REVISED CORPORATION

CODE
ATTY. CHRISTIAN GEORGE LLANES MELITANTE, BSBA, JD, MBA, REALTOR
 2

SEC 22 – BOARD OF DIRECTORS

Who exercises the corporation powers?
It shall be the board of directors, unless a specific provision of law
provides otherwise.

What does the exception mean?

It means there are corporate powers which are

1. Exclusively lodged with SH
2. Require SH approval
 3
Can the board sell treasury shares below par value, the best price that it could get given
the economic conditions availing at that time, to pay a loan already due?
Yes, pursuant to business judgment rule.

What is the business judgment rule?

Questions of management and policy are left to the sound discretion of the board, not
reviewable by the courts or SH, subject to the presence of good faith.

* Supposing the board resolved to acquire property for 10M. SHs believe that the price is
excessive. It could have been bought for 8M.

Can the SH file a resolution to revoke the board resolution?

No. Revocation of a board resolution is not one of the remedies available to the SHs. The
SHs can never supplant the will of the board.

What are the remedies available to SHs?

• 1. Derivative suit
• 2. Election of new directors
• 3. Remove directors
 4

Can the board of directors declare dividends out of reappraisal

surplus invoking business judgment rule?

No. Because there is no actual gain. it is merely paper gain and

can be wiped out in case of unfavorable economic
conditions.
The corporation lost its STB. They filed a petition with the SEC for
a replacement STB. Thereafter, the corp passed a resolution
declaring all the entries in the lost STB null and void.
 5

Can the board nullify the entries in a stock and transfer book under
the business judgment rule?
No. It is not for the board to determine whether the entries were null
and void. It is for the court to decide which entries are valid, and
which ones are not.
The corporation has been losing money for many years. To motivate
the SHs, the following board resolutions have been passed: declaring
dividends to all SH, bonuses to all directors, and bonuses to all
officers. If this is prompted by good faith on the part of the corp, is
this valid?
No. Because this is contrary to law that says no declaration of
dividends unless there is surplus profit, only the SH may fix bonuses of
directors.

What about the bonuses to officers?

While it is not contrary to law, still it cannot be justified because it is
not in good faith. You cannot give bonuses when the business is
losing money.
 6
Can the board create an ordinary office under business judgment rule?
Yes. Because the board is presumed to know what would be best for the corp.

Can the board create an office and appoint a person to occupy that office to make the
removal issue an intra-corporate controversy?
No. Only the BL can create a corporate office.

Can the board create an executive committee?

Yes, except if that committee is the same as described in Sec 34, in which case only the BL
can do so.

What is the significance of differentiating the office created by the board versus office
created by the BL?
It is not a matter of which position is more important. Just because it is created by the BL
does not mean it is more important than the one created by the board. The real
significance is to determine which has jurisdiction in case of disputes. If created by the
board, then it would be a labor dispute, hence LA, if created by the BL, it is intra-corporate
dispute, then RTC.

What if the BL authorized the board to create a corporate office? And pursuant to that
power, the board created a corporate office.
This is still not a corporate office. Only the BL can create one. The BL cannot authorize the
board to create a corporate office. Hence, the dispute is still cognizable by the LA.
What if the BL was amended to incorporate the office therein? 7
Then it becomes a corporate office, and now cognizable by the RTC.
In Balma vs College of Lingayen, JDL was appointed as dean of a college for a
term of 5 years. For the first year, the population was 3k, the following year, it
was reduced to 2k, then the third year, to 200. Because of that, he was moved
to another department. He filed a complaint for constructive dismissal with the
RTC.

Is that correct?
No. Because the office of the dean is not one created by the BL.
In Wesleyan University vs CA, the president was terminated prior to the
expiration of his 5 year term. He went to the RTC and sued. The university
moved to dismiss on the ground of lack of jurisdiction as he was just an
employee of the university. University argues it exercises control over the means
and methods of performance of the president.

Is that right?
No. The president, secretary, and treasurer, are always corporate officers
because the law so provides.

Can a person be a corporate officer and employee at the same time?

Yes. These are not incompatible offices.
 8
Who are those who can initiate a complaint and sign verification of
non-forum shopping, despite absence of board resolution?
1. Chairman
2. President
3. GM or acting GM
4. Human resource officer
5. Employment specialist

Why?
Because of their positions, they are deemed to be familiar with the
affairs of the corp.

Is the chief legal counsel one of those who can sign verification
without board resolution?
No. The list is exclusive. He must obtain a board resolution authorizing
him.
 9

Which of these qualifications for directors still hold true under the RCC?
1. Natural person – not anymore
2. President is required to be director – still retained
3. Residency requirement – not anymore
4. Max of 15 directors– still retained
5. 1 share ownership requirement – still retained
6. Continuing ownership of shares – still retained
7. Directors must not be less than 5 – not any more

Can you have a president that is a juridical person?

Not clear under the RCC whether directors may be juridical persons.
What is clear is that incorporators may be juridical persons. But since
your first incorporators can be the first board, it appears directors can
be juridical persons, and so the president can be a juridical person.
But then juridical persons are artificial beings, and incapable of
exercising corporate powers, so it needs agents. That is why they will
have to act thru nominees.
 10

Can you have 2 directors?

Yes.

Is there an exception to the removal of the min 5 directors?

Yes. Educational Institutions that are stock corps must have
at least 5 but not more than 15 directors, in multiples of 5.

What is the effect if the action is carried out by a person

not authorized by the board?
The action is not binding against the corp.
• What are the powers reserved to SHs?
11
• 1. Removal of directors
• 2. Election of directors in case vacancy is due to removal or expiration of term, increase in number of board seats
• 3. Adoption of bylaws
• 4. Fix compensation of directors
• 5. Fill up board seats if the remaining Directors do not constitute quorum

• In the annual SH meeting, there is no quorum. Election of new directors then cannot be conducted so the current
directors will serve in a hold over capacity. During the hold over period, a director resigns.
• Can the remaining directors fill up that vacancy if they still constitute quorum?
• No. Because the vacancy is still due to expiration of term and not resignation.
• What is the difference between term and tenure?
• Term is the period within which the person is entitled to hold the office. Tenure is the actual incumbency.
• Is the hold over period part of the term of the director?
• No.
• In Grace Christian High School vs CA, the school is located in Grace Village. The school claimed that it attracted
people to buy homes in the village. In view thereof, it had been made a trustee in the board of the home owners’
association for 15 years, despite not being a home owner. The management revoked the concession given so the
school filed suit, its defense being vested rights and estoppel.
• Will the suit prosper?
• No. it has no vested right because it is a requirement that a director must be a stockholder or a trustee must be a
member.
• What about the defense of estoppel?
• Estoppel cannot lie against an act that is contrary to law.
• Can the corporation allow permanent membership in the board?
• No. The directors must be elected every year, and the trustees, every 3 years.
 12
When must the director be an owner of the share?
On the date fixed in the BL. If silent, upon assumption to office as director.

In Lee vs CA, ABC obtained a loan from XYZ. The loan was secured by a voting trust
agreement of the shares of A in ABC corp. Effectively, the voting trust agreement
conferred legal to XYZ bank over the shares of A. Loan was not paid so suit was filed by
XYZ bank. Summons was served upon A.

Was there valid service of summons?

No. When he entered into a voting trust agreement, he conveyed legal title to all his
shares in favor of XYZ. Hence, he ceased to be an SH and a director.

What title is required for share ownership?

Only legal title. (Lee vs CA)

In case of scriptless shares, who has the legal title?

The stockbroker. The buyer only has the beneficial title.

Can the buyer of scriptless shares then be disqualified from holding a board seat?
Yes. Because it is not the SH on record. He should have put on record first his shares under
his name with the corp sec.
Must the share ownership appear in the books for the corp?

Yes. Until it is reflected therein, you are not deemed the owner. 13

During the 6 month service of a director, he sold his shares. Can that director insist on completing his term as it is provided by law?

No. Because it is likewise provided by law that the ownership requirement of shares must be on a continuing basis. The moment he ceases to
become an SH, he also ceases to become a director.

Can a director be disqualified on the ground of conflict of interest?

Yes. The BL can provide additional qualifications. A director must possess all of the qualifications, and none of the disqualifications provided by the
law, the AOI, and the BL.

Can the SH be denied right of inspection on the ground of conflict of interest?

Yes. Under the RCC, if the SH is a director of a competitor company, he may be denied his right of inspection.

Can the BL enlarge or expand the qualifications of directors?

Yes.

Can the BL require that SHs should have more than 1 share?

Yes

Can the BL require that directors must be a holder of 1M shares?

Yes. So long as this is not intended to deprive minority holders right of representation in the board.

Can the BL require that only college degree holders can be directors?

Yes.

Can the BL require that only deans of schools can be directors?

Yes.
 14

SEC 23 – ELECTION OF DIRECTORS

JDL is an SH in a corporation vested with public interest. He holds 1M shares. There
are 10 directors to be elected.

How will he vote?

• He can cast 10M votes, because the formula is number of shares held times the
number of vacancies, regardless of whether regular or independent.
• Since this is a corporation with public interest, there must be independent
directors, which shall be at least 20%
• The nominees shall for regular directors shall be different from the nominees for
independent directors.
• The ones with the highest votes for regular directors, and the ones with the
highest votes for the independent directors shall fill the vacancies, even though
the nominees for the independent directors received lower votes than any of
the nominees for regular directors.
• The votes can be cast in any manner he may want so long as it shall not
exceed 10M.
What is the requirement as to independent directors? 15
At least 20% of the board seats must be set aside for independent directors.

What are public companies?

• 1. Those listed in stock exchange
• 2. If not listed, holding assets of at least 50M (assets, not capital), with at least 200 SHs, each one owning 100 shares each.

The SRC defines public companies as holding assets of MORE than 50M as opposed to RCC which says AT LEAST 50M. Which one will prevail?
• It is the RCC because it is the more recent legislation.

What is an independent director?

• One whose shareholdings are not part of management, and not subject to any condition that may interfere materially to his independent judgment as director.

Who are examples of those who cannot be independent directors?

• 1. Counsel of the corp
• 2. Controlling SH with more than 10% shareholdings
• 3. Related to the controlling SH

What is the term of directors?

• For regular directors, 1 year and can be reelected with no limit.
• For independent directors, 1 year, but reelection is subject to the 525 rule.

What is the 525 rule?

• Can be reelected for consecutive 5 years, then break of 2 years, then can be reelected again for the next 5 consecutive years. After that, he is now disqualified.
He is now deemed too familiar with the affairs of the corp, hence may not be as independent as he should be.
How many corps may a person hold independent director position?
• Still not clear. As of now, there is no limit. 16

What is the formula to determine the min number of votes you need to be assured of board seat?
• Outstanding shares present during the meeting, divided by number of directors plus 1. This is the least useful information in this reviewer.

In the case of sequestered shares, is the government entitled to vote with those shares?
• No because the right to vote still belongs to the stockholder of record. The government who sequestered the shares, in the person of PCGG, is merely a
conservator, or administrator.

When can the government vote using the sequestered shares?

Only when the following tests are satisfied:
1. 2 tiered test
2. Public character test

What do you mean by 2 tiered test?

1. There is prima facie evidence that the shares are ill-gotten
2. Imminent danger of dissipation of assets during the pendency of the case

What do you mean by public character test?

This also has 2 forms:
1. The shares were bought using public funds, like coco levy funds.
2. The shares were originally in the name of the government, but transferred to another person thru fraud
In these cases, the government may be allowed to vote using sequestered shares.

What is the effect to the election if there is a finding that due to error a nominee was deprived of a director seat?
• The entire election is not deemed nullified, but the director who received the least vote must give way to the winning director.
What are the requisites for a valid SH meeting for the purpose of election?
17
1. Notice of the meeting
2. Quorum – majority of the OVS
3. Presided by officer authorized in the BL
4. Held in the city or principal office as required by the BL

What is the effect if one SH was not notified of the meeting?

• The entire proceeding is rendered void, unless the SH waives the irregularity.

When is notice no longer required?

• When the BL specifies the actual date and time of the annual SH meeting, there is no need to notify the SHs. And therefore,
lack thereof cannot be used as ground to nullify the proceedings. (Ricafort vs Dicdican)

What shares are excluded in the voting?

1. Treasury shares
2. Pref shares if denied the right to vote
3. Redeemable shares if denied the right to vote
4. Delinquent shares

Can there be quorum if there is only one attendee in the meeting?

• Yes, if that person holds majority of the OVS.

What is the first item that needs to be discussed in every meeting?

• Determination of the presence of quorum.
What is the first item that needs to be discussed in every meeting? 18

• Determination of the presence of quorum.

What is the rule on venue of SH annual meetings?

• They must be in the principal office. Only if not practicable can it be held in
another place but still within the city where the principal office is located.

What are the modes of participation for the SH under the RCC?
1. In person – physically present
2. By proxy – appointment of an agent
3. Remote communication
4. In absentia

When are remote communication and in absentia allowed?

1. When authorized by the BL, or
2. When authorized by the board, or
3. Even in the absence of the above, when the corp is vested with public interest.
 19

SEC 24 – CORPORATE OFFICERS

Can the SHs directly elect the corp officers?
• No. The power belongs to the board.

Who are the statutory corp officers?

• President, Secretary, Treasurer, and Compliance Officer (for corps
vested with public interest)

By default, who must preside the meeting?

• It should be the chairman. Only in the absence of the chairman
can the president preside.
Can the president be likewise the compliance officer? 20

• No. While the prohibition does not extend to compliance officer, the position of compliance officer must
be held on a full time basis, therefore the president cannot be the compliance officer at the same time.

What are the prohibited concurrent offices?

1. President and secretary
2. President and treasurer
3. President and chairman in public companies
4. Compliance officer and any other office

How is a corporate office created?

• It can only be created by the BL. The board does not have the power to create a corporate office. The
board merely appoints who will hold such office.

The BL provides that not all officers of the corp are required to be SHs of the corp. Is this provision valid?
• No. Because with respect to the president, he is required to be an SH.

What are the qualifications of a corp sec as provided by the SEC rules?
1. Legal skills of a chief legal officer
2. Vision and decisiveness of a CEO
3. The financial acumen of a chief financial officer
4. Interpersonal skills of a human resource officer
 21

SEC 25 – REPORT OF ELECTION

What are the requisites in postponing the SH meeting?
1. 2 weeks written notice to the SHs and the SEC
2. Within 30 days of postponement, report to the SEC why, and indicate the next scheduled election date,
which cannot be later than 60 days from the original election date.

What happens if no new date is designated in the report, or the rescheduled election is likewise not held?
• The SEC may, upon application of any SH, order the conduct of the meeting. Whoever is present in that
meeting, is deemed quorum, despite being less than majority of the OCS.

What is the GIS?

• It is the general information sheet. It is the report that is submitted to the SEC within 30 days from election
containing the information of the newly elected officers.

What is the significance of GIS?

• Only those persons whose names are listed in the GIS, duly filed with the SEC, are the lawful directors and
officers of the corp. (Premium Marble Resources vs CA)

What if there are 2 GIS submitted to the SEC, what happens now?
• This will be an intra-corporate controversy cognizable by the courts, and not by the SEC.
 22

SEC 26 – DISQUALIFICATIONS
OF DIRECTORS
Under the old code, what are the grounds for disqualification?
1. Conviction of an offense punishable by imprisonment of more than 6 years
2. Violation of the code within 5 years from appointment/election

What about under the RCC?

If within 5 years from appointment/election,
1. Conviction of an offense punishable by imprisonment of more than 6 years – must be final
2. Conviction for violation of the code – must be final
3. Conviction for violation of the SRC – must be final
4. Administrative liability involving corporate acts

Does admin liability have to be final for it be a ground for disqualification?

• No. Decisions of the SEC are immediately executory. It is not stayed by the pendency of appeal. Therefore, its finding of
admin liability is an immediate ground for disqualification.

Why is it important to determine if finality of conviction is necessary?

• Because the case could go on appeal for a long time. During the pendency the director is allowed to hold office.
 SEC 27 – REMOVAL OF DIRECTORS
What is a motion?
23

• It is an English concept which means premature ousting of a director. There is no motion here in the PH.

Who is a fiscalizer?

• He is a director representing the minority.

What are the requisites for removing a fiscalizer?

• On top of the 2/3 votes, he can only be removed for just cause. Because a director that belongs to the minority can only be removed for a just cause.

The BL provides that absence for 3 consecutive meetings, or nonpayment of subscription are grounds for removal as director by the board on majority vote.
Is this valid?

• No. Because the power to remove resides with the SHs, and not with the board.

Can the shares of a director be confiscated or appropriated by the corp?

• Based on current laws, not yet. It is allowed in the US but not here. This means that when the director is removed, he still is an SH of the corp.

Can the SEC remove a director?

Under the SEC yes,

1. Motu proprio

2. Upon complaint by aggrieved party

What are the conditions for the SEC to remove a director?

1. Notice and hearing

2. Based on disqualification which only surfaced after election

What is the effect if you knowingly elect a person who is disqualified?

• You can be sanctioned by the SEC.

• Congress enacted a law that states all former congressmen cannot be elected and must discontinue from being directors in the GOCCs. This law took
effect during the 6th month of his term.
Can the director be removed without the requisite 2/3 SH vote? 24

• Yes. Because the removal is by law, and not by a corp act. The director can
be removed on account of a law, and in such case, it is not subject to the
2/3 vote requirement.

In Bernas vs Cinco, Bernas was elected as a trustee of the Makati Sports Club.
There was disagreement among the members on how Bernas was running the
affairs of the corp. They wanted Bernas and the entire board out. Now, there
was a committee created under the BL composed of past presidents. This
committee was authorized to step in in case of breach of fiduciary duties. So
this committee called a special SH meeting and therein removed the entire
sitting board.
Is the removal valid?
• No. The meeting was improperly called. Getting the enough vote is not
enough. The meeting must have first been validly called. While the
committee was authorized to step in in case of breach of fiduciary duties, it
was not authorized by the BL to call an SH meeting. Only those authorized to
call an SH meeting by the BL may validly call the same. The call being void,
all the proceedings therein would likewise be void.

What is the remedy if the person authorized to call the meeting, does not call
the meeting?
• Any SH may file a petition with the SEC to call the meeting.
 25

SEC 28 – VACANCIES IN THE BOARD

What are the kinds of vacancies?
1. Cause relating to expiration of term, removal, or increase in number of board seats
2. Any cause other than the abovementioned

When may the SHs fill the vacancy?

1. In case of vacancy caused by expiration of term, removal, or increase in number of board seat
2. If the cause is any ground other than the 3, but the remaining directors do not have quorum
3. The board, despite still having quorum, decides to refer the matter to the SHs

When may the board fill the vacancy?

1. If the cause is any ground other than the 3, and the remaining directors have quorum
2. In case of an emergency board

What is the term of a replacement director?

• Only the unexpired portion of the replaced director.

Where do you reckon the unexpired term?

• It is counted from the date of the annual SH meeting.
• June 1 – annual SH meeting, JDL was approved director, July 1 – he resigned, Aug 1 – replaced by Pedro, Sept 1 – Pedro resigned, October 1 – replaced by Maria.

From when will you count the remaining period?

• June 1. So Maria will only serve up to June 1.
 26

When must the vacancy be filled?

• If due to expiration of term, vacancy must be filled not later than the same day of the expiration of
term to prevent any gap or vacuum in the board.

When should the replacement director be appointed in case of removal?

1. It may be during the same SH meeting where the removal is to be effected, as long as that fact is
indicated in the notice of SH meeting. In other words, it is expressly included in the agenda that there
will be an election for a replacement director.
2. In a separate election, but not later than 45 days

If the election did not occur in the same meeting where removal was effected, within what period must
the election be held?
RCC says not later than 45 days.

When should the vacancy be filled in case of increase of board seats?

• RCC says it can be filled in the same SH meeting where they voted to increase the board seats.
• 10/3/2019 AXP Internal 41
• But this seems to be wrong because the increase of board seats requires an amendment to the AOI.
Any amendment to the AOI must first be approved by the SEC. Until approved, there is no increase
in the board seats yet, and therefore no vacancy.
• But that is what the law provides so that is how you answer, even though it is wrong.
• In Volley Golf Country Club vs Caram when the director resigned during the hold over period, the
mode of vacancy is not due to resignation but still due to expiration of term. Such being the case,
only the SHs may fill the vacany.
 27
Is staggered resignation and election acceptable?
• JDL owns 2/3 of the OCS. He sold his shares to Pedro. It is standard for the
nominees of the seller to tender their resignation to give way to the nominees
of the buyer. If JDL has 10 nominees in the board out of the 15, if all of the 10
resigned at the same time, then there will be no quorum.
• So can you employ a mechanism whereby the 10 will not resign at the same
time, but by batches? First batch of 5 will resign, then the replacement 5 will
come in, then the last batch of 5 will resign, then the replacement 5 will come
in.

Is this valid?
• Yes. The requirement of the law is only that there must always be quorum at
any time replacements are effected.

Why would you resort to this?

• So that the election of the replacement directors may be left to the
competence of the board, instead of to the SHs.

In case of vacancy due to resignation, is it mandatory upon the board to fill the
vacancy?
• No. The vacancy does not bring about a mandatory obligation on the part of
the board to fill the vacancy. So long as there is still quorum, it can still transact
business.
 28

What are the requisites for appointment in the emergency board?

1. Vacancy precludes the board from having quorum
2. Presence of emergency situation
3. Those who will be elected must be officers of the corp
4. By unanimous vote

What is an emergency situation?

• It is one that if not attended to, will bring about grave, substantial,
and irreparable losses to the corp

Can the emergency board declare dividends?

• No. Because the emergency board must only respond or attend to
the emergency situation.

What is the term of the emergency board?

• Reasonable time upon the expiration of the emergency or upon
appointment of the replacement directors whichever comes earlier.
 29

SEC 29 – COMPENSATION OF DIRECTORS

What are the revisions under RCC?
1. Directors must not fix their own per diem allowance.
2. For special corps, annual financial report of each director
must be submitted to the appropriate government agency.

How is per diem now fixed?

1. By the BL
2. By the SHs
3. By the board – but prospectively, effective after their terms
expire
Are directors entitled to compensation?
• As a rule, no. Because directorial services are deemed gratuitous in nature. The return of investment is enough consideration 30
for their services.
• This is subject to exceptions.

What do you mean by compensation?

• Any remuneration for services, such as salary, profit sharing, bonuses, car plan, housing plan.

Is per diem part of the compensation?

• No. it is not a remuneration.

When can compensation be authorized?

1. If authorized by BL, or
2. Approved by SH by majority OCS
3. For non-directorial services (Western Institute of Technology vs Salas)

In Western Institute of Technology vs Salas, the SC said the term “in their capacity as such” suggests the prohibition only applies
to directorial services and not to non-directorial services. In this case, only board approval is needed to fix his compensation.
What are the conditions for the payment of per diem allowance?
1. Reasonable
2. Not fixed by the directors themselves

Is per diem subject to the 10% cap?

• No. 10% applies only to the compensation for directorial services. It does not even apply to compensation for non-directorial
services. However, under Corporate Good Governance, there is an annual limit as to how much per diem can be given.
What is the base upon which the 10% cap is determined?
• It is the net income, and not the gross income of the corp.
 31

SEC 30 – LIABILITY OF DIRECTORS

What are those cases where liability may attach on directors, officers, and agents of the corp?
1. Assenting or voting to patently unlawful act
2. Bad faith or gross negligence
3. Conflicting interest
4. Issuance of watered stocks
5. Express provision of law
6. Contractual stipulation

When is an act unlawful?

• If the law expressly declares the same to be unlawful.

If an HR officer does not notify DOLE for the termination of employment for authorized cause at least 30 days from
termination, can the officer be held liable with the corp?
• No. Because there is no law that declares such act to be unlawful. While the act affects the legality of the
termination, the indemnity can only be chargeable to the corp and not to the officer because it is not one of
those acts declared to be unlawful.
How can the officer be held liable now in this case?
• The HR Officer can be held liable if the conduct is attended by bad faith or gross negligence.
 32
Can the officers be held liable for bad decisions?
• No. Unless it is attended by gross negligence or bad faith, not just simple negligence
or imprudence.
How do you allege bad faith or gross negligence in the complaint?
• You allege the specific acts constituting bad faith or gross negligence. Mere
mention of bad faith is not enough. Furthermore, the allegations have to be proven
in trial.
In Bank of Commerce vs Nite, the president of the corp sold securities that were not
delivered to the buyer. The buyer sued the corp and the president for violation of the
SRC. The president was acquitted because there was no fraud or bad faith on her
part. Thereafter, a separate civil action for damages was filed against the president on
account of bad faith.
Can the president be made liable on a separate action on account of bad faith when
there is already a decision in a separate case acquitting her thereof?
• No. The earlier acquittal on the basis of lack of bad faith constitutes res judicata.
• In one case, the branch manager of the bank issued a pagares document. The
client want to purchase certain products from a corp but the seller does not want to
sell unless there is a guaranty as security. The bank manager, knowing the bank
cannot be a guarantor, issued a pagares document instead. A pagares document
is an undertaking to pay. It is for all intents and purposes, a security contract. The
client did not pay the seller so it sued the bank.
Who is liable?
• It cannot be the bank because the bank cannot be a guarantor. There was also no
board resolution authorizing the pagares document. So only the bank manager is
liable on the ground of bad faith or gross negligence.
Is conflict of interest a ground to hold the director liable?
33
• No. Conflict of interest per se is not a ground. It must be one that has damaging effects to the corporation.
• A is a director of ABC bank. He is also a managing partner of a law firm. ABC sought the services of his law
firm to prosecute a case against XYZ. XYZ filed a disbarment complaint against A for engaging in conflict of
interest.
Will the case prosper?
• No. Because between A and ABC, they are in fact pursuing a common object, and not in conflict with each
other. This is however a case of self-dealing.
What are watered shares?
• These are shares issued below par value for par value shares or below issued value for no par value shares.
In case the corp issues 1M shares, par value of 10, issued only for 5. Who are liable for the difference?
1. Those who consented to the issuance
2. Those who did not object
3. The subscribers

What is their obligation?

• Solidary obligation to pay the difference.
Who can enforce the payment of the difference?
1. The corp
2. The creditor, under the trust fund doctrine

In the RCC, the phrase was changed from corporation and creditors to corporation or creditors. What is the
significance of changing and to or?
• It means the creditor can only enforce the payment if the assets of the corp are not enough to pay the
creditors.
 34
What do you mean by express provision of law?
• It means the law makes the officers liable for the act of the corporation.
Such being the case, the officer cannot invoke good faith or any
personal defense as he is made liable by provision of law.
• In TR Law, when the corp is found guilty of violation of TR, the officers
are made personally liable. It is not a defense that the officer did not
actually receive the goods or the proceeds, or did not benefit at all
from the transaction.
Under contractual stipulation, what kind of liability is this?
• It would depend on the agreement he signed. It can either be
subsidiary or solidary liability. If he waived the right of excussion, he
binds himself solidarily because this is now a surety agreement.
• In Security Bank vs Cuenca, the president signed a surety agreement to
secure the loan of the corp. he resigned. Thereafter, the term of the
loan without notice to him.
Is he still liable as surety?
• No more. Any material adverse change to the main contract without
the consent of the surety releases the surety.
 35
In IEB vs Uy, the president signed a surety agreement but it turned out it
was spurious. Can the president be liable for bad faith or gross
negligence?
• No. Because in this case, the specific acts constituting bad faith was not
alleged.
What if the corporation becomes insolvent, can the president be made
liable for the separation benefits due to the employees?
• No. Because this is not one of those enumerated cases where a director
can be held liable.
Is it correct to say that the enumeration is exclusive?
• Yes.
What about piercing the corporate veil? Is that not another instance?
• No. it is not considered as the same as the enumeration because here,
there is no more separation of personalities between the corp and the
officers.
If you ask an employee to resign, is that bad faith?
• If there is basis to terminate the employee, but you want to give him
graceful exit, then asking him to resign is not bad faith. But, if there is no
cause, then there is bad faith. (Abbot vs Alcaraz)
 36

What about closure of the corp one day after receiving

adverse SC decision, is this bad faith
• Not necessarily. The SC said this may have been
coincidental so this is not enough basis to hold the
directors personally liable. (inaudible case) ?
 37

33 – DISLOYALTY OF DIRECTORS
What are the duties of the director to the corp?
1. Loyalty
a. He must promote the interest of the corp at all times
b. If there is conflict between personal and corporate interest, the latter prevails

2. Obedience a. Must obey or carry on the business of the corp as determined by the controlling interest in the corp

The president was sent to China for negotiation on the exclusive distribution of Huawei. Instead of giving the contract
to the corp, he put up his own sole prop.
What are his duties?
1. He must account for any profit earned from that transaction
2. Remit profit to the corp

What if the director used his personal funds to pursue the opportunity?
• He is still not excused. The only time he is excused is if he gets 2/3 SH approval.
 SEC 31 – DEALINGS OF DIRECTORS
38

What are the revisions here?

1. Extended to spouse, relatives up to 4th degree of affinity or consanguinity of the directors or officers
2. Material contract for corps vested with public interest must be approved by 2/3 of entire board, and majority of the
independent directors.

What constitutes self-dealing?

• When the corp enters into a contract with its own directors, and with the related interests of the directors as above
described.
What is the status of this contract?
• It is voidable at the option of the corp.
What are the conditions which makes the contract no longer voidable?
1. Presence of director not necessary for quorum
2. Vote of director not needed
3. Contract is fair and reasonable
4. Approval required in case of material contracts

Can you dispense with any of thes conditions?

• Only the first 2 can be dispensed with, provided there is approval from 2/3 of SH OCS. The condition that the
contract must be fair and reasonable cannot be dispensed with.
• In Prime White Cement vs CA, the corp appointed its director to be the exclusive distributor of cement in the
Visayas region for 5 years, with the price fixed at 9 pesos per bag.
What is the status of this contract?
• This is void because this is not fair and reasonable. You cannot have a fixed price for a period of 5 years.
 39

SEC 32 – INTERLOCKING DIRECTORS

What is the status of a contract between 2 corps with interlocking directors?
• It is valid. Interlocking director per se is not a ground to nullify the contract.
Why?
• Because it is sound business practice for corporations to contract with its allied enterprises.
What are the requirements in case of contracts between 2 corps with interlocking directors?
• It is subject to the provisions of Sec 32 if the following the stockholdings of the interlocking director is substantial in one and
nominal in the other corp.
• In essence, it is as if the contract is between him and the corporation.
What do you mean by substantial shareholdings?
• It is more than 20%.
• Note that this is only for purposes of applying the rules on interlocking directors. Substantial shareholding in general means more
than 50%.
What if the shareholding of the interlocking director is both substantial?
• Then the rules will not apply. It is as if this is just a regular contract.
In case of management contract between 2 corps with interlocking directors, what conditions must be added?
1. Board approval – majority of board of both managing and managed
2. SH approval – majority OCS of managing, 2/3 OCS of managed
 40

Can the management contract be longer than 5 years?

• It depends. The 5 year period only applies if the managing
person is a corp, but if it is a natural person, the 5 year period
does not apply.
In case of a contract between corporations with interlocking
directors, who can assail that contract?
• Only those parties to the contract may file an action. 3rd parties
cannot assail such contract.
• In DBP vs Hydro Resources, DPB granted loan to Marinduque
Mining, secured by mortgage. Loan was not paid, so the
mortgage was foreclosed. DBP then put up a subsidiary
company called Nonok, and therein transferred the foreclosed
assets. It turns out that Marinduque purchased steel products
from Remington steel, who was also unpaid. Remington want to
nullify the transfer of assets by DBP to Nonok on the ground that
they have interlocking directors.
Can Remington assail the contract between DBP and Nonok for
the transfer of assets?
• No. Remington is a third party and has no personality.
 41

SEC 34 – MANAGEMENT COMMITTEE

How can an executive committee be created?
• Only the BL can create an executive committee. The board can only appoint the
members therein but not create the executive committee per se.
Can the BL specify the names of the members of the executive committee?
• No. Because then it would limit the existence of the committee for a particular term.
Why is it that only BL can create the execom?
• Because this is like a small BOD. It can perform all acts which are within the
competence of the board. Whatever the BOD can do, execom may also do. This is
subject to exceptions.
How come the board cannot create this execom?
• Because the board cannot further delegate what has already been delegated to it
by the SH.
How many members are required in the execom?
• Not less than 3 directors.
Can you have more than 15? 42

• Yes, but that would defeat the purpose of having an execom which is supposed to
be substantially smaller than the BOD.
Can you have non-directors in the execom?
• Yes, but their role would be merely recommendatory. Only the directors can vote.
What are the acts that the execom cannot do?
1. Any act requiring SH approval
2. Filling up of vacancies
3. Amendment of BL
4. Amendment of board resolution which is not amendable
5. Declaration of cash dividends

Can the execom approve declaration of stock dividends, given that the prohibition
merely applies to declaration of cash dividends?
• Still no, because declaration of stock dividends requires SH approval.
Is there such thing as board resolution that cannot be amended or repealed?
• Obviously not because it will curtail the power of future boards. What the prohibition
means is that, the execom by express provision in the resolution is barred, but not
the BOD.
Can the board create committees?
• Yes. So long as the committee created is not the same as the execom defined by
law. (Pilipinas Port vs Go)
THANK YOU