasurer. The only qualification for a president is that he/she
must be a director, the treasurer on the other hand only needs to be a resident. It is not necessary that
the treasurer is also a director. Both the treasurer and the president may hold two or more corporate
positions concurrently. The president however cannot hold a concurrent position of secretary or
treasurer. A treasurer may hold a concurrent position of secretary because there is no prohibition under
the RCC

A Compliance Officer is a new term that is not found in the old corporation code. However, the SEC
pursuant to its regulatory and supervisory power under Section 5 of the Securities and Regulation Act
has issued a memorandum requiring certain corporations to have a compliance officer. As a matter of
fact, a compliance officer needs to apply for a Certificate of Registration of Compliance Officer with the
SEC.

Under the RCC, a compliance officer is mandatory only in corporations that are vested with public
interest. These are the corporations that are enumerated in Section 22 of the RCC.

Section 25. Report of Election of Directors, Trustees and Officers, Non-holding of Election and
Cessation from Office. - 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, the secretary, or any other
officer of the corporation, shall submit to the Commission, the names, nationalities, shareholdings, and
residence addresses of the directors, trustees and officers elected.

The non-holding of elections and the reasons therefor shall be reported to the Commission within thirty
(30) days from the date of the scheduled election. The report shall specify a new date for the election,
which shall not be later than sixty (60) days from the scheduled date.

If no new date has been designated, or if the rescheduled election is likewise not held, the Commission
may, upon the application of a stockholder, member, director or trustee, and after verification of the
unjustifiable non-holding of the election, summarily order that an election be held. The Commission
shall have the power to issue such orders as may be appropriate, including other directing the issuance
of a notice stating the time and place of the election, designated presiding officer, and the record date
or dates for the determination of stockholders or members entitled to vote.

Notwithstanding any provision of the articles of incorporation or by laws to the contrary, the shares of
stock or membership represented at such meeting and entitled to vote shall constitute a quorum for
purposes of conducting an election under this section.

Should a director, trustee or officer die, resign or in any manner case to hold office, the secretary or the
director, trustee or officer of the corporation, shall, within seven (7) days form knowledge thereof, report
in writing such fact to the Commission.

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Discussion:

Section 25 is the reason why a corporate secretary is mandatory in every corporations. The reportorial
requirements required by law to be submitted to the SEC are usually prepared and signed by the
corporate secretary. I used the word “usually” because, section 25 states that the mandatory reports
are to be submitted to the SEC by the secretary, or any other officer of the corporation.

Do not confuse the corporate secretary with the personal secretaries of the president or other officers
of the corporation. A corporate secretary does not prepare the coffee or entertain guests on behalf of
the other corporate officers.

Nature of report to be Period for submission of Content of the report

submitted
1. Election of Directors,
Trustees and Officers
2. Non-holding of Election
3. Cessation from Office
(death, resignation or in any
manner)
written report
Within thirty (30) days after
the election
within thirty (30) days from
the date of the scheduled
election
within seven (7) days form
knowledge thereof
Names, nationalities,
shareholdings, and
residence addresses of
those elected
non-holding of elections
and the reasons
therefor; a new date for
the election, which shall
not be later than sixty
(60) days from the
scheduled date
Fact of death or
resignation or any
manner

SEC. 26. Disqualification of Directors, Trustees or Officers. – A person shall be disqualified from being
a director, trustee, or officer of any corporation if, within five (5) years prior to the election or appointment
as such, the person was: (a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;

(2) For violating this Code; and

(3) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”;

(b) Found administratively liable for any offense involving fraudulent acts; and (c) By a foreign court or
equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the Commission,
the primary regulatory agency, or the Philippine Competition Commission may impose in its promotion
of good corporate governance or as a sanction in its administrative proceedings.

Discussion:

Section 26 enumerates the ground for the disqualification of directors, trustees or officers. The next
question is who determines whether a person is qualified or disqualified to be a director/trustee or
officer?

For public companies and registered issuers (those corporations that are listed and traded in the stock
exchange), SEC Memorandum Circular (MC) No. 24 Series of 2019 provides therein that the Board
sets qualification standards for its members to facilitate the selection of potential nominees for board
seats, and to serve as benchmark for the evaluation of its performance.

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How about private corporations whose shares of stock are not listed in the stock exchange? Article 3
paragraph F) of the SEC Memorandum Circular No. 6 series of 2009 otherwise known as the Revised
Code of Corporate Governance provide therein the responsibilities, duties, and functions of the of the
BOD. One of its duties and functions is to implement a process for the selection of directors. Although
SEC MC No. 24 series of 2019 expressly provides therein that it supersedes SEC MC No. 6. Series of
2009, nevertheless, it is also expressly stated therein that the said MC No. shall remain in effect for
other covered companies when applicable.

Section 26 talks about disqualification. How about the qualifications of the director? The last paragraph
of Section 26 states therein that the foregoing disqualifications is without prejudice to qualifications or
other disqualifications, which the SEC, the primary regulatory agency, or the Philippine Competition
Commission (PCC) may impose. The qualifications of a director may also be provided in the
corporation’s by-laws or the BOD itself may set the qualification standards.

SEC. 27. Removal of Directors or Trustees. – Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or in a nonstock corporation, by a vote of at least 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, and in either case, after previous notice
to stockholders or members of the corporation of the intention to propose such removal at the meeting.
A special meeting of the stockholders or members for the purpose of removing any director or trustee
must be called by the secretary on order of the president, or upon written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or a majority of the members
entitled to vote. If there is no secretary, or if the secretary, despite demand, fails or refuses to call the
special meeting or to give notice thereof, the stockholder or member of the corporation signing the
demand may call for the meeting by directly addressing the stockholders or members. 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 prescribed in this Code. Removal may be with or without cause:
Provided, That removal without cause may not be used to deprive minority stockholders or members
of the right of representation to which they may be entitled under Section 23 of this Code.

The Commission shall, motu proprio or upon verified complaint, and after due notice and hearing, order
the removal of a director or trustee elected despite the disqualification, or whose disqualification arose
or is discovered after an election. The removal of a disqualified director shall be without prejudice to
other sanctions that the Commission may impose on the board of directors or trustees who, with
knowledge of the disqualification, failed to remove such director or trustee.

Discussion:

Removal of a Director/Trustee

The removal of a director of a stock corporation requires the vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding capital stock. In the case of a non-stock
corporation, the vote of 2/3 of its members. The removal shall take place either at a regular meeting of
the corporation or at a special meeting called for the purpose. Note that before the date of the regular
or special meeting, there must be a prior notice given to stockholders or members of the corporation
of the intention to propose such removal at the meeting. Although Section 27 does not mention whether
the notice should be in writing or otherwise, but it should still be construed to mean in writing, otherwise
it would be difficult to prove later if there are questions or challenges to present proof that indeed a prior
notice was given.

The special meeting of the stockholders or members for the purpose of removing any director or trustee
must be called by the secretary on order of the president, or if there is no such order from the president
the stockholders representing a majority of the outstanding capital stock may still call such meeting
upon written demand. The law does not require that a regular meeting be called by the secretary
because the date or schedule of the regular meeting is already provided in the corporate by-laws. A
special meeting precisely, it is called special because it does not occur regularly, and it may or may not
be held.

If there is no secretary either because he/she died or resigned or herself/himself was removed, or if the
secretary, despite demand, fails or refuses to call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand may call for the meeting by directly

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addressing the stockholders or members. 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. Note that the
publication requirement is an option given only in cases where there is no secretary or if the secretary
refuses to call the special meeting or give notice thereof.

Removal with or without cause

The removal of director could be done with or without cause. When you say with cause the removal is
with a valid cause such as when the director is making acts which are inimical or against the interest of
the stockholders. It is without cause if there is really no valid reason for the removal like when the
majority wants to have new faces in the BOD or they are simply bored of the current set of directors.

Removal of a Director by the SEC

The last paragraph of Section 27 is a new provision that is not found in the old code. In order to protect
the interest of the minority stockholders who are always at the constant mercy of the majority owners,
Congress has deemed it appropriate to authorize the SEC to order the removal a director motu proprio
or upon verified complain and after due notice and hearing, order the removal of a director or trustee
elected despite the disqualification, or whose disqualification arose or is discovered after an election.
Unlike removal by a majority of the stockholders, the removal as ordered by the SEC has to be with a
cause and that is the director was elected despite being disqualified or the disqualification was only
found after he/she was elected. Furthermore, the removal ordered by the SEC is without prejudice to
other administrative sanction that the SEC may deem appropriate on the BOD, who, with knowledge of
the disqualification, failed to remove such director or trustee. Remember that it is the BOD who
determines if the director is qualified or not. So, if a member/s of the BOD still allowed one to be
nominated and elected despite having knowledge that the person is disqualified then the SEC can
impose administrative sanctions upon said member/s.

SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. – Any vacancy occurring in
the board of directors or trustees other than by removal 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 or members in a regular or special meeting called for
that purpose.

When the vacancy is due to term expiration, the election shall be held no later than the day of such
expiration at a meeting called for that purpose. When the vacancy arises as a result of removal by the
stockholders or members, the election may be held on the same day of the meeting authorizing the
removal and this fact must be so stated in the agenda and notice of said meeting. In all other cases,
the election must be held no later than forty-five (45) days from the time the vacancy arose. A director
or trustee elected to fill a vacancy shall be referred to as replacement director or trustee and shall serve
only for the unexpired term of the predecessor in office.

However, when the vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or damage to the
corporation, the vacancy may be temporarily filled from among the officers of the corporation by
unanimous vote of the remaining directors or trustees. The action by the designated director or trustee
shall be limited to the emergency action necessary, and the term shall cease within a reasonable time
from the termination of the emergency or upon election of the replacement director or trustee, whichever
comes earlier. The corporation must notify the Commission within three (3) days from the creation of
the emergency board, stating therein the reason for its creation.

Any directorship or trusteeship 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. In all elections to fill vacancies under this section, the
procedure set forth in Sections 23 and 25 of this Code shall apply.

In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of this
Code shall apply.

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 Type of vacancy
1. Removal
2. Expiration of term
3. Other than
removal/expiration (ex:
death or resignation)
4. Increase in the number
of directors or trustees (ex:
amended AoI)
Persons who will fill the
vacancy
by the stockholders or
members in a regular or
special meeting called for
that purpose
by the stockholders or
members in a regular or
special meeting called for
that purpose
By a vote of at least a
majority of the remaining
directors or trustees if still
constituting a quorum
stockholders or members
duly called for the purpose
of election at a regular or at
a special meeting OR in the
same meeting authorizing
the increase of directors or
trustees
Date of Election
may be held on the same
day of the meeting
authorizing the removal
no later than the day of
such expiration at a
meeting called for that
purpose
no later than forty-five (45)
days from the time the
vacancy arose
no later than forty-five (45)
days from the time the
vacancy arose

*A director/trustee elected to fill a vacancy is called a replacement director/trustee. His/her tenure will
depend on the type of vacancy he/she has filled. So if he/she is elected after the expiration of the term
of one of the directors, then the replacement director/trustee will serve a full year. If his/her election
was due to removal or other than expiration of term, the replacement director/trustee shall only serve
shall serve only the unexpired term of his/her predecessor in office.

* when the vacancy prevents the remaining directors from constituting a quorum and emergency action
is required to prevent grave, substantial, and irreparable loss or damage to the corporation, the vacancy
may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining
directors or trustees. The action by the designated director or trustee shall be limited to the emergency
action necessary, and the term shall cease within a reasonable time from the termination of the
emergency or upon election of the replacement director or trustee, whichever comes earlier. The
corporation must notify the Commission within three (3) days from the creation of the emergency board,
stating therein the reason for its creation.

Section 29. Compensation of Directors or Trustees. - In the absence of any provision in the bylaws
fixing their compensation, the directors or trustees shall not received any compensation in their capacity
as such, except for reasonable per diems: Provided, however, That the stockholders representing at
least a majority of the outstanding capital stock or majority of the members may grant directors or
trustees with compensation and approve the amount thereof at a regular or special meeting.

In no case shall the total yearly compensation of directors exceed ten percent (10%) of the net income
before income tax of the corporation during the preceding year.

Directors or trustees shall not participate in the determination of their own per diems or compensation.

Corporations vested with public interest shall submit to their shareholders and the Commission, an
annual report of the total compensation of each of their directors or trustees.

Discussion:

Compensation of Directors/Trustees

General Rule: The compensation must be fixed in the by-laws. If there is no such mention in the by-
laws, they shall not receive any compensation

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Exceptions:

1. Reasonable per diems

2. Unless the stockholders representing at least a majority of the outstanding capital stock or majority
of the members grant the directors or trustees with compensation and approve the amount thereof at
a regular or special meeting.

Limitations to the grant of compensation

1. Total yearly compensation of directors shall exceed ten percent (10%) of the net income before
income tax of the corporation during the preceding year.

2. Directors or trustees shall not participate in the determination of their own per diems or
compensation

SEC. 30. Liability of Directors, Trustees or Officers. – 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 or 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.

A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the
corporation in respect of any matter which has been reposed in them in confidence, and upon which,
equity imposes a disability upon themselves to deal in their own behalf; otherwise the said director,
trustee, or officer shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.

Discussion:

A corporation, as a juridical entity, may act only through its directors, officers and employees.
Obligations incurred as a result of the acts of the directors and officers as the corporate agents are not
their personal liability but the direct responsibility of the corporation they represent. As a general rule,
corporate officers are not held solidarily liable with the corporation because the 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 nearly all of the capital stock of a corporation is not of itself sufficient ground
for disregarding the separate corporate personality.

To hold a director or officer personally liable for corporate obligations, two requisites must concur, to
wit:

(1) the complaint must allege that the director or officer assented to the patently unlawful acts of the
corporation, or that the director or officer was guilty of gross negligence or bad faith; and

(2) there must be proof that the director or officer acted in bad faith. (G.R. No. 196134)

Piercing the corporate veil

Piercing the corporate veil is warranted when the separate personality of a corporation is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues. It is also warranted in alter ego cases "where
a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation."

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When the corporate veil is pierced, the corporation and persons who are normally treated as distinct
from the corporation are treated as one person, such that when the corporation is adjudged liable, these
persons, too, become liable as if they were the corporation.

SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. – A contract of the corporation
with (1) one or more of its directors, trustees, officers or their spouses and relatives within the fourth
civil degree of consanguinity or affinity is voidable, at the option of such corporation, unless all the
following conditions are present:

(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;

(d) In case of corporations vested with public interest, material contracts are approved by at least two-
thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors
voting to approve the material contract; and

(e) In case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first three (3) 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 at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting and the contract is fair and reasonable under
the circumstances.

Discussion:

Voidable contract

If you remember Article 1390 of your New Civil Code, the following contracts are voidable or
annullable:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.

Section 31 of the RCC is another type of a voidable contract that is not found in your New Civil
Code. Unlike Void contracts, voidable contracts are valid until annulled. Voidable contracts are also
susceptible to ratification. Section 31 provides the requirements and procedure for the ratification of a
contract entered between the corporation with one (1) or more of its directors, trustees, officers or their
spouses and relatives within the fourth civil degree of consanguinity or affinity may be ratified.

General Rule: A contract entered between the corporation with one (1) or more of its directors, trustees,
officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity is
voidable.

Exception: A contract entered between the corporation with one (1) or more of its directors, trustees,
officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity is valid
provided that all conditions enumerated under paragraphs (a) to (e ) of Section 31 are met.

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Ratified contract

A ratified contract is a contract that originally has a defect in it thus rendering it voidable or annullable.
It is subsequently rendered valid by an act on the part of one of the contracting parties done in
accordance with the law which provides for the manner upon which ratification shall be made.

Under Section 31 of the RCC if only one of the conditions stated in paragraphs (a), (b), and (c) is
missing, the contract may still be ratified upon a vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting and the contract is fair and reasonable under the circumstances.

If you read this provision of the law, there is actually wrong with it because a contract can only be
ratified if what is missing is either of the first two (2), not first three. Why? If what is missing is (c) The
contract is fair and reasonable under the circumstances, then that cannot be ratified because the last
sentence of Section 31 clearly states that and quoted hereunder that:

“Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting and the contract is fair and reasonable under the
circumstances.”

Anyway, I think this is just a oversight on the part of Congress because of you look at the old corporation
code, it clearly mentions there that if any of the first two conditions set forth in the preceding paragraph
is absent.

SEC. 32. Contracts Between Corporations with Interlocking Directors. – Except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a contract between two (2) or
more corporations having interlocking directors shall not be invalidated on that ground alone: Provided,
That if the interest of the interlocking director in one (1) corporation is substantial and the interest in the
other corporation or corporations is merely nominal, the contract shall be subject to the provisions of
the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.

Discussion:

Interlocking Director defined

Interlocking director is a director who simultaneously serves on the boards of two or

more corporations that deal with each other or have allied interests

General Rule: A contract between 2 or more corporations with interlocking directors is

valid provided the contract is fair and reasonable under the circumstances. The
contract cannot be invalidated by the mere fact that the corporations involved have
interlocking directors.

Exception: If it the contract is attended by fraud.

However, if the interest of the interlocking director is substantial in one corporation and
merely nominal in another, the said contract may be considered as voidable by the
corporation where the interlckiong director merely has nominal interest. In such a
situation, the same rules provided under Section 31 shall apply. For purposes of
determining whether the interest of a nominal director in one corporation is merely
nominal or substantial, stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for purposes of interlocking
directors.

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SEC. 33. Disloyalty of a Director. – Where a director, by virtue of such office, acquires a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, the director must account for and refund to the latter all such profits, unless the 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

Discussion:

A director of a corporation holds a position of trust and as such, he owes a duty of

loyalty to his corporation. In case his interests conflict with those of the corporation, he
cannot sacrifice the latter to his own advantage and benefit. As corporate managers,
directors are committed to seek the maximum amount of profits for the corporation.
This 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 interests of the stockholders.

In one case decided by the Supreme court it was held that a person cannot by the
intervention of a corporate entity violate the ancient precept against serving two
masters. He cannot utilize his inside information and his strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the equitable limitation
that it may not be exercised for the aggrandizement, preference, or advantage of the
fiduciary to the exclusion or detriment of the cestuis.

SEC. 34. Executive, Management, and Other Special Committees. – If the bylaws so provide, the board
may create an executive committee composed of at least three (3) directors. Said committee may act,
by majority vote of all its members, on such specific matters within the competence of the board, as
may be delegated to it in the bylaws or by majority vote of the board, except with respect to the: (a)
approval of any action for which shareholders’ approval is also required; (b) filling of vacancies in the
board; (c) amendment or repeal of bylaws or the adoption of new bylaws; (d) amendment or repeal of
any resolution of the board which by its express terms is not amendable or repealable; and (e)
distribution of cash dividends to the shareholders.
The board of directors may create special committees of temporary or permanent nature and determine
the members’ term, composition, compensation, powers, and responsibilities.

Discussion:
Section 34 talks about committees within the board composed of at least 3 directors.
So if there are 12 directors, the BoD may create 4 committees composed of 3 directors
for each committee.
The creation of a committee may only be pursued if it is provided for in the corporate
by-laws.
If so authorized by the corporate by-laws the act of the committee on such specific
matters within the competence of the BoD will now be the act of the entire BoD itself.
In other words, the powers that are normally exercised by the BoD are now delegated
to the committee/s

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 However the committee cannot act on matters which the BoD by themselves are not
allowed such as:
(a) approval of any action for which shareholders’ approval is also required;
(b) filling of vacancies in the board; (c) amendment or repeal of bylaws or the adoption
of new bylaws;
(d) amendment or repeal of any resolution of the board which by its express terms is
not amendable or repealable; and
(e) distribution of cash dividends to the shareholders.

i
https://corporatefinanceinstitute.com/resources/careers/jobs/board-of-directors/
ii
https://emerhub.com/philippines/corporate-structure-in-the-philippines/
iii
https://corporatefinanceinstitute.com/resources/careers/jobs/board-of-directors/

*LEGEND*

Blue text: Actual provision of the law

Black text: Legal discussions and interpretations

--END--

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