SEC

OPINIONS
WEEK 4

(BOARD OF DIRECTORS,
TRUSTEES, AND OFFICERS)

2019 CORPORATION LAW | ATTY. FRANCIS H. AMPIL| BLOCK 2C 2021

 March 23, 2011

SEC-OGC OPINION NO. 19-11

PROCEDURE FOR ELECTION OF DIRECTORS

JG Law
SOL Building
112 Amorsolo Street, Legaspi Village
Makati City

Attention: Atty. Lory Anne P. Manuel-McMullin

Atty. Myla Gloria A. Amboy

Mesdames :

This refers to your letter dated 15 October 2010 referred to us by the Commission's
Corporation and Finance Department on 08 November 2010.

In particular, you request the Commission's opinion on the validity of the procedure for
election of directors adopted by your client namely, Capitol Medical Center, Inc. (CMCI). The said
procedure is as follows:

"1. That the segregation of the votes for regular and independent directors is
acceptable, such that one vote cast per independent director (since there are only two
nominees for independent director) would already be sufficient to elect them. On the other
hand, for the regular directors, the 9 nominees with the highest votes cast in their favor
would be elected. Under this procedure, the losing nominee for regular director, even if
he/she gets a higher number of votes than the independent directors, would still not be
elected.

2. In the event of a tie between two candidates for the last slot for regular director,
the Corporation may break the tie by way of drawing of lots (by the candidates who get the
same number of votes) as an acceptable corporate practice in the absence of a provision in
the by-laws of the Corporation. (copy of the SEC Opinion dated 24 February 2004 is
attached herewith)

3. In case the other candidate (who gets the tie vote) is absent during the annual
stockholders' meeting, an authorized representative of the absent candidate or his proxy, or in
case there is no authorized representative/proxy, the presiding officer, in the presence of the
stockholders, shall draw the lot in behalf of the absent candidate." TIAEac

We confirm that this procedure is not contrary to the Corporation Code, or the Securities

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 1
Regulation Code and its Implementing Rules and Regulations. We acknowledge that segregation of
the voting for regular directors and independent ones is a practical device in order to ensure that at
least two independent directors are elected to the CMCI's 11-member Board of Directors in
accordance with SRC Rule 38.

Further, we re-affirm SEC Opinion dated 24 February 2004 regarding the manner of
resolving a deadlock in the elections, in the absence of specific provisions on the matter in the
corporation's by-laws.

This Opinion is rendered based solely on the facts and circumstances disclosed and relevant
solely to the particular issues raised therein and shall not be used in the nature of a standing rule
binding upon the Commission in other cases whether of similar or dissimilar circumstances. If,
upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be
rendered null and void.

Please be guided accordingly.

(SGD.) VERNETTE G. UMALI-PACO

General Counsel

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 2
 June 13, 1991

Eastern Rizal-Laguna
Investors League
c/o Camacho Law Office
40 Sampaguita Street
De Castro Subdivision
Ortigas Avenue Extension
Pasig, Metro Manila

Gentlemen :

This refers to your letter dated May 6, 1991, requesting confirmation of the following: cdll

a) That the total yearly compensation of directors mentioned in Section 30 of the

Corporation Code is not meant to include per diems; and

b) That in any case, the ceiling provided for therein can be exceeded upon the
unanimous votes of holders of all the outstanding shares of stock of the
corporation.

"Per diems" are allowances of money for expenses each day. (Webster Comprehensive
Dictionary International Edition 1987) The term "per diem" is limited to pay for a day's services.
(32 Words & Phrases, p. 17) On the other hand, the word "compensation" does not imply an
immediate payment, an immediate or direct return, nor the payment of cash fare or its equivalent.
(15 C.J.S. 652) Likewise, a reading of the Batasan proceedings on Section 30 of the Corporation
Code shows that the terms "salary" and "compensation" were treated as synonymous and used
interchangeably, and while "salary" connotes a fixed compensation, "per diems" relates to expense
reimbursement. (SEC Opinion dated December 8, 1987) Thus, under Section 30 of the Corporation
Code, "per diems" have been excluded from the coverage of compensation. The Law provides:

"SECTION 30. Compensation of directors. — In the absence of any provision in

the by-laws fixing their compensation, the directors shall not receive any compensation, as
such directors, except for reasonable per diems: Provided, however, That any such
compensation (other than per diems) may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a regular or
special meeting. In no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) per cent of the net income before income tax of the corporation during the
preceding year." (Emphasis supplied)

The express exception in the above provision clarifies the intention of the law that "per
diems" are not included in the limitation clause of yearly compensation of directors. It is a rule in
the interpretation of statute that the appropriate and natural office of the exception is to exempt
something from the scope of the general words of a statute which would otherwise be within the

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 1
scope and meaning of such general words. cda

However, there is a limitation that "per diems" must be reasonable. Thus, stockholders may
review such board resolution fixing or increasing per diems of the members of the Board and may
inquire into its reasonableness, and if found excessive, to afford adequate relief therefrom.

Anent the second issue, the phrase "in no case shall . . . exceed . . . " in the above-cited
provision connotes that the 10% limitation on the amount of compensation of directors does not
admit an exception. The limitation is intended for the protection not only of the stockholders but
also for the corporate creditors and prospective investors. Hence, the same should be strictly
observed.

In connection with your request for certified copies of the latest amended articles of
incorporation and amended by-laws of the Rural Bank of Majayjay, Inc., please come to the
Records Division, Administrative and Finance Department, of the Commission for the filling up of
the prescribed application form and the payment of the necessary fees therefor.

Please be advised accordingly. cdasia

Very truly yours,

(SGD.) ROSARIO N. LOPEZ

Chairman

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 2
 August 19, 1992

Ms. Ma. Lourdes S. M. Estanislao

Iluminada Farms Inc.
113 Quirino Avenue
Davao City

Madam:

This refers to your letter of July 26, 1992 requesting opinion on the following queries: cdtai

1. When the directors of a corporation receiving compensation as such directors,

apart from per diem, receive also other compensation such as incentive bonus,
consultant's fee, salary, without the benefit of the required approval or vote of
the stockholders, should such other compensation be included in the ten (10%)
percent limit prescribed in Section 30 of the Corporation Code?

2. When the directors of a corporation receiving compensation as such directors

also serve as the officers of the corporation, should their salaries as officers of
the corporation be included in the same ten (10%) percent limit prescribed in
Section 30 of the Corporation Code?

3. Are the directors receiving compensation as aforesaid, apart from per diem,
individually liable to return what they have received without the approval of the
stockholders? If such had been the practice for a long time already, will this
extinguish or mitigate the liability, if any, of the directors concerned?

4. If the compensation being received by the directors, apart from the per diem,
have the tacit approval of the stockholders and do not exceed the ten (10%)
percent limit prescribed in Section 30 of the Corporation Code, can this be
considered legal even if it is not explicitly provided for in the by-laws of the
corporation? If this has been the practice and if found to be improper or illegal,
how can this be corrected or remedied?

The Corporation Code provides

"SECTION 30. Compensation of directors. — In the absence of any provision in

the by-laws fixing their compensation, the directors shall not receive any compensation, as
such directors, except for reasonable per diem: Provided, however, That any such
compensation (other than per diem) may be granted to directors by the vote of stockholders
representing at least a majority of the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income before income tax of the corporation
during the preceding year." (Emphasis supplied) cdtai

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 1
 Under the aforecited provision, directors can receive compensation, other than per diems,
only if the by-laws fix the same, or should there not be any such provision in the by-laws, if the
stockholders representing a majority of the outstanding capital stock agree to give it to them.
Accordingly, in the absence of a provision in the by-laws or approval by the stockholders, directors
are not entitled to receive compensation.

As to what covers "total compensation", usually it includes salaries/remuneration,

bonuses/gifts, or any incentive compensation for services rendered for the corporation. The phrase
"in no case shall . . . exceed . . . in the above-cited provision connotes that the 10% limitation on the
amount of compensation of directors does not admit an exception. The limitation is intended for the
protection not only for the stockholders but also for the corporate creditors and prospective
investors.

Relative to compensation of officers, since, the Board of Directors appoints/elects the

corporate officers, ordinarily then and as manager of the corporate affairs, it is within the Board's
power to fix the salaries of the officers by way of a resolution to that effect. If there is such an
authority, a director who is also an officer may collect a salary for his services done as an officer.
The reason is that the offices of directors and officers have different functions. If a resolution fixing
the salaries of officers is not tainted with irregularity and is not for the purpose of disposing of the
profits of the corporation, the only question to be determined is whether the salary fixed is
reasonable. Considering that the board of directors and officers have different functions, we believe
that the above 10% limitation excludes salaries for services rendered by officers.

Salaries to officers and directors, made without proper authorization, may ordinarily be
recoverable in a stockholders' suit; where action by the corporation is prevented by the control of
the majority stockholders, relief may be at the instance of minority stockholders themselves, there
being no laches, acquiescence or other circumstances preventing relief, after demand has been made
upon regular corporate management to act and it has refused, or unless it appears that a demand
would be in vain and useless; and an accounting may be required of officers who have received
salaries in excess of a fair and reasonable value for the services performed, or have breached their
fiduciary duties. However, generally, the action of the directors will not be set aside by the courts
on the suit of a minority stockholder unless the result is an oppression of the minority.
Compensation is dealt with as an issue of business judgment to be questioned only in case of clear
abuse. Such a cause of action is properly brought in a court of equity, and is common to all of the
stockholders and is one for which one stockholder may sue for the benefit of all, but a derivative
action by stockholders complaining of alleged excessive salaries voted by the directors to certain
officers will be barred by laches, especially after the lapse of many years since the action
complained of occurred. (5-A Fletcher Sec. 2171 citing several authorities)

Please be advised accordingly. LexLib

Very truly yours,

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 2
 April 21, 2014

SEC-OGC OPINION NO. 04-14

RE: QUALIFICATION/DISQUALIFICATION OF BOARD OF DIRECTORS; CONFLICT OF

INTEREST

Dr. Shirley Jane D. Chua-Panganiban

President/CEO
Mid/East Scientific Medical Equipment & Services, Inc.
Tropicana Suites 1630 L. Ma. Guerrero St.
Malate, Manila

Dear Dr. Chua-Panganiban,

This refers to your letter dated 25 June 2013 requesting for opinion regarding a conflict of
interest of one of the members of your Board of Directors.

In your letter, you mentioned that on 21 December 2012, a corporate entity under the name
of Equilife Medical Equipment Supplies & Services, Inc. ("Equilife") was registered with the
Commission which has a similar primary purpose with your corporation, and which is eighty
percent (80%) owned by Ma. Ysabel E. Valenzuela, the daughter of one of your Board of Directors,
Abelardo H. Valenzuela III ("Mr. Valenzuela"). You further stated that Equilife is engaged in a
business that is directly and substantially competing with your corporation by offering the same
services that your company is rendering, thus, some of your clients did not renew their subsisting
contracts with your corporation in favor of Equilife which adversely affected your business
operations. You claim that this is possibly done through the efforts of Mr. Valenzuela, considering
that as Director, he may have direct access to your corporation's business and trade plans.

Consequently, it is your lawyer's position that the act of Mr. Valenzuela constitutes a conflict
of interest citing the case decided by the Supreme Court in John Gokongwei, Jr. v. Securities and
Exchange Commission, et al. 1(1) which held that:

(1) A director shall not be directly or indirectly interested as a stockholder in any

other firm, company, or association which competes with the subject corporation. DAEaTS

(2) A director shall not be the immediate member of the family of any stockholder in
any other firm, company, or association which competes with the subject corporation.

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 1
 office.

(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board.

Accordingly, you now seek our opinion whether there exists a conflict of interest.

Please be advised that pursuant to SEC Memorandum Circular No. 15, Series of 2003, the
Commission refrains from rendering an opinion on the matter stated in your request involving as it
does the substantial and contractual rights of private parties who would, in all probability, contest
the same in court if the opinion turns out to be adverse to their interest. Such is the nature of your
query which involves rights that are litigious in nature and may thereafter lead to an intra-corporate
issue, jurisdiction over which is already transferred to the Regional Trial Courts, pursuant to
Section 5.2 of the Securities and Regulation Code ("SRC"). However, for purposes of information
only, the following are imparted.

It is important to note that "every corporation has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs". 2(2) Thus,
under Section 47 (5) of the Corporation Code, a corporation may prescribe in its by-laws the
qualifications of its directors, officers and employees. HTSAEa

Accordingly, the qualification that "a director shall not be the immediate member of the
family of any stockholder in any other firm, company, or association which competes with the
subject corporation" is a qualificational by-law provision which may be added to those specified in
the Corporation Code, (i.e., Section 23 3(3) and Section 27 4(4)), pursuant to the case of
Gokongwei v. Securities and Exchange Commission, et al. 5(5) Thus, corporations have the power
to make by-laws declaring a person employed in the service of a rival company to be ineligible for
the corporation's Board of Directors and a provision which renders ineligible, or if elected, subjects
to removal, a director if he be also a director in a corporation whose business is in competition with
or is antagonistic to the other corporation is valid. 6(6) However, these qualifications become
effective only when the by-laws of the Corporation expressly provides for the same.

In this connection, as a general proposition, the Corporation Code provides the liability and
accountability of directors as follows:

Sec. 31. 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.

When a director, trustee or officer attempts to acquire or acquires, in violation of his

duty, any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account for the profits which
Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 2
 otherwise would have accrued to the corporation.

Sec. 34. Disloyalty of a director. — Where a director, by virtue of his office,

acquires for himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter for all such
profits by refunding the same, unless his act has been ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision
shall be applicable, notwithstanding the fact that the director risked his own funds in the
venture. caDTSE

In any case, it shall be understood that the foregoing opinion is rendered based solely on the
facts and circumstances disclosed and relevant solely to the particular issues raised therein and shall
not be used in the nature of a standing rule binding upon the Commission in other cases or upon
courts, whether of similar or dissimilar circumstances. 7(7) If upon investigation, it will be
disclosed that the facts relied upon are different, this opinion shall be rendered null and void.

Very truly yours,

Signed by representative
CAMILO S. CORREA
General Counsel
Footnotes
1. G.R. No. L-45911, 11 April 1979.
2. Ibid.
3. . . . Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a
director shall thereby cease to be a director. Trustees of non-stock corporations must be members
thereof. A majority of the directors or trustees of all corporations organized under this Code must be
residents of the Philippines.
4. No person convicted by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date
of his election or appointment, shall qualify as a director, trustee or officer of any corporation.
5. Supra, note 1.
6. Ibid.
7. Paragraph 7, SEC Memorandum Circular No. 15, Series of 2003, Re: Requests for Legal Opinions.

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 3
 September 27, 1993

Atty. Earnest A. Soberano

Consolidated Rural Bank
(Cagayan Valley), Inc.
Santiago, Isabela

Sir:

This refers to your letter of September 16, 1993 requesting opinion on the following queries:

1. Is it mandatory that the by-laws expressly provide for the creation of an

executive committee?

2. If yes, will not a provision in the by-laws "authorizing the board to create such
committees as the board may deem necessary", be a substantial compliance with
the requirement of the law?

3. If no, what would be the status of an executive committee that is created without
an express authority in the by-laws? Will it constitute an ultra-vires act of the
corporation?

The pertinent provision of the Corporation Code provides:

"SECTION 35. Executive committee. — The by-laws of a corporation may create

and executive committee, composed of not less than three members of the board, to be
appointed by the board. 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 by-laws or
on a majority vote of the board, except with respect to: (1) approval of any action for which
stockholder' s approval is also required; (2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal
of any resolution of the board which by its express terms is not so amendable or repealable;
and (5) a distribution of cash dividends to the shareholders." (Emphasis supplied). cda

It is construed from the above provision that the "Executive Committee" can only be created
by virtue of a provision in the by-laws. In other words, the Board of Directors cannot simply create
or appoint an executive committee to perform some of its functions if there is no such authority in
the by-laws. This interpretation is supported by the following statements in the Proceedings of the
Batasan Pambansa on the Corporation Code.

"Mr. Badoy. . . . Is it intended that an executive committee may be created only if so

authorized in the by-laws?

Mr. Abello. Yes, that is right.

Mr. Badoy. In other words, in corporations where the by-laws are silent the board may

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 1
 not create such an executive committee, would that be the intent. Your Honor?

Mr. Abello. Correct."

Relative to your second query, because of the nature of the function of the "Executive
Committee", the authority to appoint such body should be clearly spelled out in the by-laws, and a
provision in the by-laws which states that "authorizing the board to create such committees as the
board may deem necessary" is not a sufficient authority for its creation and appointment. The
"Executive Committee" referred to under Section 35 of the Corporation Code should be
distinguished from other committees which are within the competence of the Board to create at any
time and whose actions requires confirmation by the Board itself. The former body is as powerful
as the Board of Directors, as it actually performs certain duties of the Board, and in effect, it is
acting as the Board itself. It is to be noted that the Board of Directors only performs acts delegated
to it by law and it is a general principle of law that delegated powers cannot be further delegated.
And so, to avoid any doubt as to whether this practice of creating an "executive committee" to
perform certain delegated functions of the Board is proper or not, the Corporation Code requires
that before it can be done, it has to be expressly authorized in the by-laws. The Batasan deliberation
on the matter further states. thus:

"Mr. Mendoza. If this Code is enacted with the provision on executive committees, then
it will be a corporate body, a body, rather, of a corporation or an instrumentality of a
corporation with a standing in law, although, in a sense, it is an agent of the Board of Directors
because it performs what otherwise is vested by law in the Board of Directors. However, its
authority is not simply derived from the Board of Directors since the organization or creation
of the executive committees would be through the by-laws. (Emphasis supplied).

Anent your third query, the principle on "de facto officers" may be applied in so far as third
parties are concerned. A person is a de facto officer where he acts as such, under color of an
election or appointment. In other words, he holds office under color of authority, through
designation or election, but fails being a "de jure officer" by some irregularity or failure to qualify
as required by law. By color of authority is meant authority derived from an election or
appointment, although irregular or informal, so that the incumbent must not be a mere volunteer. In
the leading case on the subject of "de facto officers" decided in Connecticut in 1871 in relation to a
public officer, the reasoning of which applies equally well to an officer of a private corporation.
Chief Justice Butler stated the reason for the rule as follows: The de facto doctrine was introduced
as a matter of policy and necessity, to protect the interests of the public and individuals, where
those interests were involved in the official acts of persons exercising the duties of an officer,
without being lawful officers. The reason for the rule was also well stated by Justice Clopton in
Alabama as follows: "The doctrine of the validity of the acts of officers de facto rests on public
policy and justice. The official dealings of directors de facto with third persons are sustained as
rightful and valid, on the ground of continuous acquiescence by the corporation, and suffering them
to hold themselves out as having such authority; thereby inducing others to deal with them in such
capacity. The principles sustaining the validity of their official acts, are that, though wrongfully in
office, yet exercising power and functions appertaining to such office, justice and necessity require,
for the protection and preservation of the rights and interests of third persons, that their acts, within

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 2
the scope of official authority and duty, shall be sustained. Clearly it would be impracticable for
third persons to deal with corporations at all, if each one must investigate the legality of the title of
each corporation officer as a condition precedent to a business transaction. However, insofar as the
corporation is concerned, the unauthorized act of appointment of an Executive Committee may be
subject to Section 144 of the Corporation Code which provides for penalties in case of violation of
any of the provisions of the Code. cdrep

It is thus advised that if the present by-laws of corporation referred in your letter is silent on
the authority to create an "Executive Committee", it should be amended in accordance with Sec. 48
of the Corporation Code to reflect such authority so as to legalize the creation and appointment of
said corporate body.

Very truly yours,

(SGD.) ROSARIO N. LOPEZ

Chairman

Copyright 1994-2018 CD Technologies Asia, Inc. Securities and Exchange Commission 2018 3