INCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS. Illustrative examples a, Luzvimin Airways (LA), a literally fly-by-night domestic air- lines, entered into a contract with We Are the Benchmark Corp. wherein the latter would supply the sports shirts and shorts of LA’s flight attendants. It turns out LA, which is owned equally by Steven Rogers, Bruce Bummer, Natasha Romano, Thor Robinson, and Toni Spark, is not registered with the SEC. If We Are the Benchmark Corp. collects from LA, and the latter is unable to pay, and the supplier company files a case in court, the five sharehold- ers cannot move for the dismissal of the case on the ground that there is no LA corporation that exists. Moreover, Steven Rogers, Bruce Bummer, Natasha Romano, Thor Robinson, and Toni Spark will be personally liable to the complainant. b. Luzvimin Airways (LA), a literally fly-by-night domestic air- line, entered into a contract with We Are the Benchmark Corp. wherein the latter would supply the sports shirts and shorts of LA's flight attendants. It turns out LA, which is owned equally by Steven Rogers, Bruce Bummer, Natasha Romano, Thor Robin- son, and Toni Spark, is not registered with the SEC. If LA pays a downpayment to the supplier corporation and the latter is un- able to deliver as agreed upon,the supplier company cannot raise as defense for its non-fulfillment of its obligation that there is in fact no corporation to supply to. SECTION 21. Effects of Non-Use of Corporate Charter and Continuous Inoperation. — If a corporation does not formally organize and commence its business within five (5) years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five (5)-year period. However, if a corporation has commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years, the Commission may, after due notice and hearing, place the corporation under delinquent status.Adelinquent corporation shall have seine of two, 2) Year to resume operations and comply 7 requiremees that the Commission shall prescri ye. Upon compli by the corporation, the Commission shall issue ano, 7 lifting the delinquent status. Failure to comply witht requirements and resume operations within the en given by the Commission shall cause the Fevocation oft corporation's certificate of incorporation. The Commission shall give reasonable notice to, and coordinate with the appropriate regulatory agency rir to the suspension or revocation of the certificate of incorporation of companies under their special Tegulatory jurisdiction. ‘As for the corporation's failure to formally organize and commence business (after its incorporation) as a ground for automatic revocation of its certificate of incorporation (not automatic dissolution as provided in the Old Code), the Revised Code lengthened the period from two (2) years to five (5) years. On the other hand, the inoperation of the corporation for at least five (5) years after it had commenced business is no longer a ground for the suspension or revocation ofits certificate of incorporation as was. mandated by the Old Code. Instead, the legal consequence of such inoperation is the Possibility of the SEC's placing the corporation under a delinquent stats Failure of the corporation under a delinquent status to resume business within two (2) years and comply with the SEC's requirements (including a specified period within which to resume operations) will Jead to the revocation of the corporation's certificate of incorporation. . 0 ee Old Code that categorically excused a corporation’ a ila organize or operate continuously for five (5) years rr such matter, tre, Corporation's control, the Revised Code is aan het Ge oe the possibility of invoking fortuitous eve ope ation for five (5) si the corporation's control as a reason for its si pefo™ placings cats exists as the SEC is mandated to conduct abe set '8 Corporation under a delinquent status. Thus, We humblyINCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS, hearing may lead to at least two possible results: 1) non-declaration wn e corporation as delinquent or 2) declaration of the Corporation as telinquent but allowing it to resume operations within a certain period that may be shorter or longer than two (2) years, but not the revocation of its registration. section 21 does not provide for a hearing prior to the revocation of the certificate of incorporation of a corporation that fails to formally organize and commence business after the issuance of its certificate of. registration. However, the possibility of invoking uncontrollable situations that prevent a corporation from formally organizing also exists, and much would depend on the guidelines or circulars that will be issued by the SEC. Also, a corporation whose certificate of incorporation is revoked has the right to appeal the SEC's decision to the Court of Appeals according to Section 179 of the Revised Code, thus providing the opportunity to defend its failure to formally organize due to fortuitous events. Completing the registration process Required permits and compulsory registrations with other government agencies In addition to the registration of the corporation with the SEC, there are other registrations that the corporation has to do before it can embark on a business legally: 1. Barangay clearance®* No entity may conduct any business or activity unless a clearance is first obtained from the barangay where such business or activity is located or conducted. For such clearance, the barangay may impose a reasonable fee. The application for clearance shall be acted upon within seven (7) working days from the filing thereof. 2. Community Tax Certificate" Every corporation no matter how created or organized, whether domestic — 'S8 Section 152 of Republic Act No. 7160 or the “Local Government Code 189 Sections 156 to 164 of Republic Act No. 7160 or the “Local Government Code” 61revised CORPORATION CODE OF THE PHILIPPINES or resident foreign, engaged in or doing business in the Philippines pay an annual community tax to the city or municipality wher, principal office of the corporation is located. shall © the The community tax shall accrue on the first day of January of each year which shall be paid not later than the last day of February of each year, Corporations established and organized on or before the last day of June shall be liable for the community tax for that year. But corporations established and organized on or before the last day of March shall have twenty (20) days within which to pay the community tax without becoming delinquent. Corporations established and organized on or after the first day of July shall not be subject to the community tax for that year. If the tax is not paid within the time prescribed above, there shall be added to the unpaid amount an interest of twenty-four percent (24%) per annum from the due date until it is paid. 3. Business Permit to Operate (Mayor's Permit) A Mayor's Permit (or Business Permit) is a document issued to any person who shall establish, operate, or conduct any business, trade, or activity within the city or municipality. The cost of a Mayor’s Permit or the license depends upon the type of business to be registered. All local taxes, fees, and charges shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be. The city or municipality may impose a surcharge not exceeding twenty- five percent (25%) of the amount of taxes, fees, or charges not paid on time and an interest at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees, or charges, including surcharges, until such amount is fully paid but in no case shall the total interest on the unpaid amount oF Portion thereof exceed thirty-six (36) months. 4. BIR Registration After SEC re, . . the following = "ation @ business entity must go to the BIR for 140 Republi Public Act No, 8424 oF the “Tay Reform Act of 1997" 62INCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS a. Apply for a Certificate of Registration (COR) and a Tax Identifica~ tion Number; b. Register its books of accounts; c. Apply for authority to print official receipts; d, Pay the documentary stamp tax (DST) on the original issuance of the shares. 5. SSS Registration! All companies must be registered with the SSS and must secure an employer number which will be used as reference for the remittance of monthly contributions of the employees. Effectivity of coverage as an SSS employer-member starts on the first day the employer hires its first employee/s. The employer is given 30 days from the date of employment of employee to report the person for coverage to the SSS. 6. Philhealth Registration" All private sector employers are required to register with the Philippine Health Insurance Corporation and each employer shall be issued a permanent and unique PhilHealth Employer Number (PEN). All private employers are required to: a. Register their employees and their qualified dependents by sub- mitting a list of their employees, complete with their salary base and other documents as may be required; b. Report to the Philhealth its newly hired employees within thirty (30) calendar days from assumption to office; ¢. Give notice to the Philhealth of an employee's separation within thirty (30) calendar days from separation; —_ ‘Ml Republic Act No. 1199 or the “Social Security Act? 42 Republic Act No. 7875 or the “National Health Insurance Act of 20137 63REVISED CORPORATION CODE OF THE PHILIPPINES d. Keep true and accurate work records for such period and con. taining such information as the Philhealth may Prescribe; e, Allow the inspection of its premises, including its books and oth, er pertinent records. 7. Pag-ibig Registration"® All new employers shall first register with the Pag-IBIG (or Home Development Mutual Fund) branch with jurisdiction over them prior to the start of their business operation. Employers shall submit to HDME all data and information that may be required in relation to their respective businesses and employees within thirty (30) days from the start of their business operations. In addition, said employers shall ensure that their newly hired employees are registered with HDMF within thirty (30) days from the start of their employment. 8. DOLE Registration* All businesses registered in the Philippines hiring five or more employees must register with the Department of Labor and Employment (DOLE). New establishments shall register within thirty (30) days before operation. Registration shall be free of charge and valid for the lifetime of the establishment except when any of the following conditions exists, in which case re-registration as if it were a new establishment is required: a. change in business name; b. change in location; ©. change in ownership; or 4. re-opening after previous closing. Optional Registration 1. TI i he Barangay Micro Business Enterprise (BMBE) —___ 143 Republic Act No, 9679 or the “Hom \¢ Developmen : . 44 Presidential Decree No, 44 aie oF the “Labor Code of the Philippines’ 64INCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS The BMBE law*® aims for and promotes the creation and expansion of small businesses by providing benefits and incentives that will help BMBE enterprises to grow and succeed. ‘A BMBE is defined as any business enterprise engaged in production, processing, or manufacturing of products, including agro-processing, as well as trading and services, with total assets of not more than P3 million. These assets include those arising from loans but not the land on which the plant and equipment are located. To qualify as a BMBE, the business should be engaged in sale of services and products and its total assets is not more than P3,000,000.00. However, for purposes of the BMBE Act, the benefits and incentives provided will exclude the following, even if they have assets not more than P3,000,000.00: Service provided by PRC-licensed individuals in the practice of profes- sion, such as doctors, accountants, lawyers, engineers, etc; or e. An enterprise involved with or connected to large-scale enter- prises such as franchises. Both new and existing qualified enterprises can apply for a BMBE Certificate of Authority. A registered BMBE shall be issued a Certificate of Authority as proof of registration, effective for a period of two years. The application is renewable every two years. One only needs to go to the nearest Negosyo Center, accomplish and submit a BMBE application form together with a copy of the SEC Registration Certificate. Benefits and Incentives for BMBEs a. Exemption from income tax This, however, does not include exemption from transaction tax- es such as value-added tax (VAT) and other percentage taxes, among others. ——__. 145. Republic Act No. 9178 or the “Barangay Micro Business Enterprises (BMBEs) Act of 2002 65>| REVISED CORPORATION CODE OF THE PHILIPPINES b, Exemption from Minimum Wage Law coverage (BMBE em will still receive the same social security and health care as other employees) Ployees benefits c. Credit priority ie., financing and special credit facility from such institutions as Land Bank of the Philippines, Development Bank of the Philippines, etc. Growth assistance such as assistance in technology, training, and marketing from government agencies such as DTI Negosyo Cen- ters, UP Institute for Small Scale Industries (UP-ISSI), and the Department of Science and Technology (DOST). 2. Intellectual Property Registration To protect its tradename, trademark register them with the Intellectual Pr. is vested from the moment of creation, , and patents, a corporation must operty Office. Copyright, however , SO there is no need to register it:» TITLE III + Board of Directors/Trustees and Officers SECTION 22.The Board of Directors or Trustees of a Corporation; Qualification and Term. — Unless otherwise provided in this Code, the board of directors or trustees shall exercise the corporate powers, conduct all business, and control all properties of the corporation. Directors shall be elected for a term of one (1) year from. among the holders of stocks registered in the corporation's books, while trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Each director and trustee shall hold office until the successor is elected and qualified. A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the corporation shall cease to be such. The board of the following corporations vested with public interest shall have independent directors constituting at least twenty percent (20%) of such board: (a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The Securities Regulation Code” namely those whose securities are registered with the Commission, corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares; 67REVISED CORPORATION CODE OF THE PHILIPPINES (b) Banks and quasi-banks, NSSLAs, Pawnshops, compo. rations engaged in money service business, Pren, trust and insurance companies, and other financiaj in. termediaries; and (c) Other corporations engaged in businesses Vested with public interest similar to the above, as may be determined by the Commission, after taking inty account relevant factors which are germane to the objective and purpose of requiring the election of an independent director, such as the extent of minority ownership, type of financial products or securities issued or offered to investors, public interest involved in the nature of business operations, and other analogous factors. An independent director is a Person who, apart from shareholdings and fees received from the corporation, is independent of Management and free from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director. Independent directors must be elected by the shareholders present or entitled to vote in absentia during the election of directors. Independent directors shall be subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number of board memberships and other requirements that the Commission will Prescribe to strengthen their independence and align with international best Practices, ‘The Board's role The powers of a corporation _ - i Fe exercised by the per on e*PFESS, implied /incidental and inhere® 'e board of directors (BOD) (for stock corporations) an 68BOARD OF DIRECTORS /TRUSTEES & OFFICERS board of trustees (BOT) (for non-stock corporations),"’ or through duly- authorized corporate officers or agents."* ‘And the BOD’s decisions cannot be overturned by the stockholders or members of the corporation. Any action taken by stockholders on matters within the Board’s competence is merely advisory and does not bind the corporation.“® Neither may the SEC nor the courts invalidate the decisions of the Board in the exercise of its business judgment in good faith." Inturn, the Board and the officers of the corporation have fiduciary duties to the corporation, and care and loyalty are demanded of them."' Care requires the minimal standards of attentiveness and prudence. Loyalty entails stringent standards of fairness especially when the interest of the fiduciary—the Board and the corporate officers who exercise powers for the corporation's benefits—conflicts with that of the corporation's.'* The business judgment rule presumes that directors have acted in good faith and have sufficiently investigated the facts and circumstances surrounding an issue. This rule notwithstanding, the Board and corporate officers’ diligence and competence in the performance of their decision- making may be looked into." One reason for this is that fiduciaries are not allowed to serve their own interest at the expense of the corporation, failing which the fiduciary becomes guilty of disloyalty.'* Some instances of disloyalty are self-dealing, taking corporate opportunities, trading on insider information. ——___ 147 See Tolentino vs. Shenton Realty Corp., G-R. No. 162103, June 19, 2009. 148 San Juan Structural and Steel Fabricators vs. CA, G.R. No. 129459, September 29, 1998. ve isayan vs. NLRC, G.R. No. 69999, April 30, 1991; Alberto Barreto vs. La ina, G.R. No. 34719, December 8, 1932. 10 Philippine Stock Exchange, Inc. vs. CA, G.R. No, 125469, October 27, 1997. "SI See Gokongwei vs, SEC, G. R. No. L~4591, April 1, 1979 182. Id, 153 14, 154 1a, 155 1a, 156 id. 69REVISED CORPORATION CODE OF THE PHILIPPINES Sanctions , Considering the fiduciary positions of the eae and the care and faith that are required of them in the conduct of a € corporation's business, the fraudulent conduct of business is thus punishable under Section 165 with a fine ranging from two hundred thousand Pesos (P200,000.00) to two million pesos (P2,000,000.00). And when the violation is injurious ea detrimental to the public, the fine ranges from four hundred thousand pesos (P400,000.00) to five million pesos (P5,000,000.00). Said fines are in addition to the personal liabilities of board directors and corporate officers who act in bad faith in the management of the corporation. Qualifications and disqualifications of directors Unlike the Old Code, the Revised Code does not require that majority of the directors or trustees must be residents of the Philippines. Nonetheless, a director must be a natural person of legal age, and must be a stockholder of record, owning at least one share in her own name, ie., legal title over the share of stock. If the director ceases to be an owner of a share of stock in the corporation, she shall be disqualified as a director. The articles of incorporation or bylaws cannot be amended to allow a non-stockholder to become director in the board.” In addition to the non-ownership of at least a single stock as 4 disqualification for directorship, Section 26 provides that a person cannot serve asa director, trustee, or officer if, within five (5) years prior to the ection or appointment as such, the person was: 1. Convicted by final judgment: a. Of an offense Punishabl impri: . ceeding Six (6) years; le by imprisonment for a period ex b. For Violating this Code; and —___ 157 SEC Opinion dated 21 September 1984,BOARD OF DIRECTORS /TRUSTEES & OFFICERS c. For violating Republic Act No. 8799, otherwise known as “The Se- curities Regulation Code”; 2, Found administratively liable for any offense involving fraudulent acts; and 3, Declared liable by a foreign court or equivalent foreign regulatory au- thority for acts, violations, or misconduct similar to those enumerated in paragraphs (a) and (b) above. The SEC and the Philippine Competition Commission may also impose additional qualifications and disqualifications in “its promotion of good corporate governance or as a sanction in its administrative proceedings."* Other qualifications and disqualifications Both the Revised Code and the Old Code expressly empower the corporation to provide in its bylaws other qualifications (and disqualification) of its directors.° The corporation's bylaws may therefore disqualify a candidate for directorship in order to protect the interest of the corporation, e.g., a stockholder who sits in the board of a competitor corporation.’ Term of office Directors of the board shall hold office for one year or until their successors are elected or qualified. In the case of non-stock corporations, trustees may have a term of up to three years. In any case, directors and trustees can be re-elected without limit and can stay in their position until they are teplaced, ie., no longer elected. In Valle Verde Country Club vs. Africa," the Supreme Court explained the Director's “term of office” as opposed to “tenure in office’, and said: To repeat, the issue for the Court to resolve is whether the remaining directors of a corporation's Board, still constituting a quorum can —— 188 RA 11232, Sec. 26, x . 58 SEC Opinion dated 23 April 1993 160 Gokongwei vs. SEC, ibid. r SI GR No. 151969, september 4, 2009. 1REVISED CORPORATION CODE OF THE PHILIPPINES. ect another director to fill in a vacancy caused by the: resignation of : Idover director. The resolution of this legal issue is Significant) tinged on the determination of what constitutes a director's term of i office. ‘The holdover period is not part of the term of office of a member of the board of directors. ‘The word “term” has acquired a definite meaning in jurisprudence. In several cases, we have defined “term” as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another." The term of office is not affected by the holdover." The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify. Term is distinguished from tenure in that an officer’s “tenure” rep- Tesents the term during which the incumbent actually holds of- fice. The tenure may be shorter (or, in case of holdover, longer) than ‘he term for reasons within or beyond the power of the incumbent Based on the above discussion, when Section 23" of the Corporation Code declares that it “the board of directors . .. shall hold office for one 162 See Topacio Nueno v, (ory Peer i MES 8 2, 2-22 (46 bay, vangelista, 100 Phil, 688,694 Sh 1884 7 ScRaz51, M484 0874: Apariv. Court of apes Ne Le S00, anuary 4 tor or trust of all ees. — Unless otherwise provi -d in this Code, the ort ery fae under this Code ae be eaeeeed a bse Member among the wg eMC and hel by the board o ae XS of the cor “TS of stocks, or where there is no Sto« ua che corporation Every director masts ah ual. °* WP® Shall hold office for one (her unt i nae ateant tor wheter which shane a a 6 () share of Fwhich re shall the capital stock of the corporation o! of whi 8 tobe stan 1p ich he gare id inhi recor me ration. Any direc 18 director ghana, a (ne OP the books of the corporation. ANY myeaone ation Tallon must be members al thereby ceases {) Share of the capital stock of the corpor® Organized under ths rs thereor SPY Cease to be 8 director, Trustees of non-stock COrPO "ae sof no! ons Code must be reatietY the directors ort tees of all corporati ‘ents of the Philippinex TeBOARD OF DIRECTORS/ TRUSTEES & OFFICERS (year until their successors are elected and qualified,” we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period — that time from the lapse of one year from a member's election to the Board and until his successor’s election and qualification — is not part of the director's original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term.'"> Illustrative case After the lapse of one year from his election as member of the Board in 1996, director Makalintal’s term of office is deemed to have already expired. His continued service in the Board in a holdover capacity cannot be considered as an extension of his term, as Makalintal’s term of office began in 1996 and expired in 1997; but because of the holdover doctrine in Section 23, he continued to hold office until his resignation on November 10, 1998. This holdover period, however, is not to be considered as part of his term, which, as declared, had al- ready expired. With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section 29 of the Corporation Code, must be filled by the stockholders of the corporation in a regular or special Meeting called for the purpose, and not by the remaining members of the Board. To assume that the vacancy is caused by Makalintal’s res~ ‘gnation in 1998 and not by the expiration of his term in 1997 is both illogical and unreasonable. His resignation as a holdover director did not change the nature of the vacancy, which was caused by the expi- tation of Makalintal’s term long before his resignation."*° 1 165 Woy : " "ds & Phrases, Vol. 19, p. 576. ‘ale Verde Country Cub vs, Arica, id. 73REVISED CORPORATION CODE OF THE PHILIPPINES. Changes in Section 22 Besides the renumbering, the Revised Code added in the second Paragraph a provision on the term of trustees in non-stock corporations, But the more significant change is the requirement for corporations Vested with public interest to have independent directors, who will constitute at Teast twenty percent (20%) of the Board’s members. An independent director is “a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director’ Although called as such, independent directors remain subject to the rules governing other directors such as qualifications and disqualifications, etc. and other requirements that the SEC may impose “to strengthen their independence and align with international best practices.” Independent directors Section 22 enumerates which corporations should have independent directors: 1. Corporations covered by Section 172 of the SRC, specifically: a. those whose securities are registered with the Commission b. corporations listed with an exchange “ ‘orPorations with assets of at least Fifty million pes (°50,000,000.00) and having two hundred (200) or more holdes iss ofshares, each holding at least one hundred (100) shares of @ Of its equity shares; 2. Bans and quasi-banks, non- (NSSLAg), Pawnshops, busines; 'S, Preneed, ty ‘ i , trust a - dot! intermediaries; ind insurance companies, an\ s ciation stock savings and loan asso e p : se corporations engaged in money gnancil ” a a3, Other corporations engaged in businesses vested wit similar to those in nos. land 2.as may be determined b after considering relevant factors that are connect. and purpose of requiring the election of an indepen as: BOARD OF DIRECTORS /TRUSTEES & OFFICERS ith public interest y the Commission, ed to the objective dent director, such a. the extent of minority ownership b. type of financial products or securities issued or offered to inves- c. public interest involved in the nature of business operations, and d. other analogous factors. SECTION 23. Election of Directors or Trustees. — Except when the exclusive right is reserved for holders of founders’ shares under Section 7 of this Code, each stockholder or member shall have the right to nominate any director or trustee who possesses all of the qualifications and none of the disqualifications set forth in this Code. At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy, the owners of majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. When so authorized in the bylaws or by a majority of the board of directors, the stockholders or members may also vote through remote communication or in absentia: Provided, That the right to vote through such modes may be exercised in corporations vested with public a notwithstanding the absence of a provision in the bylaws of such corporations. Gag +h remote Astockholder or member who participates vee present for communication or in absentia, shall be deemed P Purposes of quorum. 75REVISED CORPORATION CODE OF THE PHILIPPINES The election must be by ballot if requested by any Voting stockholder or member. In stock corporations, stockholders entitled to vote shall have the right to vote the number of shares of Stock standing in their own names in the stock books of the corporation at the time fixed in the bylaws or where the bylaws are silent, at the time of the election. The said Stockholder may: (a) vote such number of shares for as many Persons as there are directors to be elected; (b) cumulate said shares and give one (1) candidate as many votes as the number of directors to be elected multiplied by the number of the shares owned; or (c) distribute them on the same principle among as many candidates as may be seen fit: Provided, That the total number of votes cast shall not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in 'S, members of nonstock corporations may cast as tes as there are trustees to be elected but may not cast more than one (1) vote for one (1) candidate. Nominees for directors or trustees receiving the highest number of votes shall be declared elected. If no election is hel outstanding capital entitled to vote are through remote at the Meeting, 4, or the owners of majority of the Stock or majority of the members Not present in person, by proxy: a communication or not voting in in Such meeting may be adjourned am 8 Corporation shall Proceed in accordance with Section this Code, : . ies The directors or trustees elected shall perform ae by law, rules of good corporate gove 76BOARD OF DIRECTORS/TRUSTEES & OFFICERS The right to elect members of the board of directors /trustees is vested in the stockholders/members of the corporation. The manner of choosing the members of the board of directors is by election. Mere designation without election is not legally feasible.” Automatic membership in the board of directors is also not allowed." In Gamboa vs. Teves," the Court said: Indisputably, one of the rights of a stockholder is the right to par- ticipate in the control or management of the corporation. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation. Conduct of elections At the election for directors or trustees, stockholders representing the majority of the capital stock must be present in person or through a representative authorized to act by written proxy; in the case of non- stock corporations, a majority of the members entitled to vote must be Present during the election. The Revised Code provides that if authorized in the bylaws or by a majority of the board of directors, stockholders or members may also vote through remote communication or in absentia. In the case of corporations vested with public interest, the right to vote through remote communication or in absentia may be asserted despite the absence of a pertinent provision in the bylaws. behetoss And stockholders participating and voting through remote aan or in absentia shall be considered present for purposes of de quorum. 0 unless a Voting may be done by acclamation or by show of hands a llots. Stockholder or member request that voting be done by ballo —— 187 SEC Opinion dated 28 March 1985. 168 SEC Opinion dated 8 april 1997 163 GR No, 176579, June 28, 2011. M70. SEC Opinion dated 5 March 1992REVISED CORPORATION CODE OF THE PHILIPPINES Counting the votes Voting in the election of directors is determined on the basis of the Dumber of shares subscribed, which shares must form part of the outstanding capt stock.” For stock corporations, a stockholder who has one share of stock ig given a number of votes equivalent to the number of elective positions, tt there are five (5) directors to be elected, her shareholding will give her five votes. However, delinquent stocks shall not be entitled to vote. Methods of voting 1, Straight voting: Under this method, the votes are distributed equally among the candidates without preference. Iltustrative example In the election for the board of directors of Aim High, Inc., 10 stock- holders vie for the 5 seats in the Board: stockholders A, B, C, D, EF, G,H,1,J. If stockholder Z has 2 shares, then she has 10 votes that she can equally give to all the candidates. 2. Cumulative voting: The right of cumulative voting is a method of concentrating or giving the votes to one candidate, devised to give the minority the opportunity to secure representation in the board. In cumulative voting, a stockholder can give a number of votes to One or some of the candidates at the stockholder’s discretion without any limitation, except that the total votes cast by said stockholder shall not exceed the number of shares owned by her multiplied PY the number of directors to be elected." Cumulative voting is 28h Sranted by law. Because it is a statutory right, the corporation has . Power to deprive the stockholders of its use." Ilustrative example 4, 10 'n the election for the board of directors of Aim High, !¢> —— ML_ SEC Opinion dated 19 March 1992. 172. SEC Opinion dated 21 Aprit 1997, 173 SEC Opinion dated 6 June 1991, 174 SEC Opinion dated 13 August 1986, 78BOARD OF DIRECTORS/ TRUSTEES & OFFICERS. stockholders vied for the 5 seats in the Board: stockholders A, B, C D,E, F, GH, lJ, with candidates I and J belonging to the minority stockholders. Stockholder Z, also identified with the minority stockholders, has 2 shares. What she can do with her 10 votes is to divide them equally between candidates 1 and J to increase their chances of being elected to the Board. 3. Mixed voting: The stockholder concerned can distribute the votes among her candidates of choice in any manner she pleases. Illustrative example In the election for the board of directors of Aim High, Inc., 10 stockhold- ers vied for the 5 seats in the Board: stockholders A, B, C, D, E, F, G, H, I, J. Stockholder Z, who owns 2 shares, can give her 10 votes to her candi- dates of choice, e.g., 3 votes to candidate A, 2 votes to candidate B, and 5 votes to candidate C, or in any other manner she pleases. The Revised Corporation Code does not require a certain number of votes for one to be declared elected as director. By a plurality of votes, the candidates receiving the highest number of votes shall be declared elected."5 Dead members May “dead” members vote and are they considered in determining quorum? The Court said that it depends on the Articles of Incorporation, and answered this question in Tan vs. Sycip" in the following manner: On the other hand, membership in and all rights arising from a Non-stock corporation are personal and non-transferable, un- less the articles of incorporation or the bylaws of the corporation Provide otherwise. In other words, the determination of whether or not dead members are entitled to exercise their voting rights (through their executor or administrator), depends on the corpo Tation’s articles of incorporation or bylaws. pee te 0 ; a SEC Opinion dated 11 April 1994. ® GR No, 153468, August 17, 2006. 79REVISED CORPORATION CODE OF THE PHILIPPINES For non-stock corporations, a member shall be given votes equivalent to the number of elective positions. For example, if there are five (5) trustees to be elected, she shall be given five (5) votes; however, she may not cumulate these votes. The candidates who receive the highest number of votes shall be declared elected. Meetings called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if no election is held or i¢ there is no quorum attained. SECTION 24. Corporate Officers. — Immediately after their election, the directors of a corporation must formally organize and elect: (a)a president, who must be a director; (b) a treasurer, who must be a resident; (c) a secretary, who must be a citizen and resident of the Philippines; and (d) such other officers as may be provided in the bylaws. If the corporation is vested with public interest, the board shall also elect a compliance officer. The same person may hold two (2) oF more positions concurrently, except that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in this Code. The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors. oct of a corporation are as follows: (1) president, (2) treasure public intent (4) compliance officer, if the corporation is vested The Revised Coan (5) such other officers as stated in the by! Ne requirement a © retained the essence of the first paragraph, ¢ Bon the Preside i ee President be a director, and the prohibit ae The addition ie ne Cither secretary or treasurer at the same Tr. ‘on is mainly on the need for corporations vested with P! interest i: em west to have a compliance officer in the Board. The treasurer '§ ° be a resident of the Philippines. Inthe s . rum ae the pring *hird of Section 24 ofthe Old Code, references #0 1 "on against directors attending and voting in mee 80 2BOARD OF DIRECTORS /RUSTEES & OPFiCERS roxy were removed and transferred to Sections 51 i pro respectively and 52 of the Revised Authority of corporate officers and agents Corporate agents may derive their authority to act on the corporation's behalf from different sources: the law such as the Corporation Code and the provisions on agency of the Civil Code, the corporation's articles of incorporation and bylaws, or through the acts of the Board categorically expressed in pertinent board resolutions or “implied from a habit or custom of doing business.” And obligations incurred by corporate agents, whether directors, officers, and employees, on behalf of the corporation are the “direct accountabilities of the corporation they represent” and not that of the agent; and only in exceptional circumstances will the corporate agent be solidarily liable with the corporation."* Examples of such exceptional circumstances are to be found in Sections 31, 65, and 144 of the Corporation Code, and also in instances when the corporate agent has agreed to be personally and solidarily liable with the corporation,” or in labor cases, when corporate directors and officers act with malice or in bad faith in terminating an employee's services." Kinds of authority A corporate agent’s authority to deal with third persons may be actual or apparent and the principal, i.e., the corporation, “is liable for obligations contracted by the agent.”*! “Actual authority is either express or implied. The extent of an agent’s express authority is to be measured by the power delegated to him by the corporation, while the extent of his implied authority is measured by his Prior acts that have been ratified or approved, or their benefits accepted by his principals 77 Vicente vs Geraldez, G.R. No. L-32473, July 31, 1973, See also San Juan Structural and “ ‘abricators vs, CA, ibid, M5 MAM Realty Development Corp. vs. NERC, G.R. No. 114787, June 2, 195 citing Tramat lercantile, Inc. vs.CA, G.R. No. 11008, November 7, 1994 ie = ws and Co,, Ine. vs. CA, G.R, No, L-61549, May 27, 1985. ha Cis NLRC, G.R. No, L-57767, January 31, 1984. 8 ilippine International Bank vs, CA, G.R. No, 115849, January 24, aie Banate vs, Philippine Countryside Rural Bank (Liloan, Cebu), Inc, GR No, 163825, July 1.sgeviseD CORPORATION CODE OF THE PHILIPPINES Doctrine of apparent authority / “(he doctrine of apparent authority provides tha, stopped from denying the agent's authority if it of its officers or any other agent to act Within t authority, and it holds him out to the Public ag those acts” On the other hand, a corporation will be ¢: knowingly permits one the scope of an apparen' possessing the power to do | Specifically referring to banks, to which the doctrine has been mainly applied, the Court said: Abank is liable for wrongful acts of its officers done in the interest of the bank or in the course of. dealings of the officers in their represen- tative capacity but not for acts outside the scope of their authority (9 CLS. p. 417). A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom (10 Am Jur 2, p. 114). Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit (McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR 1021). Application of these principles is especially necessary because banks have a fiduciary relationship with the public and their stability 4e~ pends on the confidence of the people in their honesty and efficien” cy. Such faith will be eroded where banks do not exercise strict Ca"? in the selection and supervision of its employees, resulting in PT” dice to their depositors. Basis of the doctrine In one case, the Court expounded on the doctrine, thus: —__ 183 Advance Paper Corp. vs. Arma 184 First Philippi 223 SCRA 3 ‘Traders Corp., G.R_No. 176897, December 1, 2015: ine International ae eof APPA 50 (une if on, Bank vs. CA, ibid. quoting Prudential Bank vs. COM 82 ‘ite. «alBOARD OF DIRECTORS/TRUSTEES & OFFICERS The doctrine of apparent authority is a species of the doctrine of estoppel. Article 1431 of the Civil Code provides that “[t}hrough es- toppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.” Estoppel rests on this rule: “Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such dec- laration, act or omission, be permitted to falsify its ‘The apparent authority may be inferred not only from practice but “(i)ts existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation.** SECTION 25. Report of Election of Directors, Trustees and Officers, Non- Holding of Election and Cessation from Office. — Within thirty (30) days after the election of the directors, trustees, and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Commission, the names, nationalities, shareholdings, and residence addresses of the directors, trustees, and officers elected. The non-holding of elections and the reasons therefor shall be reported to the Commission within thirty (30) aye from the date of the scheduled election. The report foo specify a new date for the election, which shall not be than sixty (60) days from the scheduled date. "S Notales vs. Capito Medical Center, GR, No. 142625, December 19,2008 cing De Cte Gnee157 Phi 483 G90 cng See; pat: ule a ofthe Rules oF Court ‘, itchell, 31 4.D.3d 958, 819 NYS.2d 169 (2008). feibe ino Beople'’s aircargo and Warehousing Co. Inc. vs. CA, GR. No. 17847, October 7.1908 68 ps Trading v. Court of Appeals, 209 SCRA 763, 781, 784 June 15, 1992; citing 19 83REVISED CORPORATION CODE OF THE PHILIPPINES If no new date has been designated, or if the Tescheduleq election is likewise not held, the Commission may, upon the application of a stockholder, member, director o, trustee, and after verification of the unjustified non: holding of the election, summarily order that an election be held, The Commission shall have the power to issue such orders as may be appropriate, including orders directing the issuance of a notice stating the time and place of the election, designated presiding officer, and the record date or dates for the determination of stockholders or members entitled to vote. Notwithstanding any provision of the articles of incorporation or 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 under this section. Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the director, trustee or officer of the corporation, shall, within seven (7) days from knowledge thereof, report in writing such fact to the Commission. A significant change introduced by the Revised Code is the need for the corporation to also report the non-holding of scheduled elections, the reason why elections were not held, and a new schedule for elections. If the report does not indicate a new schedule or if the rescheduled élections are not held, the SEC may order the holding of elections up" the application of a stockholder, member, director, or trustee, and after the SEC's finding that the non-holding of the elections is unjustified. Another important amendment to the law is the non-requirement of the or of ma, pf owners representing the majority of outstanding stock cop by the fs nis to be present in person or by proxy in elections scheduled to the genau rae £0 constitute a quorum. This is clearly an except! Seneral rule that the presence of shareholders representing theBOARD OF DIRECTORS/TRUSTEES & OFFICERS majority of outstanding stock capital or of members is necessary to constitute quorum. SECTION 26. Disqualification of Directors, Trustees or Officers. — A person shall be disqualified from being a director, trustee or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was: (a) Convicted by final judgment: (1) Of an offense punishable by imprisonment for a period exceeding six (6) years; (2) For violating this Code; and (3) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”; (b) Found administratively liable for any offense involving fraudulent acts; and (© By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above. The foregoing is without prejudice to earings or other disqualifications, which the Commission, primary regulatory agency, or the Philippine ore a Commission may impose in its promotion of goo corporate governance or as a sanction in its adminis Proceedings. within five (5) years int as officer of the The 4 « Revised Code states more clearly the rule that it of the Pri i under consideration, Thus, successive discussions on the per diem of@3t director or trustee will need to be conducted without the participation ° the director or trustee whose per diem is discussed and decided up” 0 In Western Institute of Technology vs, Salas," which involved the s°" : sat compensation of corporate officers through the bylaws, the Court § the following: 197 GR No. 113032, August 21, 1997. 98BOARD OF DIRECTORS /TRUSTEES & opnicens There is no argument that directors or tr are not entitled to salary or other comper nothing more than the usual and ordina rule is founded upon a presumption that directors/trustees rend service gratuitously, and that the return upon their shares adequate: ly furnishes the motives for service, without compensation Under the foregoing section, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their com- pensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders’ meeting agree to give it to them. Ustees, as the case may be sation when they perform Ty duties of their office. This This proscription, however, against granting compensation to direc- tor/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which state: “ . . [T]he direc- tors shall not receive any compensation, as such directors, . .” The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for ser- vices performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they ren- der services to the corporation in a capacity other than as directors/ trustees. SECTION 30, Liability of Directors, Trustees or Officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. Laws of the 'S8 Agbayani, Aguedo F, Commentaries and Jurisprudence on the Commercial Laws Agu Philippines, Vol. 3, 1988 ed. p. 258 199 Agbayani, Aguedo F, ibid. 99 BieREVISED CORPORATION CODE OF THE PHILIPPINES A director, trustee or officer shall not attempt to acqy; or acquire any interest adverse to the corporatign respect of any matter which has been reposed in them confidence, and upon which, equity imposes a disabiii. upon themselves to deal in their own behalf; otherwise, th, said director, trustee or officer shall be liable as a truste, for the corporation and must account for the profits which otherwise would have accrued to the corporation. Personal liabilities Sections 30 to 33 provide the instances when directors, trustees, and corporate officers incur personal liabilities. The Revised Code retained the rule in the Old Code. In Ingersoll vs. Malabon Sugar Company,” the Court declared: The general rule is that in corporate affairs the will of the majority controls, and that contracts intra vires entered into by the board of directors are binding upon the corporation and that the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. It cannot be emphasized more that directors, trustees, and officers have a fiduciary relationship with the corporation. They are expected to decide and act with the best interest of the corporation in mind. Directors and officers should exercise corporate powers reposed in them in good faith, and they must not be negligent in their dealings with the corporation. And they cannot willfully and knowingly vote for patently unlawful acts of the corporation. As previously mentioned, directors or trustees may exercise their business judgment and are not liable for mistakes or errors as long as they act in good faith, with due care and prudence. Thus they may not acquit? any personal or pecuniary interest that will result in conflict with their duty as director or trustee. They will be liable jointly and severally or damages suffered by the corporation, its stockholders or members 4 other persons for these infractions. 200 GR. No. 27770, December 3i, 1927, 100BOARD OF DIRECTORS /raUSTEES & OFFICERS i fficer violates hi : Ifa director, trustee, or of es his fiduciary duty by ecu attempting to acquire an interest adverse to the eee cael fe jable as a trustee for the corporation and must account for the profits thet should have accrued to the corporation. at ‘The Court in Tramat Mercantile vs. CA? laid down instances when personal liability of a director, trustee, or officer may arise, viz: 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;?? 2. He consents to the issuance of watered stocks or if, having knowl- edge thereof, he does not forthwith file with the corporate secre- tary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; * or 4, Heis made, by a specific provision of law, to personally answer for his corporate action. Other sanctions 1. Section 170 provides that a corporation's dissolution resulting from its violations of the Revised Code is not a hindrance to the filing of appropriate action against the director, trustee, or officer of the corporation responsible for said violation. 2. Section 171 also grants discretion to the court to impose the ae Priate penalty on the corporation and/or upon its directors, — ees, stockholders, members, officers, or employees responsible fora violation of said Section or indispensable to its commission. —— 201 G.R.No, 11008, November 7, 1994 202 See Section 31, Corporation Code. 203 See Section 65, Corporation Code. 24 See De Asis & Co, nc. vs. Court of Appeals, 136 SCRA 599. 205 Exemplif ified le jon Code; see also Sec. 13, rm in Ariel 144, Corporat Code; see al Presidential Decree 115 (Trust 101REVISED CORPORATION CODE OF THE PHILIPPINES SECTION 31. Dealings of Directors, Trustees or Officers with Corporation. — A contract of the corporation with one, (or more of its directors, trustees, officers or their spouses ang relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of such corporation unless all the following conditions are present: : (a) The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting, (b) The vote of such director or trustee was not necessary for the approval of the contract; (©) The contract is fair and reasonable under the circum- stances; (@)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 (©) In case of an officer, the contract has been previously authorized by the board of directors. Where any of the first three (3) conditions set forth in the Preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two- thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the advers? interest of the directors or trustees involved is made #t such meeting and the contract is fair and reasonable under the circumstances, 102BOARD OF DIRECTORS / TRUSTEES & OFFICERS this section is usually referred to as the case of the self-dealing director (although it may also involve a trustee or officer of the Corporation), The Revised Code has expanded the definition of the self-dealing director, which now includes the director's, trustee's, or officer's spouse and relatives within the fourth civil degree of consanguinity (ie., by blood, such as children, parents, siblings, and first cousins), or affinity (by marriage, such as the spouse's parents, children, and siblings). Status of the self-dealing director's contract Generally, a contract entered into by a corporation with one of its directors, trustees, or officers is voidable at the corporation's option, i.e, the corporation may choose to have it annulled by the courts. An exception to the rule is the confluence of the following conditions that will make the contract valid—therefore, not annullable or subject to ratification: 1. The presences of the director or trustee in the board meeting approving the contract was not necessary to constitute quorum for the meeting; 2. The vote of the director or trustee was not necessary for the ap- Pproval of the contract; 3. The contract is fair and reasonable under the circumstances; and 4. In case of an officer, the contract has been previously authorized by the board of directors. s above is not present, to ratification by the -thirds (2/3) of the Under the Old Code, if any of the first two condition: Tote ge of a self-dealing director is subject ot the stockholders re ting at least two presenting of the futstanding capital stock or of at least two-thirds 2/3) of the We 8 meeting called for the purpose. In the case of an offcet™ Te corporation, an additional condition is that the con an Previously authorized by the board of directors. is : tof the is’, 380 necessary that full disclosure of the adverse intewet Ty ®ctor/s or trustee/s concerned is made in the 2 103oS” REVISED CORPORATION CODE OF THE PHILIPPINES. Furthermore, the contract should be fair and reasonable under th Circumstances. The question therefore is what does “fair and reasonatje: mean? This question was answered in the illustrative case below, Illustrative case Prime White Cement (PWC) entered into a contract with its Director, Te wherein the latter would act as executive dealer and/or distrib, utor of the company’s cement products in Mindanao. Because of the contract Te started his marketing campaign thru print media, among others. Te also entered into contracts with hardware stores that he would supply their cement needs. However, PWC, instead of comply. ing with the original terms of the contract with Te, imposed addition- al conditions on the latter. Unable to convince PWC to abide by the original contract, Te was forced to cancel his contracts with his buy- ers, and therefore sued PWC for damages. The issue is whether the dealership agreement between PWC and Te is a valid and enforceable contract. The Court ruled that the case is one of a self-dealing direc- tor, Te being a director of PWC; and the dealership agreement is not fair and reasonable because it is one-sided in favor of Te at PWC’s expense. The contract is therefore not valid and cannot be ratified; moreover, Te was found to be guilty of disloyalty to the company.° However, under the Revised Code, even the absence of fairness and reasonability is not a ground for invalidating a self-dealing director's contract, which means it may still be ratified. At the same time, though, ratification of the contract concerned is subject to two provisos or conditions: 1) that full disclosure of the adverse interest of the directors oF trustees involved is made at the ratification meeting; and 2) the contract is fair and reasonable under the circumstances. The last condition gives the impression that a self-dealing director's contract that is not fair and reasonable may after all be not ratifiable. There is a need, we humbly Propose, for SEC to clarify Section 31. Corporations vested with public interest ‘The Revised Code also provides that in case of corporations vested with Public interest, material contracts need to be approved by at least W° 206 Prime White Cement Corporation vs, IAC, G.R, No. L~68555, March 19, 1993. 104BOARD OF DIRECTORS /TRUSTEES & oPricens thirds (2/3) of the entire membership of the board, with atleast a majority of the independent directors voting to approve the material concn What constitutes a material contract is not provided for by the Code; thus, itis subject to the SEC's definition. _— SECTION 32. Contracts Between Corporations with Interlocking Directors, — Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two (2) or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one (1) corporation is substantial and the interest in the other corporation or corporations is merely nominal, the contract shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. A fair and reasonable contract between two or more corporations with interlocking directors shall not be invalidated simply because they have interlocking directors, except in cases of fraud. However, if the interest of the interlocking director in one corporation : Substantial,i.e., exceeding twenty (20%) percent of the outstanding a Stock, and her interest in the other corporation(s) is minimal, she shall be Subject to the provisions of Section 32 of the Revised Code. i irtue of SECTION 33, Disloyalty of a Director. — Where a director, PY Soe such office, acquires a business opportunity whit) St belong to the corporation, thereby obtaining P! , yust account Pei A ion, the director must act Prejudice of such corporation, profits, unless the act for and refund to the latter all such owning or has been ratified by a vote of the See aeanaiad representing at least two-thirds (2/3) 0 licable, notwith- capital stock. This provision shall be apP 1 105oN REVISED CORPORATION CODE OF THE PHILIPPINES standing the fact that the director risked one’s own in the venture. Fundy To reiterate, directors have a fiduciary relationship with the Corporation, If a director, by virtue of her office, acquires a business Opportunity tha should belong to the corporation, she must account for the Profits ang refund them to the prejudiced corporation, unless her act has been ratitieg by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This holds true even ifthe directo, risked her own funds in the venture. Again in the Gokongwei vs. SEC case,” the Court elaborated on the concept of disloyalty by holding that: Although in the strict and technical sense, directors of a private cor- poration are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, “they occupy a fiduciary relation, and in this sense the relation is one of trust”°* “The ordinary trust relationship of di- rectors of a corporation and stockholders’ according to Ashaman v. Miller,2” “is not a matter of. ‘statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stock- holders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof...” Justice Douglas, in Pepper v. Litton,?° emphatically restated the oe dard of fiduciary obligation of the directors of corporations, thus! mea . ; 0 ‘A director is a fiduciary. .. heir powers are powers in trust. ..He ea isin such fiduciary position cannot serve himself first and his ces' 207 GR.No. L-45911, April, 1979, 208 Fletcher, Cyclopedia Corporations, 1975 Ed, Vol. 3, p. 144, Sec. 838. 209 101 Fed. 2d 85, cited in Aleck, Modern Corporation Law, Vol. 2, Sec. 959. 210 308 US. 309; 84 L. ed. 281, 289-291 106 oe