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REVISED CORPORATION CODE

Part II

JGA Medina
Bus. Org II, Philippine Law School
Review . . . . Foreign Investments Act:
• Control Test to prevailing mode to determine nationality.
• No capitalization requirement for foreign owned export oriented companies.
• Generally, USD200k capitalization for foreign owned domestic market companies.
USD100k under certain conditions.
• Investment Rights of former Filipino citizens.
• Negative List

Steelcase, Inc. v. Design International Selections, Inc., G.R. No. 171995. April 18, 2012 -
Doing Business . . . soliciting orders, service contracts, opening offices, appointing
representatives or distributors domiciled in the Philippines . . . . . . “the appointment of a
distributor in the Philippines is not sufficient to constitute ‘doing business’ unless it is
under the full control of the foreign corporation. If the distributor is an independent entity
which buys and distributes products, other than those of the foreign corporation, for its
own name and its own account, it cannot be considered to be doing business in the
Philippines.
POWERS of a CORPORATION
Section 35. Corporate powers and capacity. –

a. To sue and be sued in its corporate name;


b. Perpetual Existence unless provided otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation;
5. To adopt, amend or repeal by-laws;
6. To issue or sell stocks, sell treasury stocks, or admit members if a non-stock;
7. To deal with real and personal property, including securities and bonds of other corporations;
8. To enter into partnership, joint venture , merger or consolidation with other corporations;
9. To make reasonable donations, except that foreign corporations prohibited from giving
donations to political parties or candidates;
10. To establish pension, retirement plans;
11. To exercise powers essential or necessary to carry out its purpose as stated in the articles.
Exercise of Powers
• The Corporation Code therefore tells us that the power of a corporation to validly grant
or convey any of its real or personal properties is circumscribed by its primary purpose. It
is therefore important to determine whether the grant or conveyance is pursuant to a
legitimate corporate purpose, or is at least reasonable and necessary to further its
purpose. (Agdao Landless)

• In determining whether or not a corporation may perform an act, one considers the
logical and necessary relation between the act assailed and the corporate purpose
expressed by the law or in the charter, for if the act were one which is lawful in itself or
not otherwise prohibited and done for the purpose of serving corporate ends or
reasonably contributes to the promotion of those ends in a substantial and not merely in
a remote and fanciful sense, it may be fairly considered within corporate powers. The
test to be applied is whether the act in question is in direct and immediate furtherance
of the corporation's business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.
(Querubin vs. Comelec)
Business Judgment Rule Ong Yong v. Tiu, G.R. Nos. 144476 & 144629, April 8, 2003

Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's
directors and stockholders is a violation of the "business judgment rule" which
states that:

. . . (C)ontracts intra vires entered into by the board of directors are binding upon
the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to wanton destruction to the rights of
the minority, as when plaintiffs aver that the defendants (members of the board),
have concluded a transaction among themselves as will result in serious injury to
the plaintiffs stockholders.
SEC. 44. Ultra Vires Acts of Corporations
• Corporation shall possess or exercise corporate powers conferred by this law, or by its
articles of incorporation and those necessary or incidental to the exercise of the powers
conferred.

• Corporations are artificial entities granted legal personalities upon their creation by their
incorporators in accordance with law. Unlike natural persons, they have no inherent powers. Third
persons dealing with corporations cannot assume that corporations have powers. It is up to those
persons dealing with corporations to determine their competence as expressly defined by the law
and their articles of incorporation. A corporation may exercise its powers only within those
definitions. Corporate acts that are outside those express definitions under the law or articles of
incorporation or those "committed outside the object for which a corporation is created" are
ultra vires. The only exception to this rule is when acts are necessary and incidental to carry out a
corporation's purposes, and to the exercise of powers conferred by the Corporation Code and
under a corporation's articles of incorporation (University of Mindanao vs. BSP).
Section 36. Power to extend or shorten corporate term. –
• May extend or shorten its term when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by two-thirds (2/3) vote.
• In case of extension of corporate term, any dissenting stockholder may exercise his appraisal
right.

Section 37. Power to increase or decrease capital stock; incur, create


or increase bonded indebtedness.
• Majority of Board and two-thirds (2/3) vote of stockholders.
• With treasurer’s affidavit showing at least twenty-five (25%) percent of such increased capital
stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed
has been paid.
• Require prior approval of the Securities and Exchange Commission.
• No decrease shall be approved if its effect shall prejudice rights of corporate creditors.
• Bonds issued by a corporation shall be registered with the SEC.
Section 38. Power to deny pre-emptive right.
• All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe
to all issues or disposition of shares of any class, in proportion to their respective
shareholdings, unless denied by the articles of incorporation. Pre-emptive right
shall not extend to shares to be issued in compliance with laws requiring stock
offerings or minimum public stock ownership or to shares to be issued in good
faith with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.

• The stockholder must be given a reasonable time within which to exercise their
preemptive rights. Upon the expiration of said period, any stockholder who has
not exercised such right will be deemed to have waived it. Jose Campos, Jr. & Maria Clara L.
Campos, THE CORPORATION CODE: COMMENTS, NOTES AND SELECTED CASES, Vol. II (1990 ed.), p. 58.
Section 39. Sale or other disposition of assets.
• Subject to the provisions of Competition Act, by a majority vote of its board, may sell
lease, exchange, mortgage, pledge or otherwise dispose its properties and assets for
money, stocks, bonds, or other property or consideration as board may deem expedient.
cash.
• If sale is all or substantially all of assets including goodwill, that is, would be rendered
incapable of continuing business or accomplishing the purpose, 2/3 vote of SH required.
• After such authorization board may in its discretion, abandon such sale, lease, exchange.
• Dissenting stockholder may exercise appraisal right.
• Exception: Sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if necessary in the usual and regular course of business or if the
proceeds of the sale or other disposition will be appropriated for the conduct of its
remaining business.
Business Enterprise Transfer

• Where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except if
purchaser expressly or impliedly agrees to assume debts, transaction amounts to a
consolidation or merger of the corporations or is entered into fraudulently in order to
escape liability for such debts, or the purchasing corporation is merely a continuation of
the selling corporation (Nell Doctrine).

• Section 40 suitably reflects the Business-Enterprise Transfer under the exception of the
Nell Doctrine because the purchasing or transferee corporation necessarily continued the
business of the selling or transferor corporation. Given that the transferee corporation
acquired not only the assets but also the business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the former. The litmus test to determine
the applicability of Section 40 would be the capacity of the corporation to continue its
business after the sale of all or substantially all its assets. (Y-I Leisure Philippines)
Section 40. Power to acquire own shares
• Must have unrestricted retained earnings and for a legitimate corporate purpose or
purposes including:

1. To eliminate fractional shares arising out of stock dividends;


2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during
said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code.

• Example of legitimate purpose: Acquisition of listed shares held by the public in case of
delisting from the Stock Exchange.

• Shares acquired become treasury shares.


• The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances:

(1) amendment of the Articles of Incorporation to reduce the authorized capital stock,
(2) purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and
(3) dissolution and eventual liquidation of the corporation.

Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to


acquire its own shares and in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements therefor are complied
with.
• Ong Yong v. Tiu, G.R. No. 144476, 144629, April 8, 2003.
CIR v. Manning, G.R. No. L-28398, Aug. 6, 1975.

Treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. They are
therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been
retired by the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share, participates
neither in dividends, because dividends cannot be declared by the corporation to
itself, nor in the meetings of the corporations as voting stock, for otherwise equal
distribution of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation though it still
represent a paid — for interest in the property of the corporation.

Is it subject to pre-emptive rights?


Section 41. Invest corporate funds in another corporation or business
or other purpose. –

• May invest its funds in any other corporation or business for any purpose upon
vote by majority of the board and ratified by two-thirds (2/3) SH vote.

• Where the investment by the corporation is reasonably necessary to accomplish


its primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary.

• Dissenting stockholder shall have appraisal right.


Section 42. Power to declare dividends. –
• By board of directors out of the unrestricted retained earnings payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them.
• Any cash dividends due on delinquent stock shall first be applied to the unpaid balance
on the subscription plus costs and expenses.
• Stock dividend shall require 2/3 SH vote. Stock dividends withheld from the delinquent
stockholder until unpaid subscription is fully paid
• Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
1. when justified by definite corporate expansion projects or programs;
2. prohibited under any loan agreement with any financial institution or creditor
unless consent secured;
3. it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.
SEC. 43. Power to Enter into Management Contract.
• Approved by majority board and SH of both managing and managed corps.
• 2/3 vote of SH of both managing and managed corps. if:
i. SH representing the same interest of both the managing and the managed corporations
own or control more than one-third (1/3) of the total outstanding capital stock entitled to
vote of the managing corporation; or
ii. where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the managed
corporation
• No management contract shall be entered into for a period longer than five years per term.
• Service contracts or operating agreements relating exploration, development, exploitation or
utilization of natural resources may be subject to periods provided by laws or regulations.
APPRAISAL RIGHTS
SEC. 80. When the Right of Appraisal May Be Exercised.

• Any stockholder of a corporation shall have the right to dissent and


demand payment of the fair value of the shares in the following instances:
(a) Amendment to the articles of incorporation will change or restrict the
rights of any stockholder or class of shares, or of authorizes
preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate
existence;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets as provided in this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than
the primary purpose of the corporation.
SEC. 81. How Right is Exercised.
• Written demand on the corporation for payment of the fair value of the shares
within 30 days from vote. Failure to make the demand within 30 day period shall
be deemed a waiver of the appraisal right.
• Corporation shall pay to such stockholder, upon surrender of the stock
certificates, the fair value thereof as of the day prior to the date on which the
vote was taken, excluding any appreciation or depreciation.
• If within sixty (60) days from the date of the vote, there is no agreement on the
fair value of the shares, it shall be determined by three (3) disinterested persons
and their award shall be paid within thirty (30) days after such award.
• No payment shall be made to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to cover such payment.
SEC. 82. Effect of Demand and Termination of Right
• All rights accruing to such shares, including voting and dividend rights, shall be
suspended
• If the dissenting stockholder is not paid the value of the said shares within thirty
(30) days after the award, the voting and dividend rights shall immediately be
restored.
SEC. 83. When Right to Payment Ceases.
• No demand for payment may be withdrawn without consent of corporation.
• If demand allowed to be withdrawn, or corporate action is abandoned or
rescinded, or disapproved by the Commission, or where Commission determines
that stockholder is not entitled to the appraisal right, then the status of the
stockholder shall be restored, and all dividend distributions which accrued will be
paid.
SEC. 84. Who Bears Costs of Appraisal.
• Section 85. Who bears costs of appraisal:
• The costs and expenses of appraisal shall be borne by the corporation. If appraisal value is
approximately the same as the price the corporation offered. stockholder, shall bear appraisal
costs. In the case of an action to recover fair value, all costs and expenses shall be assessed
against the corporation, unless the refusal of the stockholder to receive payment was unjustified.

• Section 86. Notation on certificates; rights of transferee.


• Within ten (10) days after demanding payment for his shares, submit the certificates of stock
representing his shares to the corporation for notation as dissenting shares. His failure to do so
shall, at the option of the corporation, terminate appraisal rights.
• If shares represented by the certificates bearing such notation are transferred, the rights of the
dissenting stockholder shall cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions which would have accrued shall be paid to transferee.
No payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover the payment.
The trust fund doctrine backstops the requirement of unrestricted retained
earnings to fund the payment of the shares of stocks of the withdrawing
stockholders. Under the doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors,
who are preferred in the distribution of corporate assets. The creditors of a
corporation have the right to assume that the board of directors will not use the
assets of the corporation to purchase its own stock for as long as the corporation
has outstanding debts and liabilities. There can be no distribution of assets among
the stockholders without first paying corporate debts. Thus, any disposition of
corporate funds and assets to the prejudice of creditors is null and void.
Turner v. Lorenzo Shipping Corp., G.R. No. 157479, November 24, 2010
MANAGEMENT and CONTROL
SEC. 22. The Board of Directors or Trustees of a Corporation
• exercise the corporate powers, conduct all business, and control all properties of
the corporation.
• Directors a term of one 1 year, trustees a term not exceeding three (3) years.
Must be or member
• The board of the 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 "The Securities Regulation Code“
(b) Banks and quasi-banks, nonstock savings and loan associations, pawnshops,
money service business, preneed, trust and insurance companies, & other
financial intermediaries; and
(c) Other corporations engaged in businesses vested with public interest similar
to the above, as may be determined by the Commission,
Independent Directors (Sec. 22):

• 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 of directors is the directing and controlling body of the corporation. It
is a creation of the stockholders and derives its power to control and direct the
affairs of the corporation from them. The board of directors, in drawing to itself
the power of the corporation, occupies a position of trusteeship in relation to the
stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of the corporate affairs.

• The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have
stood for election, and who have actually been elected by the stockholders, on an
annual basis. Only in that way can the continued accountability to shareholders,
and the legitimacy of their decisions that bind the corporation's stockholders, be
assured. The shareholder vote is critical to the theory that legitimizes the exercise
of power by the directors or officers over the properties that they do not own.
Bernas v. Cinco, G.R. Nos. 163356-57 & 163368-69, July 1, 2015
• A corporation is a juridical person separate and distinct from its stockholders or members. The
property of the corporation is not the property of its stockholders or members and may not be
sold by the stockholders or members without express authorization from the corporation's board
of directors.
• A corporation may act only through its board of directors or, when authorized either by its bylaws
or by its board resolution, through its officers or agents in the normal course of business. The
general principles of agency govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, bylaws, or relevant provisions of law.
• Persons dealing with an assumed agent, whether the assumed agency be a general or special one,
are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of authority, and in case either is controverted, the burden
of proof is upon them to establish it.
• As a general rule, the acts of corporate officers within the scope of their authority are binding on
the corporation. But when these officers exceed their authority, their actions "cannot bind the
corporation, unless it has ratified such acts or is estopped from denying it.
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, G.R. No. 129459, September 29, 1998:
The general principles of agency govern the relationship between a corporation and its representatives. Law
and jurisprudence recognize actual authority and apparent authority as the two (2) types of authorities
conferred upon a corporate officer or agent in dealing with third persons.
Express actual authority refers to the power delegated to the agent by the corporation, while an agent's
implied authority can be measured by his or her prior acts ratified by the corporation or whose benefits have
been accepted by the corporation.
Apparent authority is based on the principle of estoppel, determined by the acts of the principal and not by
the acts of the agent.
• An agent's apparent authority from the principal may also be ascertained through:
(1) the general manner by which the corporation holds out an officer or agent as having power to act, or
(2) the acquiescence in his acts of with actual or constructive knowledge thereof, whether within or without
the scope of his ordinary powers.
• The doctrine of apparent authority provides that even if no actual authority has been conferred on an agent,
his or her acts, as long as they are within his or her apparent scope of authority, bind the principal. However,
the principal's liability is limited to third persons who are reasonably led to believe that the agent was
authorized to act for the principal due to the principal's conduct.
Calubad v. Ricarcen Development Corp., G.R. No. 202364, August 30, 2017
• Inasmuch as a corporate president is often given general supervision and control over corporate
operations, the strict rule that said officer has no inherent power to act for the corporation is
slowly giving way to the realization that such officer has certain limited powers in the transaction
of the usual and ordinary business of the corporation. In the absence of a charter or by[-]law
provision to the contrary, the president is presumed to have the authority to act within the
domain of the general objectives of its business and within the scope of his or her usual duties.
• It has been held in other jurisdictions that the president of a corporation possesses the power to
enter into a contract for the corporation, when the 'conduct on the part of both the president and
the corporation [shows] that he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had recognized, approved and
ratified his former and similar actions.
• Furthermore, a party dealing with the president of a corporation is entitled to assume that he has
the authority to enter, on behalf of the corporation, into contracts that are within the scope of
the powers of said corporation and that do not violate any statute or rule on public policy.”
Colegio Medico-Farmaceutico De Filipinas, Inc. v. Lim, G.R. No. 212034, July 2, 2018
SEC. 23. Election of Directors or Trustees.
• Each stockholder or member shall have the right to nominate any director or trustee.
• There must be present owners of majority of the outstanding capital stock, or majority of the
members entitled to vote. When so authorized in the bylaws or by a majority of the board of
directors, may 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 even in the
absence of provision in the bylaws of such corporations.
• The election must be by ballot if requested by any voting stockholder or member.
• In stock corporations, cumulative voting allowed. No delinquent stock shall be voted.
• Unless otherwise provided in the articles of incorporation or in the bylaws, members of nonstock
corporations may cast as many votes as there are trustees to be elected but may not cast more
than one (1) vote for one (1) candidate.
• If no election is held, corporation shall proceed in accordance with Section 25 of this Code.
• The directors or trustees elected shall perform their duties as prescribed by law, rules of good
corporate governance, and bylaws of the corporation.
Cumulative Voting: (see internet for calculator)

• Cumulative voting is a type of voting system that helps strengthen the


ability of minority shareholders to elect a director. This method allows
shareholders to cast all of their votes for a single nominee for the
board of directors when the company has multiple openings on its
board.

• For example, if the election is for five our directors and you hold 500
shares. You are entitled to one vote per share per director for a total
of 2,500 votes.

• You could vote all 2,500 votes for one candidate or divide your votes
whichever way you want.
Under the 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 management functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over fundamental and major corporate changes.
While stockholders are entitled to receive profits, the management and direction of the corporation
are lodged with their representatives and agents — the board of directors or trustees. In other
words, acts of management pertain to the board; and those of ownership, to the stockholders or
members. In the latter case, the board cannot act alone, but must seek approval of the stockholders
or members.
Conformably with the foregoing principles, 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 a voice in the management of corporate affairs, or in which a member in a nonstock
corporation can have a say on how the purposes and goals of the corporation may be achieved.
Once the directors or trustees are elected, the stockholders or members relinquish corporate
powers to the board in accordance with law.
Tan v. Sycip, G.R. No. 153468, August 17, 2006
SEC. 25. Report of Election of Directors, Trustees and Officers, Non-
holding of Election and Cessation from Office.
• Within thirty (30) days after the election, corporation, shall submit to the Commission, 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) and shall specify a new date for the election which shall be within sixty (60) days from the
scheduled date.
• If no new date has been designated, or if the rescheduled election is likewise not held, the Commission
may, upon the application summarily order that an election be held. The Commission shall have the
power to issue such orders as may be appropriate.
• 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.
SEC. 24. Corporate Officers.
Immediately after their election, the directors 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, elect a compliance officer.
The same person may hold 2 or more positions concurrently, except that no one
shall act as president and secretary or as president and treasurer 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.
Conformably with Section 25, a position must be expressly mentioned in the By-
Laws in order to be considered as a corporate office. Thus, the creation of an office
pursuant to or under a By-Law enabling provision is not enough to make a position
a corporate office. Guerrea v. Lezama, the first ruling on the matter, held that the
only officers of a corporation were those given that character either by the
Corporation Code or by the By-Laws; the rest of the corporate officers could be
considered only as employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:
An "office" is created by the charter of the corporation and the officer is
elected by the directors or stockholders. On the other hand, an employee
occupies no office and generally is employed not by the action of the directors
or stockholders but by the managing officer of the corporation who also
determines the compensation to be paid to such employee.
Matling Industrial and Commercial Corporation v. Coros, G.R. No. 157802, October 13, 2010
SEC. 52. Regular & Special Meetings of Directors or Trustees, Quorum.
• Unless articles the bylaws provides for greater majority, a majority of the directors or trustees as
stated in the articles of incorporation shall constitute a quorum. Every decision reached by at
least a majority of the directors or trustees constituting a quorum, except for the election of
officers which shall require the vote of a majority of all the members of the board, shall be valid
as a corporate act.
• Regular meetings of the board shall be held monthly, unless the bylaws provide otherwise.
Special meetings may be held at any time upon the call of the president or as provided in the
bylaws.
• Meetings of board may be held anywhere in or outside of the Philippines, unless the bylaws
provide otherwise. Notice of regular or special meetings must be sent at least two (2) days prior
to the scheduled meeting. A director or trustee may waive this requirement, either expressly or
impliedly.
• Directors or trustees can participate and vote through remote communication Directors or
trustees cannot attend or vote by proxy at board meetings.
• A director or trustee who has a potential interest in any related party transaction must recuse
from voting on the approval of the related party transaction without prejudice to compliance with
the requirements of Section 31 of this Code.
The general rule is that a corporation, through its board of directors, should act in the manner and within the
formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting
called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by
any objecting director or shareholder.
Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which was illegal
for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or
impliedly, by the corporation's subsequent course of conduct. Thus, in one case, it was held:
" . . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) Sec. 429, at page 290, it
is stated: ‘Thus, acts of directors at a meeting which was illegal because of want of notice may be
ratified by the directors at a subsequent legal meeting, or by the corporation's course of conduct . . .'
"Fletcher, supra, further states in Sec. 762, at page 1073-1074: 'Ratification by directors may be by an
express resolution or vote to that effect, or it may be implied from adoption of the act, acceptance or
acquiescence. Ratification may be effected by a resolution or vote of the board of directors expressly
ratifying previous acts either of corporate officers or agents; but it is not necessary, ordinarily, to show a
meeting and formal action by the board of directors in order to establish a ratification.'cdt
• "In American Casualty Co., v. Dakota Tractor and Equipment. Co., 234 F. Supp. 606, 611 (D.N.D.
1964), the court stated: 'Moreover, the unauthorized acts of an officer of a corporation may be ratified
by the corporation by conduct implying approval and adoption of the act in question. Such ratification
may be express or may be inferred from silence and inaction.'
• ||| (Lopez Realty, Inc. v. Fontecha, G.R. No. 76801, [August 11, 1995], 317 PHIL 216-230)
SEC. 26. Disqualification of Directors, Trustees or Officers.
A person shall be disqualified from being a director, trustee or officer of any corporation if, within
five (5) years prior to the election or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as "The Securities Regulation Code";
(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similar to those enumerated in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other disqualifications, which the
Commission, the primary regulatory agency, or the Philippine Competition Commission may
impose.
Gokongwei, Jr. v. Securities and Exchange Commission
G.R. No. L-45911, April 11, 1979

• Every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.
• No vested right of stockholder to be elected director. Any person who
buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law.
• Although in the strict and technical sense, directors of a private
corporation 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 directors of a
corporation and stockholders", according to Ashaman v. Miller, "is not a
matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence
of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof . . ."
• A director is a fiduciary. . . . Their powers are powers in trust. . . . He who is in
such fiduciary position cannot serve himself first and his cestuis second. . . . He
cannot manipulate the affairs of his corporation to their detriment and in
disregard of the standards of common decency. He cannot by the intervention of
a corporate entity violate the ancient precept against serving two masters. . . . He
cannot utilize his inside information and strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot violate rules of fair play
by doing indirectly through the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the detriment of the
stockholders and creditors no matter how absolute in terms that power may be
and no matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference, or advantage of the fiduciary to
the exclusion or detriment of the cestuis.
• The doctrine of "corporate opportunity" is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting
for two entities with competing interests. This doctrine rests fundamentally on
the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when the interest of the
corporation justly calls for protection.

• An amendment to the corporate by-law which renders a stockholder ineligible to


be director, if he be also director in a corporation whose business is in
competition with that of the other corporation, has been sustained as valid. It is a
settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation's Board of Directors.
SEC. 160. Violation of Disqualification Provision; Penalties.
When, despite the knowledge of the existence of a ground for
disqualification as provided in Section 26 of this Code, a director,
trustee or officer willfully holds office, or willfully conceals such
disqualification, such director, trustee or officer shall be punished with
a fine ranging from Ten thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00) at the discretion of the court, and shall
be permanently disqualified from being a director, trustee or officer of
any corporation. When the violation of this provision is injurious or
detrimental to the public, the penalty shall be a fine ranging from
Twenty thousand pesos (P20,000.00) to Four hundred thousand pesos
(P400,000.00).
SEC. 34. Executive, Management, and Other Special Committees.
If the bylaws so provide, the board may create an executive committee composed of at
least three (3) directors which may act, by majority vote, 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) Where shareholders' approval is also required;
(b) Filling of vacancies in the board;
(c) Amendment or repeal of bylaws or the adoption of new bylaws;
(d) Amendment or repeal of any resolution of the board which by its express terms is
not amendable or repealable; and
(e) Distribution of cash dividends to the shareholders.
The board may create special committees of temporary or permanent nature and
determine the members' term, composition, compensation, powers, and responsibilities.
SEC. 27. Removal of Directors or Trustees.
• By two-thirds (2/3) of the outstanding capital stock or of the members at a regular meeting of the
corporation or at a special meeting after notice to stockholders or members of the intention to
propose such removal at the meeting.
• A special meeting must be called by the secretary on order of the president, or upon written
demand of at least a majority of the outstanding capital stock or members entitled to vote.
• If there is no secretary, or if the secretary fails or refuses to call the special meeting or to give
notice, stockholder or member signing the demand may call for the meeting by directly
addressing the stockholders or members.
• Removal may be with or without cause: Provided, That removal without cause may not be used
to deprive minority of the right of representation under Section 23 of this Code.
• The Commission shall, motu proprio or upon verified complaint, and after due notice and hearing,
order the removal of a director or trustee elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an election.
Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in
the MSC by-laws can it be gathered that the Oversight Committee is authorized to step in
wherever there is breach of fiduciary duty and call a special meeting for the purpose of
removing the existing officers and electing their replacements even if such call was made
upon the request of shareholders.

Needless to say, the MSCOC is neither empowered by law nor the MSC by-laws to call a
meeting and the subsequent ratification made by the stockholders did not cure the
substantive infirmity, the defect having set in at the time the void act was done. The defect
goes into the very authority of the persons who made the call for the meeting. It is apt to
recall that illegal acts of a corporation which contemplate the doing of an act which is
contrary to law, morals or public order, or contravenes some rules of public policy or public
duty, are, like similar transactions between individuals, void. The void election of 17
December 1997 cannot be ratified by the subsequent Annual Stockholders' Meeting.

Bernas v. Cinco, G.R. Nos. 163356-57 & 163368-69, [July 1, 2015]


SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board.
• Vacancy other than by removal or by expiration of term may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting a quorum;
• Vacancy due to term expiration - election shall be held no later than the day of such expiration.
• Vacancy due to removal - election may be held in same meeting.
• In all other cases, the election must be held no later than forty-five (45) days from the time the
vacancy arose.
• The replacement director or trustee serves only for the unexpired term of the predecessor.
• When the vacancy prevents the remaining directors from constituting a quorum and emergency
action is required to prevent grave, substantial, and irreparable loss or damage to the
corporation, the vacancy may be temporarily filled from among the officers of the corporation by
unanimous vote of the remaining directors or trustees. The term shall cease within a reasonable
time from the termination of the emergency or upon election of the replacement.
• Any directorship or trusteeship to be filled by reason of an increase in the number of directors or
trustees filled only by an election at a regular or at a special meeting.
Term is distinguished from tenure in that an officer's "tenure" represents the term during
which the incumbent actually holds office. The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons within or beyond the power of the incumbent.
Based on the above discussion, when Section 23 of the Corporation Code declares that
"the board of directors . . . shall hold office for one (1) year until their successors are
elected and qualified", we construe the provision to mean that the term of the members of
the board of directors shall be only for one year; their term expires one year after election
to the office. The holdover period — that time from the lapse of one year from a member's
election to the Board and until his successor's election and qualification — is not part of
the director's original term of office, nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an incumbent member of the board of
directors continues to serve in a holdover capacity, it implies that the office has a fixed
term, which has expired, and the incumbent is holding the succeeding term.
Valle Verde Country Club, Inc. v. Africa, G.R. No. 151969, [September 4, 2009]
SEC. 29. Compensation of Directors or Trustees.

• In the absence of any provision in the bylaws directors or trustees shall not receive any
compensation in their capacity as such, except for reasonable per diems. However,
majority of stockholders or members may grant directors or trustees with compensation
and approve the amount thereof at a regular or special meeting.
• In no case shall the total yearly compensation of directors exceed ten percent (10%) of
the net income before income tax of the corporation during the preceding year.
• Directors or trustees shall not participate in the determination of their own per diems or
compensation.
• Corporations vested with public interest shall submit to their shareholders and the
Commission, an annual report of the total compensation of each of their directors or
trustees.
SEC. 30. Liability of Directors, Trustees or Officers.

• Shall be liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons if:
 Willfully and knowingly vote for or assent to patently unlawful acts of the
corporation;
 Guilty of gross negligence or bad faith in directing the affairs of the corporation;
 Acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees
• When a director, trustee or officer attempts to acquire or acquire, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has
been reposed in him in confidence, as to which equity imposes a disability upon him
to deal in his own behalf, he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation.
• Before a director or officer of a corporation can be held personally liable for corporate
obligations, the following requisites must concur:

(1) the complainant must allege in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and
(2) the complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.

Corporate directors and officers are solidarily liable with the corporation for the
termination of employees done with malice or bad faith; and declared that bad faith did
not connote bad judgment or negligence, but a dishonest purpose or some moral obliquity
and conscious doing of wrong, or meant a breach of a known duty through some motive or
interest or ill will, or partook of the nature of fraud

Lozada v. Mendoza, G.R. No. 196134, October 12, 2016


Bad faith implies breach of faith and willful failure to respond to plain and well understood
obligation. It does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a
known duty through some motive or interest or ill will. It partakes of the nature of fraud.
Gross negligence is the want of even slight care, acting or omitting to act in a situation
where there is duty to act, not inadvertently but willfully and intentionally, with a
conscious indifference to consequences insofar as other persons may be affected. It
evinces a thoughtless disregard of consequences without exerting any effort to avoid them;
the want or absence of or failure to exercise slight care or diligence, or the entire absence
of care.
Section 31 lays down the "doctrine of corporate opportunity" and holds personally liable
corporate directors found guilty of gross negligence or bad faith in directing the affairs of
the corporation, which results in damage or injury to the corporation, its stockholders or
members, and other persons.
Sanchez v. Republic, G.R. No. 172885, October 9, 2009
SEC. 64. Liability of Directors for Watered Stocks.

A director or officer of a corporation who:


(a) consents to the issuance of stocks for a consideration less than its
par or issued value;
(b) consents to the issuance of stocks for a consideration other than
cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, does not file a
written objection with the corporate secretary, shall be liable to the
corporation or its creditors, solidarily with the stockholder
concerned for the difference between the value received at the time
of issuance of the stock and the par or issued value of the same.
SEC. 31. Dealings of Directors, Trustees or Officers with the
Corporation.
A contract of the corporation with directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. The presence of such director or trustee in the meeting approving the contract was not
necessary to constitute a quorum (may be ratified by 2/3 vote);
2. The vote of such director or trustee was not necessary for the approval of the contract (may
be ratified by 2/3 vote if contract fair and reasonable);
3. The contract is fair and reasonable under the circumstances(may be ratified by 2/3 vote);
4. 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
5. That in case of an officer, the contract has been previously authorized by the board of
directors.
Section 32. Contracts between corporations w/ interlocking directors.
• Except in cases of fraud, and if contract is fair and reasonable a contract between two or more
corporations having interlocking directors shall not be invalidated on that ground alone.
• If the interest of the interlocking director in one corporation is substantial (exceeding 20% of
capital stock) and his interest in the other corporation or corporations is merely nominal, he shall
be subject to the provisions Sec. 32 insofar as the latter corporation is concerned.

Section 33. Disloyalty of a director. –


• A director, by virtue of his office, acquires a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he must account to
the latter for all such profits by refunding the same, unless ratified by a vote of the owning or
representing at least two-thirds (2/3) of the outstanding capital stock. This provision apply even if
the director risked his own funds in the venture.
Prime White Cement Corp. v. Intermediate Appellate Court
G.R. No. 68555, March 19, 1993.

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


duty of loyalty to his corporation. In case his interests conflict with those of
the corporation, he cannot sacrifice the latter to his own advantage and
benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders.

• . . . He cannot by the intervention of a corporate entity violate the ancient


precept against serving two masters . . .
Lent v. Tullett Prebon (Philippines), Inc.,
G.R. Nos. 189158 & 189530, January 11, 2017

• The Corporation Code was intended as a regulatory measure, not


primarily as a penal statute. Sections 31 to 34 in particular were
intended to impose exacting standards of fidelity on corporate
officers and directors but without unduly impeding them in the
discharge of their work with concerns of litigation. Considering the
object and policy of the Corporation Code to encourage the use of the
corporate entity as a vehicle for economic growth, we cannot espouse
a strict construction of Sections 31 and 34 as penal offenses in
relation to Section 144 in the absence of unambiguous statutory
language and legislative intent to that effect.
Director’s and Officer’s Liability Summary -
1. When :
(a) wilfully 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;
2. Watered stocks.
3. When contractually agreed or stipulated to liability. or
4. By specific provision of law, personally liable.
5. In labor cases, for the termination of employment with malice or in bad faith.

MAM Realty Development Corporation v. NLRC