TITLE 3: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
Correlation of the Board of Directors/ Trustees,
Officers and Stockholders
- Under Corporation Code, stockholders or members
periodically elect the board of directors or trustees¸
who are charged with the management of the
corporation. The board, in turn periodically elects
officers to carry out the management functions on
a day-to-day basis
Acts of management and ownership
Where do corporate-powers reside
- One of the most important rights of a qualified
shareholder or member is the right to vote either
personally or by proxy for the directors or trustees
who are to manage the corporate affairs
- The right to choose the persons who will direct,
manage and operate the corporation is significant
because it is the main way in which a stockholder
can have the voice in the management of the
corporate affairs, or which a member in a nonstock
corporation can have say on how the purposes and
goals of the corporation may be achieved
- Once the directors or trustees are elected,
stockholders or members renounce corporate
powers to the board in accordance with law
What is business judgment rule
- Contracts intra vires entered into by the board of
directors are binding upon the corporation and
courts will not interfere unless such contracts are
unreasonable and oppressive as to amount to
wanton destruction to the rights of minority as
when the plaintiffs claim that the defendant have
concluded a transaction among themselves as will
result in serious injury to plaintiffs
SECTION 22: Board of Directors or Trustees of a
Corporation; Qualification and Term
- Unless otherwise provided in Code, the board of
directors or trustees shall exercise the corporate
powers, conduct all business, and control all
properties of corporation
Directors – shall be elected for a term of 1 year from
among the holders of stocks registered in the
corporation’s books. Director who ceases to own at
least one share of stock
Trustees – shall be elected for a term not exceeding 3
years from among the members of the corporation
Trustee who ceases to be a member
Both Directors and Trustees – Shall hold the office until
the successor is elected and qualified
- An independent director is a person who, apart
from shareholdings and fees received from
corporation, is independent of management and
free from business or other relationship which could
reasonably perceived to materially interfere with
the exercise of independent judgment 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
the term, term limit, maximum number of board
memberships, and other requirements that
Commission will prescribe to strengthen their
independence and align with international best
practices
Governing body of a corporation
- Is board of directors
- The concentration in the board of the powers of
control of corporate business and appointment of
corporate officers and managers is necessary for
efficiency in any large organization
- Stockholders are too numerous, scattered and
unfamiliar with the business. Thus, the plan of
corporate organization is for the stockholders to
choose the directors who shall control and
supervise the conduct of the business
The board shall exercise good faith
- The board shall exercise good faith, care, and
diligence in the administration of the affairs of the
corporation, and protect not only the interest of
the majority but also to the minority of the stock
- In case corporate directors are guilty of a breach of
trust – not a mere error of judgment or abuse of
discretion, a stockholder may institute a suit in
behalf of himself and other stockholders and for
the benefit of the corporation, to bring remedy of
the wrong inflicted directly upon corporation, and
indirectly to shareholders
Derivative suit
- In case of mismanagement where the wrongful
acts are committed by the directors or trustees, a
shareholder or member may find that that he has
no remedies because the former are vested by law
with the right to decide whether or not the
corporation should sue, and they will never be
willing to sue themselves
- Because of the frequent occurrence of such a
situation, the common law gradually recognized the
right of a stockholder to sue on behalf of a
corporation which is also known as derivative suit
- It has been proven to be an effective remedy of the
minority against the abuses of management. Thus,
an individual stockholder is permitted to institute a
derivative suit on behalf of the corporation
wherein he holds stock in order to protect
corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be
sued or hold the control of the corporation
- In such actions, the suing stockholder is regarded as
the nominal party, with the corporation as the
party in interest
Qualifications of Board of Directors/Trustees (re sec 22
and 26)
For a stock corporation, ownership of at least 1 share of
the capital stock of the corporation in his own name.
For non-stock corporation, only members of the
corporation can be elected.
- It must be registered in Corporation's book.
- The director or trustee must be capacitated.
- The director or trustee must be of legal age.
- Other qualifications as may be prescribed in the by-
laws of the corporation
Term of Office
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 trustees
shall hold office until the successor is elected and
qualified. A director who ceases to own at least one (1)
share of stock or trustee who ceases to be a member of
the corporation shall cease to be such.
Board of Director/Trustees, Officers, and Stockholders
Acts of management and ownership:
• Acts of management pertain to the board and those
of ownership, to the stockholders or member. In the
latter case, the board cannot act alone, but must seek
approval of the stockholders or members.
Where do corporate power reside?
• Once the directors or trustees are elected, the
stockholders or members relinquished
corporate powers to the board in accordance
with law.
• The governing body of a corporation is its
Board of Directors.
The authority of the board of directors or trustees is
restricted to the management of the regular business
affairs of the corporation, unless more extensive power
is expressly conferred.
The Corporation's board of directors is
understood to be that body which exercises:
- All powers provided for under the corporation code;
- Conducts all business of the corporation; and
- Controls and holds all property of the corporation.
(Sec. 22, par. 1)
Authority of the board of directors
- With the exception only of some powers expressly
granted by law to stockholders/members, the board
of directors/trustees has the sole authority to
determine policies, enter into contracts, and
conduct the ordinary business within the scope of
its charter
- The authority of the board of directors is restricted
to the management of the regular business affairs
of the corporation, unless more extensive power is
expressly conferred
- The main reason behind the giving corporate
powers on the board of directors is not lost on the
court, but the concentration in the board of
powers of control of corporate business and of
appointment of corporate officers and managers is
necessary for efficiency in any large organization
- Stockholders are too numerous, scattered, and
unfamiliar with the business and conduct directly,
thus they will choose someone to be a board of
directors
Corporation exercises its powers through its board of
directors
- Corporation exercises its powers through board of
directors or its duly authorized officers and agents,
except in instances where Corporation code
requires stockholder’s approval of certain specific
acts
 the corporation has caused persons dealing with the
officer or agent to believe that it has conferred.

May corporate powers be directly conferred upon

- Its members have been characterized as trustees or
corporate officers?
directors clothed with a fiduciary character
- Directors of the corporation shall elect its
- Directors may appoint officers and agents, and as
corporate officers
incident to this power of appointment, they may
- It is clear that corporate powers may be directly
discharge those appointed
granted upon corporate officers or agents by
- Unless duly authorized, a treasurer, whose powers
statute, the articles of incorporation, the by-laws or
are limited, cannot bind the corporation in sale of
by resolution or other act of the board of directors
its assets
- An officer who is not director may also appoint
other agents when authorized by the by-laws or by
the board of directors, which are called express
powers
- There are also powers incidental to express power
conferred
- It is fundamental principle in the law of agency that
every delegation of authority, whether general or
special, carries with it, unless the contrary be
expressed, implied authority to do all those acts,
naturally and ordinarily done in such cases, which
are reasonably necessary and proper to be done in
order to carry into effect the main authority
conferred
Power to decide whether a corporation can enter into
Note: A juridical person who is not a stockholder cannot
a binding contract
be a director, but it can be an ex officio member without
- A corporation, as a juridical entity, primarily acts
voting rights in the board
through its board of directors, which exercises its
corporate powers
Qualifications of a board of director/ trustee
- Generally, in the absence of authority from the
1. For stock corporation, ownership of at least 1
board of directors, no person, not even its officers
share of the capital stock of the corporation in
can validly bind the corporation
his own name. For a non-stock corporation, only
- The power and responsibility to decide whether a
members of the corporation can be elected
corporation can enter into a binding contract
2. Director or trustee must be capacitated
depends with the board of directors
3. Director or trustee must be of legal age
4. Other qualifications as may be prescribed in the
Note: Corporate officer or agent may represent and
by-laws of the corporation
bind the corporation with 3rd persons to the extent that
the authority was given to him, and this includes
powers which have been intentionally conferred, ang
also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as
Independent Director
- A person who, apart from shareholding and fees
received from the corporation, is independent of
management and fee from any business or other
relationship which could reasonably be perceived to
materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as director

SECTION 23: Election of Directors or Trustees

- Except when the exclusive right is reserved for Requirements for the election of director or trustees
holders or founder shares, each stockholder or
member shall have the right to nominate any
director or trustee who possesses all the
qualifications and none of the disqualifications set
forth.
- At 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 majority of 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, SECTION 24: Corporate Officers
notwithstanding the absence of provision in the - Immediately after their election, the directors of a
bylaws of such corporations corporation must formally organize and elect
- Stockholder or member who participates through a. President, who must be a director
remote communication or in absentia, shall be b. Treasurer, who must be a resident
deemed present for purposes of quorum c. Secretary, who must be a citizen and resident of
- Election must be by ballot if requested by any PH
voting stockholder or member d. Other officers as provided in bylaws

- If the corporation vested with public interest, the

Methods of Voting- Election of Directors (Sec. 24)
Stockholders have the option to adopt any of the
following:
1. Straight Voting — every stockholder "may vote
such number of shares for as many persons as
there are directors" to be elected.
2. Cumulative Voting for One Candidate — a
stockholder is allowed to concentrate his votes
and "give one candidate as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal."
3. Cumulative Voting by Distribution — a
stockholder may cumulate his shares by
multiplying also the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit.
Note: Cumulative voting is not available in non-stock
corporations unless provided for in the by-laws.
board shall also elect a compliance officer. The
same person may hold two 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 by Code
- Officers shall manage the corporation and perform
such duties as may be provided in the bylaws
and/or resolved by the board of directors
Corporate Officers
- This position must be expressly mentioned in the
by-laws in order to be considered as corporate
office
GR: Acts of corporate officers within the scope of their
authority are binding on the corporation
EXPN: If the acts exceeds the scope of authority, unless
it has ratified such acts or is estopped from disclaiming
them
Requirements for the Election of Board of the date of scheduled election. The report shall
Directors/Trustees specify a new date of election, which shall not be
later than 60 days from the scheduled date
- Notwithstanding any provision of the articles of
incorporation or bylaws 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
- Director, trustee or office die, resign or in any
manner cease to hold office, the secretary, or the
director/trustee or officer of the corporation shall
report in writing such fact to the Commission
within 7 days from knowledge

Objective of the Report of Election

- All corporations duly organized pursuant are

required to submit within the period stated (30
days) to the SEC the names, nationalities,
shareholdings, and residences of the directors,
trustees or officers elected
- The objective is to give the public information,
under sanction of oath responsible officers, of the
nature of the business, financial condition and
operational status of the company together with
the information on its key officers or managers so
that those dealing with it and those who intend to
What is quorum at the meeting of directors and
do business with it may know or have the means of
trustees?
knowing facts concerning the corporation’s financial
- A majority of the directors or trustees, as fixed in resources and business responsibility
the articles of incorporation, shall constitute a
SECTION 26: Disqualification of Directors, Trustees, or
quorum for the transaction of corporate business
Officers
(unless the articles of incorporation or the bylaws
provide for greater majority

GR: Majority of the number of directors or trustees, as

fixed in the articles of incorporation, shall constitute a
quorum for the transaction of corporate business and
every decision of at least a majority of the directors or
trustees present at a meeting which there is a quorum
shall be valid as a corporate act except for the election
of officers which shall require the vote of a majority of
all members on the board

EXPN: If the articles of incorporation or by-laws provide

for a greater majority
SECTION 27: Removal of Directors or Trustees
SECTION 25: Report of election of directors, trustees
Power to remove directors or trustees
and officers, non-holding of election and cessation
from office - This power belongs to the stockholder or members
exclusively
- Within 30 days after the election of directors,
- However, the SEC shall upon verified complaint,
trustees or officers, secretary or other officers shall
and after due notice of hearing, order the removal
submit to the Commission the names,
of a director or trustee elected despite the
nationalities, shareholdings, and residence
disqualification or whose disqualification is
addresses of the directors, trustees and officers
discovered subsequent to an election
elected
- Removal of a disqualified director shall be without
- Non-holding of elections and the reasons shall be
prejudice to other sanctions that the Commission
reported to the Commission within 30 days from
 may impose on the board of directors or trustees
who, with knowledge of the disqualifications,
failed to remove such director or trustee
GR: Removal of directors or trustees may be with or
without cause
- Any directorship or trusteeship to be filled by
EXPN: Removal without cause may not be used to
deprive minority stockholders or members of the right
of representation to which they may be entitled
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.
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.

Filling of Vacancies in the Board

1. By the stockholders or members —
2. Removal by the stockholders or members;
3. Expiration of term;
Note: Removal of officers can be done by the board of
4. Increase in the number of directors or trustees
directors due to amendment of the articles of
incorporation;
SECTION 28: Vacancies in the Office of Director or
5. Other than the removal or expiration of term,
Trustee; Emergency Board like death, resignation, abandonment, or
- Any vacancy occurring in the board of directors or disqualification, if the remaining directors or
trustees other than by removal or by expiration of trustees do not constitute a quorum for the
term may be filled by the vote of at least a majority purpose of filling the vacancy.
of the remaining directors or trustees, if still 6. By the members of the board Of directors or
constituting a quorum; otherwise, said vacancies trustees.-
 If still constituting a quorum, at least a
must be filled by the stockholders or members in a
regular or special meeting called for that purpose. majority of them are empowered to fill
any vacancy occurring in the board
- When the vacancy is due to term expiration, the other than by removal by the
election shall be held no later than the day of such stockholders or members or by
expiration at a meeting called for that purpose. expiration Of term.
 Replacement Director/Trustees.
A director or trustee elected to fill the
- When the vacancy arises as a result of removal by
vacancy shall be referred to as
the stockholders or members, the election may
replacement director or trustee and shall
held on the same day of the meeting authorizing
serve only for the unexpired term of the
the removal and this fact must be so stated in the
predecessor in office.
agenda and notice of said meeting. In all other
cases, the election must be held no later than forty-
SECTION 29: Compensation of Directors or Trustees
five (45) days from the time the vacancy arose.
- In the absence of any provision in the bylaws fixing
their compensation, the directors or trustees shall
- A director or trustee elected to fill a vacancy shall
not receive any compensation in their capacity as
be referred to as replacement director or trustee
such, except for reasonable per diems: Provided,
and shall serve only for the unexpired term of the
however, That the stockholders representing at
predecessor in office.
least a majority of the outstanding capital stock or
majority of the members may grant directors or
- However, when the vacancy prevents the
trustees with compensation and approve the
remaining directors from constituting a quorum
amount at a regular or special meeting.
and emergency action is required to prevent grave,
substantial, and irreparable loss or damage to the
- In no case shall the total yearly compensation of
corporation, the vacancy may be temporarily filled
directors exceed ten percent (10%) of the net
from among the officers of the corporation by
income before income tax of the corporation
unanimous vote of the remaining directors or
during the preceding year.
trustees. The action by the designated director or
trustee shall be limited to the emergency action
- Directors or trustees shall not participate in the
necessary. and the term shall cease within a
determination of their own per diems or
reasonable time from the termination of the
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.
Compensation...
 The provision on compensation of directors
does not include corporate officers who are not
directors.
GR: Directors or Trustees shall not receive any
compensation, as such directors or trustees, except for
reasonable per diems.
EXPN:
1. When it is fixed by corporation's by-laws; or
2. When the stockholders, representing at least
majority of the outstanding capital stock, or
majority of the members, vote to grant the
same.
Limitations on Compensation:
 In No case shall the total yearly compensation
of directors exceed 10% of the net income
before income tax of the corporation during the
preceding year.
Note: Directors or trustees shall not participate in the
determination of their own per diems or compensation.
Corporation 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.
The Grounds are:
1. The grants of bonus should either appear in the
by-laws, or
2. Should be approved by the stockholders
representing at least a majority of outstanding
capital stock of Corporation approved in a
regular and special meeting of stockholders;
3. The bonus (or other form of compensation not
per diems) should not exceed ten percentum
(10%) of the net income before tax of the
Corporation during the preceding year.
SECTION 30: Liability of Directors, Trustees or Officers
- 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.
Three-Fold Duties of Directors
1. Duty of obedience. — to direct the affairs Of
the corporation only in accordance with the
purposes for which it was organized (Or restrict
their acts within the scope of the Powers of the
Corporation).
2. Duty of Diligence. — Directors and Officers are
required to exercise due care in the
performance of their functions (Or due
diligence that a reasonably prudent man would
exercise in the conduct of his personal affairs or
in similar circumstances.
3. Duty of Loyalty. — the director or officer owes
loyalty and allegiance to the corporation — a
loyalty that is undivided and an allegiance
(obligation of fidelity /faithfulness) that
influenced by no consideration other than the
welfare of the corporation.
Grounds for liability to pay damages:
1. By willingly or knowingly voting for or assenting
to patently unlawful acts of the corporation.
2. By being guilty of gross negligence or bad faith
in directing the affairs of the corporation.
3. By acquiring any personal or pecuniary interest
in conflict with their duty as such director or
trustees.
Nature of liability: Joint and several, (i.e., solidary).
• To whom Liable? — to the corporation, its
stockholders or members or other persons who suffer
damages resulting from the acts abovementioned.
Liability of directors, trustees or officers for secret
profits
- A director, trustee or officer shall be liable as
trustee for the corporation and must account for
the profits which otherwise would have accrued to
the corporation when he attempt 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.
Examples when Solidary Liability Directors, Officers or
Employee
1. When directors and trustees or, in appropriate
case, the officer of a corporation:
 a. vote for or assent to patently unlawful acts
of the corporation;
b. act in bad faith or with gross negligence in
directing the corporate affairs;
c. are guilty of conflict of interest to the
prejudice of the corporation, its
stockholders or members and other
persons; (Sec. 30, RCC)
2. When a director or officer has consented to the
issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with
the corporate secretary his written objection
thereto (Sec 64);
3. When a director, trustee or officer has
contractually agreed or stipulated to hold
himself personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made by
specific provision of law, personally liable for
his corporate action.
Error in Business Judgment
- If the cause of the losses is merely error in business
judgment not amounting to bad faith or
negligence, director and/or officers are not liable.
- For them to be held accountable, the
mismanagement and the resulting losses on
account thereof are not the only matters to be
proven; it is likewise necessary to show that the
directors and/or officers acted in bad faith and with
malice in doing the assailed acts.
Business Judgement Rule
- Courts cannot undertake to control the discretion
of the board of directors about administrative
matters as to which they have the legitimate power
of action and contract intra vires entered into by
the board of directors are binding upon the
corporation and the courts will not interfere unless
such contracts are so unconscionable and
oppressive as to amount to a wanton destruction
of the rights of minority.
- Question of Policy or of Management are left
solely to the honest decision of the board as the
business manager of the corporation, and the court
is without authority to substitute its judgement for
that of the board, and as long as it acts in good
faith and in the exercise of honest judgment in the
interest of the corporation, its orders are not
reviewable the courts.
SECTION 31: Dealings of Directors, Trustees or Officers
with the Corporation
- A contract of the corporation with one (I) 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 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 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.
Self-dealing directors/trustees/officers — those who
personally contract with the corporation in which they
are directors. It is discouraged because the directors,
trustees and officers have fiduciary relationship with the
corporation and there can be no real bargaining where
the same is acting on both sides of the trade.
GR: A contract of the corporation with one or more of
its directors or trustees, officers or their spouses and
their relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of
such corporation.
EXPN:
1. That the presence of director or trustee in the
board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting.
2. That the vote of such director or trustee was
not necessary for the approval of the contract;
3. That the contract is fair and reasonable under
the circumstances;
4. In case of corporation 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
5. That in case of an officer, the contract has been
previously authorized by the board of directors
Ratification by SH on Self-dealing Directors/ Trustees/
Officers
- A contract of the Corp. with directors or trustees or
officers may be ratified by the vote of stockholders
 representing at least 2/3 of the outstanding capital
stock or at least 2/3 of the member in a meeting
called for the purpose. The REQUISITES are:
1. Any of the first three conditions set forth in the
first paragraph of Section 31 is absent;
2. Full disclosure of the adverse interest of the
directors or trustees involved is made in such
meeting; and
3. That the contract is fair and reasonable.
SECTION 32: Contracts Between Corporations with
Interlocking Director
- Except in cases of fraud, and provided the contract
is fair and reasonable under the circumstances, a
contract between two or more corporations having
interlocking directors shall not be invalidated on
that ground alone: 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 fatter corporation
or corporations are concerned.
• Stockholding exceeding twenty percent (20%) of the
outstanding capital stock shall be considered
substantial for purposes of interlocking directors.
Interlocking Directorate, Concept
- There is interlocking directorate when one, some or
all of the directors of one corporation, is/are also
directors of another corporation or other
corporations. Or
- There is interlocking directorate when a director
holds seats in the board of directors of two or
more corporations.
- Interlocking director by itself is not prohibited
under the Revised Corporation Code. However, the
by-laws may contain provisions that disallow
interlocking directors.
GR: A contract between two or more corporations
having Interlocking directors shall not be invalidated on
that ground alone.
• These Contracts are valid provided that-
a) The contract is not fraudulent; and
b) The contract is fair and reasonable under the
circumstance.
EXPN: However, if the interest of the interlocking
director in one Corporation is substantial, i.e., his
stockholdings exceed 20% of the outstanding capital
stock and the other merely nominal the rules of section
32 on self-dealing directors shall apply insofar as the
latter corporation is concerned. SECTION 31 applies
SECTION 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 director risked one's own funds in the
venture.
Doctrine of Corporate Opportunity
- 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.
- The act of a director violating the doctrine of
corporate opportunity can be ratified by a vote of
the stockholders owning or representing at least
two-thirds (2/3) of the outstanding capital stock
The "Corporate Opportunity" Doctrine
- Under this doctrine, a director who, 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, is guilty of disloyalty and should,
therefore, account to the latter for all such profits
by refunding the same, notwithstanding that he
risked his funds in the venture.
- Under Section 33, the guilty director will only be
exempted from the liability to the corporation if his
disloyal act is ratified by the vote of the
stockholders owning or representing at least 2/3 of
the outstanding capital stock (Sec. 30 and 33)
SECTION 34: Executive, Management and Other Special
Committees
- lf 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.

Note: The board of directors may create special

committee of temporary or permanent nature and
determine the members' term, composition,
compensation, powers, and responsibilities.

Executive Committee
- It is a body created by the by-laws and composed of
not less than three members of the board which,
subject to the statutory limitations, has all the
authority of the board of directors to the extent
provided in the by-laws.
Limitations on the power of Executive Committee:
1. Approval of any action for which a shareholders'
approval is also required;
2. Filling of vacancies in the board;
3. Amendment or repeal of by-laws or the
adoption of a new by-laws;
4. Amendment or repeal of any resolution of the
board which by its express terms is not
amendable or repealable; and
5. Distribution of cash dividends to the
shareholders

Quorum and Voting

GR: Quorum is the same as that of the Board of
Directors. A majority of a Committee member
constitute a quorum.
• To bind the corporation, it is essential that the
Executive Committee acts "by majority vote of all its
members."
• If the Executive Committee is not validly constituted,
the members thereof may be considered as de facto
officers.