TITLE III courts are not in the business of business, and the

BOARD OF DIRECTORS /TRUSTEES AND laissez faire rule or the free enterprise system prevailing
OFFICERS in our social and economic set-up dictates that it is
better for the State and its organs to leave business to
the businessmen especially so when courts are ill-
Correlation of the board of directors/trustees, equipped to make business decisions. More
officers, and stockholders importantly, the social contract in the corporate family to
decide the course of the corporate business has been
Under the Corporation Code, stockholders or vested in the board and
members periodically elect the board of directors or not with courts,'
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- SEC.22. The Board of Directors or Trustees of a
to-day basis. As owners,though, the stockholders or Corporation; Qualification and Term. - Unless
members have residual powers over fundamental and otherwise provided in this Code, the board of
major corporate changes. directors or trustees shall exercise the corporate
powers, conduct all business, and control all
properties of the corporation.
Acts of management and ownership
Directors shall be elected for a term of one
While stockholders and members (in some (1) year from among the holders of stocks
instances) are entitled to receive profits, the registered in the corporation's books, while
management and direction of the corporation are trustees shall be elected for a term not exceeding
lodged with their representatives and agents—the three (3) years from among the members of the
board of directors or trustees. In other words, acts of corporation. Each director and trustee shall
management pertain to the board: and those of hold office until the successor is elected and
ownership, to the stockholders or members. In the qualified. A director who ceases to own at least one
latter case, the board cannot act alone, but must seek (1) share of stock or a trustee who ceases to be a
approval of the stockholders or members. member of the corporation shall cease to be such.

The board of the following corporations

Where do corporate powers reside? vested with public interest shall have independent
directors constituting at least twenty percent (20%)
Conformably with the foregoing principles, one of such board:
of the most important rights of a qualified shareholder
or member is the right to vote—either personally or by (a) Corporations covered by Section 17.2 of
proxy—for the directors or trustees who are to manage Republic Act No. 8799, otherwise known as "The
the corporate affairs. The right to choose the persons Securities Regulation Code", namely those whose
who will direct, manage and operate the corporation is securities are registered with the Commission,
significant, because it is the main way in which a corporations listed with an exchange or with assets
stockholder can have a voice in the management of of at least Fifty million pesos (P50,000,000.00) and
corporate affairs, or in which a member in a nonstock having two hundred (200) or more holders of
corporation can have a say on how the purposes and shares, each holding at least one hundred (100)
goals of the corporation may be achieved. Once the shares of a class of its equity shares;
directors or trustees are elected, the stockholders or
members relinquish corporate powers to the board in (b) Banks and quasi-banks, nonstock
accordance with law savings and loans associations, pawnshops,
corporations engaged in money service business,
preneed, trust and insurance companies, and other
What is business judgment rule? financial intermediaries; and

Contracts intra vires entered into by the board (c) Other corporations engaged in
of directors are binding upon the corporation, and courts businesses vested with public interest similar to the
will not interfere unless such contracts are so above, as may be determined by the Commission,
unconscionable and oppressive as to amount to wanton after taking into account relevant factors which are
destruction to the rights of the minority, as when germane to the objective and purpose of requiring
plaintiffs aver that the defendants (members of the the election of an independent director, such as the
board), have concluded a transaction among extent of minority ownership type of financial
themselves as will result in serious injury to the products or securities issued or offered to
plaintiffs, stockholders. investors, public interest involved in the nature of
business operations, and other analogous factors.
The reason behind the rule is aptly explained
by Dean Cesar L. Villanueva, an esteemed author in An independent director is a person who,
corporate law, thus: apart from shareholdings and fees received from
Courts and other tribunals are wont to override the corporation, is independent of management and
the business judgment of the board mainly because, free from any business or other relationship which
could, or could reasonably be perceived to such a situation, the common law gradually recognized
materially interfere with the exercise of independent the right of a stockholder to sue on behalf of a
judgment in carrying outthe responsibilities as a corporation in what eventually became known as a
director. "derivative suit." It has been proven to be an effective
remedy of the minority against the abuses or
management. Thus, an individual stockholder is
Independent directors must be elected by permitted to institute a derivative suit on behalf of the
the shareholders present or entitled to vote in corporation wherein he holds stock in order to protect or
absentia during the election of directors. vindicate corporate rights, whenever officials of the
Independent directors shall be subject to rules and corporation refuse to sue or are the ones to be sued or
regulations governing their qualifications, hold the control of the corporation. In such actions, the
disqualifications, voting requirements, duration of suing stockholder is regarded as the nominal party,
term and term limit, maximum number of board with the corporation as the party in interest.
memberships and other requirements that the
Commission will prescribe to strengthen their Authority of the board of directors or trustees
independence and align with international best
practices. With the exception only of some powers
expressly granted by law tostockholders (or members,
in case of non-stock corporations), the board of
Governing body of a corporation directors (or trustees, in case of non-stock corporations)
has the sole authority to determine policies, enter into
The governing body of a corporation is its board contracts, and conduct the ordinary business of the
of directors. The concentration in the board of the corporation within the scope of its charter, i.e., its
powers of control of corporate business and of articles of
appointment of corporate officers and managers is incorporation, by-laws and relevant provisions of law.
necessary for efficiency in any large organization. Verily, the authority of the board of directors is restricted
Stockholders are too numerous, scattered, and to the management of the regular business affairs of the
unfamiliar with the business of a corporation to conduct corporation unless more extensive power is expressly
its business directly. And so the plan of corporate conferred.
organization is for the stockholders to choose the
directors who shall control and supervise the conduct of The raison d'etre behind the conferment of
corporate business. corporate powers on the board of directors is not lost on
the Court. Indeed, the concentration in the board of the
powers of control of corporate business and of
The board shall exercise good faith appointment of corporate officers and managers is
necessary for efficiency in any large organization.
The board of directors of corporations is a Stockholders are too numerous, scattered, and
creation of the stockholders. The board of directors, or unfamiliar with the business of a corporation to conduct
the majority thereof, controls and directs the affairs of its business directly. And so the plan of corporate
the corporation; but in drawing to itself the power of the organization is for the stockholders to choose the
corporation, it occupies a position of trusteeship in directors who shall control and supervise the conduct of
relation to the minority of the stock. The board shall corporate business.
exercise good faith, care, and diligence in the
administration of the affairs of the corporation. and Corporation exercises its powers through its board
protect not only the interest of the majority but also that of directors
of the minority of the stock.
A corporation exercises its powers through its
It is well settled in this jurisdiction that where board of directors and/or its duly authorized officers and
corporate directors are guilty of a breach of trust—not agents, except in instances where the Corporation
of mere error of judgment or abuse of discretion—and Code requires stockholders' approval for certain
intracorporate remedy is futile or useless, a stockholder specific acts.
may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation to A corporation's board of directors is understood to be
bring about a redress of the wrong inflicted directly upon that body which:
the corporation and indirectly upon the stockholders. (1) exercises all powers provided for under the
Corporation Code;
Derivative suit (2) conducts all business of the corporation; and
(3) controls and holds all property of the corporation.
In cases of mismanagement where the
wrongful acts are committed: by the directors or trustees Its members have been characterized as
themselves, a stockholder or member may find that he trustees or directors clothed with a fiduciary character.
has no redress because the former are vested by law Moreover, the directors may appoint officers and
with the right to decide whether or not the corporation agents, and as an incident to this power of appointment,
should sue, and they will never be willing to sue they may discharge those appointed.
themselves. The corporation would thus be helpless to
seek remedy. Because of the frequent occurrence of
 Accordingly, the property of the corporation is intentionally conferred, powers added by custom and
not the property of its stockholders or members and usage,as usually pertaining to the particular officer or
may not be sold by the stockholders or members agent, and such apparent powers as the corporation
without express authorization from the corporation's has caused persons dealing with the officer or agent to
board of directors. believe that it has conferred.

Moreover, unless duly authorized, a treasurer,

whose powers are limited, cannot bind the corporation Problem:
in a sale of its assets. Olongapo City transferred all its existing water
facilities and assets to the Olongapo City Water District
(0CWD). In the interim, Subic Water- a new corporate
THREE LEVELS OF CONTROL entity - was incorporated, and OCWD has an equity
participation of 10%.
1. The Board of Directors
They are responsible for corporate policies and On November 24, 1996, Subic Water was
the general management of the business affairs of the granted the franchise to operate and to carry on the
corporation. However, just as a natural person may business of providing water and sewerage services in
authorize another to do certain acts in his behalf, so Olongapo City. Hence, Subic Water took over OCWD's
may the board of directors of a corporation validly water operations in Olongapo City.
delegate some of its functions to individual officers or
agents appointed by it. To finally settle their money claims against each
other, Olongapo City and OCWD entered into a
compromise agreement on June 4, 1997. In this
2. The Officers agreement, Olongapo City and OCWD offset their
They, in theory, execute the policies laid down respective claims and counterclaims. OCWD also
by the board, but in practice often have wide latitude in undertook to pay to Olongapo City its net obligation
determining the course of business operations. amounting to P135,909,467 to be amortized for a period
of not exceeding 25 years at 24% per annum.
3. The Stockholders
They have the residual power over fundamental The compromise agreement also contained a
corporate changes, like amendments of the articles of provision regarding the parties' request that Subic
incorporation. Water, Philippines, which took over the operations of
the 0longapo City Water District, be made the co-maker
for OCWD's obligations. Mr. X, then chairman of Subic
Note: Water, acted as its representative signed the agreement
As a general rule, all corporate powers are to be on behalf of Subic Water.
exercised by the board of directors, exceptions are
made where the Code provides otherwise. Pursuant to the compromise agreement and in
payment of OCWD's obligations to Olongapo City,
Power to Decide Whether a Corporation can Enter Olongapo City and OCWD executed a Deed of
into a Binding Contract Assignment on November 24, 1997. 0n December 15,
1998, OCWD was judicially dissolved
A corporation, as a juridical entity, primarily acts
through its board of directors, which exercises its Almost four years later, on May 30, 2003,
corporate powers. In this capacity, the general rule is Olongapo City, through its new counsel, filed a motion
that, in the absence of authority from the board of for the issuance of a writ of execution against OCWD.
directors no person, not even its officers, can validly OCWD, through former counsel, filed a manifestation
bind a corporation. alleging that OCWD had already been dissolved and
that Subic Water is
In People's Aircargo and Warehousing Co., now the former 0CWD.
Inc.v.Court of Appeals, the Supreme Court held that the
power and responsibility to decide whether a Because of this assertion, Subic Water also
corporation can enter into a binding contract is lodged filed a manifestation informing the court that as borne
with the board of directors, subject to the articles of out by the articles of incorporation and general
incorporation, by-laws, or relevant information sheet of Subic Water xxx OCWD is not
provisions of law. As we have clearly explained in Subic Water.
another case: Can X validly bind Subic Water in signing a
Compromise Agreement?
Answer:
A corporate officer or agent may represent and bind An officer's actions can only bind the
the corporation in transactions with third persons to the corporation if he had been authorized to do so. An
extent that the authority to do so has been conferred examination of the compromise agreement reveals that
upon him, and this includes powers which have been it was not accompanied by any document showing a
intentionally conferred, and also such powers as, in grant of authority to Mr. X to sign on behalf of Subic
the usual course of the particular business, are Water.
incidental to, or may be implied from, the powers Subic Water is a corporation. A corporation as
a iuridical entity primarily acts through its board of provided the Board of Directors, composed of 11
directors, which exercises its corporate powers. In this members to serve for 1 year until their successors are
capacity, the general rule is that in the absence of duly elected and have qualified. On December 20,
authority from the board of directors, no person, not 1975, a committee of the board of directors prepared a
even its officers, can validly bind a corporation. draft of an amendment to the by-laws, reading as
Mr. X signed the compromise agreement purely follows:
in his own capacity. No document such as the minutes
of Subic Water's board of directors' meeting or a The candidates for Directors receiving the first 14
secretary's certificate, purporting to be an authorization highest number votes shall be declared and proclaimed
to Mr. X to conform to the compromise agreement, was elected until their successors are elected and qualified.
ever presented. In effect, Mr. X's act of signing the X CHRISTIAN HIGH SCHOOL representative is a
compromise agreement was outside of his authority to permanent Director of the ASSOCIATION.
undertake.
Since Mr. X was never authorized and there This draft was never presented to the general
was no showing that Subic Water's articles of membership for approval. Nevertheless, from 1975,
incorporation or bv-laws eranted him such authority, after it was presumably submitted to the board, up to
then the compromise agreement he signed cannot bind 1990, X Christian School was given a permanent seat
Subic Water. Subic Water cannot likewise be made a in the board of directors of the association.
surety or even a guarantor for OCWD's obligations.
OCWD's debts under the compromise agreement are On February 13, 1990, the associations'
its own corporate obligations. OCWD and Subic Water committee on election in a letter informed the principal
are two separate and different entities. of the school, that it was the sentiment thatall directors
should be elected by members of the association
because to make a person or entity a permanent
May Corporate Powers be Directly Conferred upon Director would deprive the right of voters to vote for 15
Corporate Officers? members of the Board.

The directors of the corporation shall elect its X Christian School requested the chairman of the
corporate officers election committee to change the notice of election by
following the procedure in previous elections, claiming
It is clear that corporate powers may be directly that the notice issued for the 1990 elections ran counter
conferred upon corporate officers or agents by statute, to the practice in previous years and was in violation of
the articles of incorporation, the by-laws or by the by-laws (of 1975) and unlawfully deprived X
resalution .or other_ act of the board of directors. In Christian High School of its vested right to a permanent
addition, an officer who is not a director may also seat in the board.
appoint other agents,
authorized by the by-laws or by the board of directors. Can X Christian High School sit in the board of directors
Such are referred as express powers. There are also of X Village Association, Inc. as a permanent member
powers incidental to express powers conferred. It is a thereof?
fundamental principle in the law of agency that eve
delegation of authority, whether general or special, Answer:
carries with it, unless contrary be expressed, implied
authority to do all of those acts, naturally ordinarily done The board of directors of communications must be
in such cases, which are reasonably necessary and elected from among the stockholders or members.
proper be done in order to carry into effect the main There may be corporations in which there are unelected
authority conferred. members in the board but it is clear that in the examples
cited by X Christian High School, the unelected
members sit officio members, ie, by virtue of and for as
Example: long as they hold a particular office. But in the case of X
Since the by-laws are a source of authority for Christian High School. there is no reason at all for its
corporate officers and agents of the corporation, a representative to be given a seat in the board. Nor does
resolution of the Board of Directors appointing an X Christian High School claim a right to such seat by
attorney in fact to represent and bind it during the pre- virtue of an office held. In fact, it was not given such
trial conference of a case is not necessary because its seat in the beginning. It was only in 1975 that a
by-laws allow its officers proposed amendment to the by-laws sought to give it
to execute a power of attorney to a designated officer one.
clothing him with authority to direct and manage
corporate affairs. Since the provision in question is contrary to
law, the fact that for fifteen years it has not been
questioned or challenged but, on the contrary, appears
Problem: to have been implemented by the members of the
X Christian High School is an educational association cannot forestall a later challenge to its
institution at X Villag*1 in Quezon City. X Village validity. Neither can it attain validity through
Association, Inc., on the other hand, is an organization acquiescence because, if it is contrary to law, it is
of building owners, lessees, and residents at X Village. beyond the power of the members of the association to
As adopted in 1968, the by-laws of the association waive its invalidity. For that matter, the members of the
association may have formally adopted the provision in directors, the stockholders or members may also
question, but their action would be of no avail because vote through remote communication or in absentia:
no provision of the by-laws can be adopted if it is Provided, That the right to vote through such
contrary to law. modes may be exercised in corporations vested
with public interest, notwithstanding the absence of
Note: a provision in the bylaws of such corporations.
A juridical person who is not a stockholder cannot
be a director, but it can be an ex officio member without A stockholder or member who participates
voting rights in the Board. through remote communication or in absentia, shall
be deemed present for purposes of quorum.
Qualifications of a board of director/trustee
1. For a stock corporation, ownership of at least 1 share The election must be by ballot if requested by any
of the capital stock of the corporation in his own name. voting stockholder or member.
For a non-stock corporation, only members of the
corporation can be elected. In stock corporations, stockholders entitled to
2. The director or trustee must be capacitated. vote shall have the right to vote the number of
3. The director or trustee must be of legal age. shares of stock standing in their own names in the
4. Other qualifications as may be prescribed in the by- stock books of the corporation at the time fixed in
laws of the corporation. the bylaws or where the bylaws are silent, at the
time of the election. The said stockholder may: (a)
Independent Director vote such number of shares for as many persons as
An independent director is a person who, apart there are directors to be elected; (b) cumulate said
from shareholding and fees received from the shares and give one (1) candidate as many votes as
corporation, is independent of management and free the number of directors to be elected multiplied by
from any business or other relationship which could, or the number of the shares owned; or (c) distribute
could reasonably be perceived to materially interfere them on the same principle among as many
with the exercise of independent judgment in carrying candidates as may be seen fit: Provided, That the
out the responsibilities as a director total number of votes cast shall not exceed the
number of shares owned by the stockholders as
Note: shown in the books of the corporation multiplied by
Independent directors must be elected by the the whole number of directors to be elected:
shareholders present or entitled to vote in absentia Provided, however, That no delinquent stock shall
during the election of directors. be voted. Unless otherwise provided in the articles
of incorporation or in the bylaws, members of
Note: nonstock corporations may cast as many votes as
The board of the following corporations vested there are trustees to be elected but may not cast
with public interest shall have independent directors more than one (1) vote for one (1) candidate.
constituting at least twenty percent (20%) of such board: Nominees for directors or trustees receiving the
highest number of votes shall be declared elected.
1. Corporations covered by Section 17.2 of The
Securities Regulation Code; If no election is held, or the owners of majority
of the outstanding capital stock or majority of the
2. Banks and quasi-banks, nonstock savings and loan members entitled to vote are not present in person,
associations, pawnshops, corporations engaged in by proxy, or through remote communication or not
money service business, preneed, trust and insurance voting in absentia at the meeting, such meeting may
companies, and other financial intermediaries; and be adjourned and the corporation shall proceed in
accordance with Section 25 of this Code.
3. Other corporations engaged in businesses vested
with public interest similar to the above, as may be The directors or trustees elected shall perform
determined by the Commission. their duties as prescribed by law, rules of good
corporate governance, and bylaws of the
SEC. 23. Election of Directors or Trustees. - Except corporation.
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 Requirements for the election of directors/trustees
nominate any director or trustee who possesses all 1. The owners of majority of the outstanding capital
of the qualifications and none of the stock, or if there be no capital stock, a majority of the
disqualifications set forth in this Code. members entitled to vote, of the corporation must be
present, either in person or through a representative
At all elections of directors or trustees, there authorized to act by written proxy.
must be present either in person or through a 2. When so authorized in the by-laws or by majority of
representative authorized to act by written proxy, the board of directors, the stockholders or members
the owners of majority of the outstanding capital may also vote through remote communication or in
stock or if there be no capital stock, a majority of absentia.
the members entitled to vote. When so authorized 3. The election must be by ballot, if requested by any
in the bylaws or by a majority of the board of voting stockholder or member.
4. In stock corporations, the total number of votes cast
shall not exceed the number of shares owned by the 4. Creation of the positions of Assistant Vice-Presidents
stockholder as shown in the books of the corporation (AVPs) for Corporate Planning, Operations, Finance
multiplied by the whole number of directors to be and Administration, and the election thereto of board
elected. Provided, that no delinquent stock shall be members; and
voted.
5. In nonstock corporations, the members of nonstock xxx
corporations may cast as many votes as there are
trustees to be elected but may not cast more than one Did F Corp.'s Board of Directors act within its powers in
(1) vote for one (1) candidate. creating the positions of AVPs for Corporate Planning,
6. Nominees for directors or trustees receiving the Operations, Finance and Administration?
highest number of votes shall be declared elected.
Answer:
In the present case, the board's creation of the
SEC.24. Corporate Officers. - Immediately after their positions of Assistant Vice Presidents for Corporate
election, the directors of a corporation must Planning, Operations, Finance and Administration, was
formally organize and elect: (a) a president, who in accordance with the regular business operations of F
must be a director; (b) a treasurer, who must be a Corp. as it is authorized to do so by the corporation's
resident; (c) a secretary, who must be a citizen and by-laws, pursuant to the Corporation Code.
resident of the Philippines; and (d) such other
officers as may be provided in the bylaws If the In turn, the amended Bylaws of F Corp. provides the
corporation is vested with public interest, the board following:
shall also elect a compliance officer. The same
person may hold two (2) or more positions Officers of the corporation, as provided for by the
concurrently, except that no one shall act as by-laws, shall be elected by the board of directors at
president and secretary or as president and their first meeting after the election of Directors.
treasurer at the same time, unless otherwise
allowed in this Code. The officers of the corporation shall be a Chairman
of the Board, President, a Vice-President, a Secretary,
The officers shall manage the corporation and a Treasurer, a General Manager and such other officers
perform such duties as may be provided in the as the Board of Directors may from time to time provide,
bylaws and/or as resolved by the board of directors. and these officers shall be elected to hold office until
their successors are elected and qualified. Likewise, the
Corporate officer fixing of the corresponding remuneration for the
The position must be expressly mentioned in the positions in question is. provided for in the same by-
by-laws in order to be considered as a corporate office. laws of the corporation, viz:

As a general rule, the acts of corporate officers xxx The Board of Directors shall fix the compensation of
within the scope of their authority are binding on the the officers and agents of the corporation.
corporation. But when these officers exceed their
authority, their actions "cannot bind the corporation,
unless it has ratified such acts or is estopped from
disclaiming them.

Problem:
C, F Corp.'s former president wrote a letter to
the corporation's Board of Directors questioning the
board's creation of the positions of Assistant Vice-
Presidents (AVPs) for Corporate Planning, Operations, CORPORATE OFFICERS
Finance and Administration, with a monthly
remuneration of P13,050 each, and the election thereto
of certain members of the board.

In his aforesaid letter, C requested the board to

take necessary action/actions to recover from those
elected to the aforementioned positions the salaries
they have received.

Subsequently, C purportedly in representation

of F Corp. and its stockholders, among which is herein
M Corp. filed with the SEC a petition which he describes
as a derivative suit against G, H, I, J, K, L, M, N, and O
who were then the incumbent members of F Corp's Note:
Board of Directors, for alleged acts of mismanagement Any 2 or more positions may be held
detrimental to the interest of the corporation and its concurrently by the same person, except that no one
shareholders at large, namely: shall act as president and secretary, or as president and
treasurer at the same time and Officers, Non-holding of Election and Cessation
from Office. - Within thirty (30) days after the
Corporate Officer vs. Corporate employee election of the directors, trustees and officers of the
corporation, the secretary, or any other officer of
the corporation, shallsubmit 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) days from the date of the scheduled
What is QUORUM at the meeting of directors or election. The report shall specify a new date for the
trustees? election, which shall not be later than sixty (60) days
A majority of the directors or trustees, as fixed in from the scheduled date.
the articles of incorporation, shall constitute a quorum
for the transaction of corporate business (unless the If no new date has been designated, or if the
articles of incorporation or the bylaws provide for a rescheduled election is likewise not held, the
greater majority). Majority means fifty percent plus one Commission may, upon the application of a
(50% + 1). stockholder, member, director, or 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
General rule: directing the issuance of a notice stating the time
A majority of the number of directors or trustees, and place of the election, designated presiding
as fixed in the articles of incorporation, shall constitute officer, and the record date or dates for the
a quorum for the transaction of corporate business, and determination of stockholders or members entitled
every decision of at least a majority of the directors or to vote.
trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election Notwithstanding any provision of the articles of
of officers which shall require the vote of a majority of incorporation or bylaws to the contrary, the shares
all the members of the board. of stock or membership represented at such
meeting and entitled to vote shall constitute a
Exception: quorum for purposes of conducting an election
If the articles of incorporation or the by-laws provide under this section.
for a greater majority.
Should a director, trustee, or officer die,
Example: resign, or in any manner cease to hold office, the
secretary, or the director, trustee, or officer of the
X Corporation has 15 board of directors as stated corporation, shall, within seven (7) days from
in its articles of incorporation. The quorum is 8 which is knowledge thereof, report in writing such fact to the
the majority and this is the required number needed for Commission.
the transaction of corporate business. Thus, if in the
board of directors' meeting, only 5 out of the 15 directors Objective of the Report of Election
attended the meeting, said meeting is not valid. By the express mandate of the Corporation
However, if there are 8 or more directors who attended Code, all corporationsduly organized pursuant thereto
the meeting, said meeting is valid. Assuming that there are required to submit within the period therein stated
were exactly 8 directors who attended the meeting then (30 days) to the Securities and Exchange Commission
it needs at least 5 votes [majority of 8 (50% of 8+1)] to the names, nationalities, shareholdings, and residences
have a valid corporate act (like a proposed purchase of of the directors, trustees and officers elected
equipment or a proposed opening of a branch store of
the corporation). Evidently, the objective sought to be achieved by
Section 26 (Now Section 25, Revised Corporation
On the other hand, if X Corporation provided for a Code) is to give the public information. Under sanction
greater majority in its by-laws like 10, then this will be of oath of responsible officers of of the nature of
the quorum which is the number needed for the business, financial condition and operational status of
transaction. ence, if there are only 8 or 9 directors who the company together with information on its key
attended the meeting out of 15 directors, said meeting officers or managers, so that those dealing with it and
is not valid. Conversely, if there are 10 or more who those who intend to do business with it may know or
attended the meeting, said meeting is valid. Assuming have the means of knowing facts concerning the
that there were 12 directors who attended the meeting corporation's financial resources and business
then it needs at least 7 votes [majority of 12 (50% of 12 responsibility.
+1)] to have a valid corporate act (like a proposed bank
loan for corporate expansion). Problem:
On July 18, 1986, P, Inc., filed an action for damages
SEC. 25. Report of Election of Directors, Trustees
against C Bank. The complaint states, inter alia:

3, Sometime in August to October 1982, D Corp. issued SEC. 26. Disqualification of Directors, Trustees or
3 checks in the aggregate amount of P31,663 payable Officers.- A person shall be disqualified from being
to P Inc.; a director, trustee or officer of any corporation if,
within five (5) years prior to the election or
5. On or about August to October 1982, former officers appointment as such, the person was:
of the P, Inc. headed by B, without any authority
whatsoever from the P, Inc.,deposited the above (a) Convicted by final judgment:
mentioned checks to the current account of his conduit (1) Of an offense punishable by imprisonment for a
corporation, I Corp. which the latter maintained with C period exceeding six (6) years;
bank; (2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise
6. Although the checks were clearly payable to the p, known as "The Securities Regulation Code";
Inc, C bank accepted the checks to be deposited to the (b) Found administratively liable for any offense
current account of 1 Corp. thus allowing I Corp. to make involving fraudulent acts; and
use of the funds to the prejudice of the P, Inc.; (c) By a foreign court or equivalent foreign
XXX XXXXXX regulatory authority for acts, violations or
14, P, Inc., has demanded upon C bank to restitute the misconduct similar to those enumerated in
amount representing the value of the checks but C bank paragraphs (a) and (b) above,
refused;

The foregoing is without prejudice to

In its Answer, C Bank alleged that P, Inc, has no qualifications or other disqualifications, which the
authority to sue in this instance and the complaint Commission, the primary regulatory agency, or the
should, therefore, be dismissed for failure to state a Philippine Competition Commission may impose in
cause of action. C bank alleged that the filing of the case its promotion of good corporate governance or as a
was without authority from its duly constituted board of sanction in its administrative proceedings.
directors as shown by the excerpt of the minutes of P,
Inc.'s board of directors' meeting. Disqualification of directors, trustees or officers
1. If within five (5) years prior to the election or
Was the filing of the case for damages against C bank appointment as such, theDirectors, Trustees or Officers
authorized by the Board of Directors of P, Inc? were convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six
Answer: (6) years:
'The Minutes of the Meeting of the Board on a. For violating the Revised Corporation Code;
April 1, 1982 showed the newly elected officers for the and
year 1982, P, Inc., failed to show proof that this election b. For violating Republic Act No. 8799, otherwise
was reported to the SEC In fact, the last entry in their known as "The Securities Regulation Code"
General Information Sheet with the SEC, as of 1986 2. If within five (5) years prior to the election or
appears to be the set of officers elected in March 1981. appointment as such, the Directors, Trustees or Officers
We agree with the finding of the Court of were found administratively liable for any offense
Appeals that "in the absence of any board resolution involving fraudulent acts.
from its board of directors, the authority to act for and in 3. If within five (5) years prior to the election or
behalf of the corporation the present action must appointment as such, the Directors, Trustees or Officers
necessarily fail, The power of the corporation to sue and found by were foreign court or an equivalent foreign
be sued in any regulatory authority for acts, violations misconduct
court is lodged with the board of directors that exercises similar to those enumerated in paragraphs (1) and (2)
its corporate powers. Xxx. above.
By the express mandate of the Corporation
Code (Now Section 25, Revised Corporation Code),
all corporations duly organized pursuant thereto are SEC. 27. Removal of Directors or Trustees. Any
required to submit within the period therein stated (30 director or trustee of a corporation may be removed
days) to the Securities and Exchange Commission the from office by a vote of the stockholders holding or
names, nationalities, shareholdings, and residences of representing at least two-thirds (2/3) of the
the directors, trustees, and officers elected. outstanding capital stock, or in a nonstock
Evidently, the objective sought to be achieved corporation, by a vote of at least two. thirds (2/3) of
by Section 26 (Now Section 25, Revised Corporation the members entitled to vote: Provided, that such
Code) is to give the public information, under sanction removal shall take place either at a regular meeting
of oath of responsible officers, of the nature of business, of the corporation or at a special meeting called for
financial condition and operational status of the the purpose, and in either case, after previous
company together with information on its key officers or notice to stockholders or members of the
managers, so that those dealing with it and those who corporation of the intention to propose such
intend to do business with it may know or have the removal at the meeting. A special meeting of the
means of knowing facts concerning the corporation's stockholders or members for the purpose of
financial resources and business responsibility. removing any director or trustee must be called by
the secretary on order of the president, or upon 3. There must be a previous notice to stockholders or
written demand of the stockholders representing or members of the corporation of the intention to propose
holding at least a majority of the outstanding capital such removal at the meeting; and
stock, or a majority of the members entitled to vote. 4. The special meeting of the stockholders or members
If there is no secretary, or if the secretary, despite of a corporation for the purpose of removal must be
demand, fails or refuses to call the special meeting called by the secretary on order of the president or on
or to give notice thereof, the stockholder or member the written demand of the stockholders representing or
of the corporation signing the demand may call for holding at least a majority of the outstanding capital
the meeting by directly addressing the stock or a majority of the members entitled to vote.
stockholders or members. Notice of the time and
place of such meeting, as well as of the intention to Problem:
propose such removal, must be given by Y and X, together with J, S, and V, were
publication or by written notice prescribed in this incorporators and directors of Z Corp., a dialysis clinic,
Code. Removal may be with or without cause: with X acting as Corporate Secretary and Administrator.
Provided, That removal without cause may not be The conflict started when Y and X questioned J, S, and
used to deprive minority stockholders or members V's plan to enter into a joint venture with Q Hospital, Inc.
of the right of representation to which they may be Because of this, Y and X claim that J, S, and V tried to
entitled under Section 23 of this Code. compel them to waive and assign their shares with Z
Corp. but they refused. Thereafter, X sought an
indefinite leave of absence due to stress, but this was
The Commission shall, motu proprio or upon denied by J, as Z Corp.'s President X, nevertheless, did
verified complaint, and after due notice and hearing, not report for work, causing J to demand an explanation
order the removal of a director or trustee elected from her why she should not be removed as
despite the disqualification, or whose Administrator and Corporate Secretary. X replied,
disqualification arose or is discovered subsequent expressing her sentiments over the disapproval of her
to an election. The removal of a disqualified director request for leave and J, S, and V's decision with regard
shall be without prejudice to other sanctions that to the Q Hospital Inc.'s venture.
the Commission may impose on the board of
directors or trustees who, with knowledge of the X did not attend the board meeting. ln said
disqualification, failed to remove such director or meeting, the Board passed several resolutions ratifying
trustee. the disapproval of X's request for leave, dismissing her
as Administrator, declaring the position of Corporate
Power to remove directors or trustees Secretary vacant, appointing K as the new Corporate
The power to remove directors or trustees Secretary and authorizing the call of a Special
belongs to the stockholders or members exclusively. Stockholders Meeting for the purpose of the removal of
However, the Securities and Exchange Y and X as directors of Z Corp.
Commission shall, motu proprio or upon verified K issued the corresponding notices for the
complaint, and after due notice and hearing, order the Special Stockholders Meeting which were received by
removal of a director or trustee elected despite the Y and X. Again, they did not attend the meeting. The
disqualification, or whose disqualification arose or is stockholders who were present removed Y and X as
discovered subsequent to an election. The removal of a directors of Z Corp
disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the Was the removal of Y and X from Z Corp. valid?
board of directors or trustees who, with knowledge of Answer:
the disqualification, failed to remove such director or
trustee. In this case, X was removed as a corporate
officer through the resolution of Z Corp.'s Board of
Directors adopted in a special meeting. Y and X's
General Rule: removal was a valid exercise of the powers of Z's Board
Removal of directors or trustees may be with or of Directors.
without cause.
Based on its articles of incorporation, Z Corp.
Exception: has five directors two of the positions were occupied by
Removal without cause may not be used to Y and X and the remaining three are held by J, S, and
deprive minority stockholders or members of the right of V. This being the case, the presence of all, J, S, and V,
representation to which they may be entitled under in the Special Meeting of the Board established a
Section 23 of this Code. quorum for the conduct of business. The unanimous
resolutions carried by the Board during such meeting
are therefore valid and binding against Y and X . Y_and
Requisites for removal X's removal as members of Z Corp.'s Board of Directors
I. The removal should take place at a regular or special was likewise valid.
meeting duly called for the purpose;
2. The director or trustee can only be removed by a vote Only stockholders or members have the power
of the stockholders representing at least 2/3 of the to remove the directors or trustees elected by them, as
outstanding capital stock or 2/3 of the members entitled laid down in Section 28 of the Corporation Code (Now
to vote in case of non-stock corporations; Section 27, Revised Corporation Code), which
provides in part: held on the same day of the meeting authorizing the
removal and this fact must be so stated in the
SEC. 28. Removal of directors or trustees. -- Any agenda and notice of said meeting. In all other
director or trustee of a corporation may be removed cases, the election must be held no later than forty-
from office by a vote of the stockholders holding or five (45) days from the time the vacancy arose. A
representing at least two-thirds (2/3) of the outstanding director or trustee elected to fill a vacancy shall be
capital stock or if the corporation be a non-stock referred to as replacement director or trustee and
corporation, by a vote of at least two-thirds (2/3) of the shall serve only for the unexpired term of the
members entitled to vote: Provided, that such removal predecessor in office.
shall take place either at a regular meeting of the
corporation or at a special meeting called for the
purpose, and in either case, after previous notice to However, when the vacancy prevents the
stockholders or members of the corporation of the remaining directors from constituting a quorum and
intention to propose such removal at the meeting. A emergency action is required to prevent grave,
special meeting of the stockholders or members of a substantial, and irreparable loss or damage to the
corporation for the purpose of removal of directors or corporation, the vacancy may be temporarily filled
trustees or any of them, must be called by the secretary from among the officers of the corporation by
on order of the president or on the written demand of unanimous vote of the remaining directors or
the stockholders representing or holding at least a trustees. The action by the designated director or
majority of the outstanding capital stock, or if it be a non- trustee shall be limited to the emergency action
stock corporation, on the written demand of a majority necessary, and the term shall cease within a
of the members entitled to vote. xxx Notice of the time reasonable time from the termination of the
and place of such meeting,as well as of the intention to emergency or upon election of the replacement
propose such removal, must be given by publication or director or trustee, whichever comes earlier, The
by written notice as prescribed in this Code. xxx corporation must notify the Commission within
Removal may be with or without cause: Provided, three (3) days from the creation of the emergency
that removal without cause may not be used to deprive board, stating therein the reason for its creation
minority stockholders or members of the right of
representation to which they may be entitled under Any directorship or trusteeship to be filled by
Section 24 of this Code (Now Section 23, Revised reason of an increase in the number of directors or
Corporation Code) trustees shall be filled only by an election at a
regular or at a special meeting of stockholders or
X and Y do not dispute that the stockholders' members duly called for the purpose, or in the same
meeting was held in accordance with Z Corp's By-Laws. meeting authorizing the increase of directors or
The ownership of Z Corp.'s outstanding capital stock is trustees if so stated in the notice of the meeting.
distributed as follows: J - 200 shares; S - 100 shares; V-
100 shares; X - 75 shares; and Y - 25 shares, or a total In all elections to fill vacancies under this
of 500 shares. A two-thirds vote of Z Corp.'s outstanding section, the procedure set forth in Sections 23 and
capital stock would be 333.33 shares, and during the 25 of this Code shall apply.
Stockholders' Special Meeting held onFebruary 16,
1998, 400 shares voted for petitioners' removal. Said
number of votes is more than enough to oust petitioners
from their respective positions as members of the
board,with or without cause. FILLING OF VACANCIES IN THE OFFICE OF THE
DIRECTOR/TRUSTEE

Note:
Removal of officers can be done by the board
of directors.

SEC. 28. Vacancies in the 0ffice of Director or

Trustee; Emergency Board. Any vacancy occurring
in the board of directors or trustees 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, still constituting a E quorum; otherwise,
said vacancies must be filled by the stockholders or
members in a regular or special meeting called for
that purpose Replacement Director/Trustee
A director or trustee elected to fill a vacancy shall
be referred to as replacement director or trustee and
When the vacancy is due to term expiration, the shall serve only for the unexpired term of the
election shall be held no later than the day of such predecessor in office.
expiration at a meeting called for that purpose.
When the vacancy arises as a result of removal by
the stockholders or members, the election may be When the vacancy is due to term expiration
 When the vacancy is due to term expiration, the directors or trustees constituting a quorum is merely
election shall be held no later than the day of such permissive, not mandatory, Corporations, therefore,
expiration at a meeting called for that purpose. may choose how vacancies in their respective boards
may be filled up -- either by the remaining directors
constituting a quorum, or by the stockholders or
When the vacancy arises as a result of removal by members in a regular or special meeting called for the
the stockholders or members purpose.
When the vacancy arises as a result of removal
by the stockholders or members, the election may be The By-Laws of X School prescribed the specific
held on the same day of the meeting authorizing the mode of filling up existing vacancies in its board of
removal and this fact must be so stated in the agenda trustees; that is, by a majority vote of the remaining
and notice of said meeting. members of the board.

While a majority of the remaining corporate

Other causes of vacancy members were present, however, the "election" of the
In all other cases, the election must be held no four trustees cannot be legally upheld for the obvious
later than forty-five (45) days from the time the vacancy reason that it was held in an annual meeting of the
arose. members not of the board of trustees, We are not
unmindful of the fact that the members of X School
themselves also constitute the trustees, but we cannot
Emergency Board of Director ignore X Schools' bylaw provision, which specifically
When the vacancy prevents the remaining prescribes that vacancies in the board must be filled up
directors from constituting a quorum and emergency by the remaining trustees. In other words, these
action is required to prevent grave, substantial, and remaining member-trustees must sit as a board in order
irreparable loss or damage to the corporation, the to validly elect the new ones.
vacancy may be temporarily filled from among the
officers of the corporation by unanimous vote of the Indeed, there is a well-defined distinction between
remaining directors or trustees. The action by the a corporate act to be done by the board and that by the
designated director or trustee shall be limited to the constituent members of the corporation The board of
emergency action necessary, and the term shall cease trustees must act, not individually or separately, but as
within a reasonable time from the termination of the a body in a lawful meeting. On the other hand, in their
emergency or upon election of the replacement director annual meeting, the members may be represented by
or trustee, whichever comes earlier. The corporation their respective proxies.
must notify the Commission within three (3) days from
the creation of the emergency board, stating therein the
reason for its creation. SEC.29. Compensation of Directors or Trustees. - In
the absence of any provision in the bylaws fixing
Problem: their compensation, the directors or trustees shall
not receive any compensation in their capacity as
X School is a nonstock, non-profit educational such, except for reasonable per diems: Provided,
corporation with 15 regular members, who also however, That the stockholders representing at
constitute the board of trustees. During the annual least a majority of the outstanding capital stock or
members meeting held on April 6, 1998, there were only majority of the members may grant directors or
11 living member-trustees, as 4 had already died. Out trustees with compensation and approve the
of the eleven, 7 attended the meeting. The meeting was amount thereof at a regular or special meeting.
convened and chaired by Atty. P over the objection of
Atty. Q who argued that there was no quorum. In the In no case shall the total yearly
meeting, A, B, C, and D were voted to replace the four compensation of directors exceed ten percent
deceased member-trustees. (10%) of the net income before income tax of the
corporation during the preceding year.
A B, C, and D maintained that the deceased
member-trustee should not be counted in the Directors or trustees shall not participate in
computation of the quorum because, upon their death, the determination of their own per diems or
members automatically lost all their rights (including the compensation.
right to vote) and interests in the corporation.
Should dead members still be counted in the
determination of the quorum for purposes of conducting Corporations vested with public interest
the annual members' meeting? shall submit to their shareholders and the
Commission, an annual report of the total
Answer: compensation of each of their directors or trustees.

Undoubtedly, trustees may fill vacancies in the

board, provided that those remaining still constitute a Note:
quorum. The phrase "may be filled" in Section 29 (Now The provision on compensation of directors
Section 28, Revised Corporation Code) shows that does not include corporate officers who are not
the filling of vacancies in the board by the remaining directors.
 compensation to X, Y, and Z as corporate officers
retroactive June 1, 1985.
General rule:
Directors or Trustees shall not receive any
compensation, as such directors or trustees, except for On March 13, 1991, A, B, and C filed an
reasonable per diems affidavit-complaint against X, Y, and Z for falsification of
a public document. The charge for falsification of public
document was anchored on X, Y, and Z's submission of
Exception: W Corp.'s income statement for the fiscal year 1985-
1. When it is fixed by the corporation's by-laws; or 1986 with the SEC reflecting therein the disbursement
2. When the stockholders, representing at least a of corporate funds for the compensation of X, Y, and Z
majority of the outstanding capital stock, or majority of based on Resolution No. 48, series of 1986, making it
the members, vote to grant the same. appear that the same was passed by the board on
March 30, 1986, when in truth, the same was actually
In construing the said provision, it bears stressing passed on June 1, 1986, a date not covered by the
that the directors of a corporation shall not receive any corporation's fiscal year 1985-1986 (beginning May 1,
compensation for being members of the board of 1985 and ending April 30, 1986).
directors, except for reasonable per diems. The two
instances where the directors are to be entitled to
compensation shall be when it is fixed by the Are X, Y, and Z entitled to compensation as officers?
corporation's by-laws or when the stockholders,
representing at least a majority of the outstanding Answer:
capital stock vote to grant the same at a regular or
special stockholder's meeting, subject to the This proscription, however, against granting
qualification that, in any of the two situations, the total compensation to directors/trustees of a corporation is
yearly compensation of directors, as such directors, not a sweeping rule. Worthy of note is the clear
shall in no case exceed ten (10%) percent of the net phraseology of Section 30 (Old Corporation Code)
income before income tax of the corporation during the which states: "xxx The directors shall not receive any
preceding year. compensation, as such directors, xxx." The phrase as
such directors is not without significance for it delimits
There is no argument that directors or trustees, the scope of the prohibition to compensation given to
as the case may be, are not entitled to salary or other them for services performed purely in their capacity as
compensation when they perform nothing more than the directors or trustees. The unambiguous implication is
usual and ordinary duties of their office. This rule is that members of the board may receive compensation,
founded upon a presumption that directors/trustees in addition to reasonable per diems, when they render
render service gratuitously and that the return upon their services to the corporation in a capacity other than as
shares adequately furnishes the motives for service, directors/trustees. In the case at bench, Resolution No.
without compensation. Under the foregoing section, 48, s. 1986 granted monthly compensation to X, Y, and
there are only 2 ways by which members of the board Z not in their capacity as members of the board, but
can be granted compensation apart from reasonable rather as officers of the corporation, more particularly as
per diems: Chairman, Vice-Chairman, Treasurer and Secretary of
W Corp.
1. When there is a provision in the by-laws fixing their
compensation; and Clearly, therefore, the prohibition with respect to
2. When the stockholders representing a majority of the granting compensation to corporate directors/trustees
outstanding capital stock at a regular or special as such under Section 30 is not violated in this particular
stockholders' meeting agree to give it to them. case. Consequently, the last sentence of Section 30
(Now Section 29, Revised Corporation Code) which
provides: xxx In no case shall the total yearly
Problem: compensation of directors, as such directors, exceed
X, Y, and Z are the controlling members of the ten percent (10%) of the net income before income tax
Board of Trustees of W Corp, a stock corporation of the corporation during the preceding year xxx does
engaged in the operation of an educational institution. not likewise find application in this case since the
According to A, B, and C, the minority stockholders of compensation is being given to X, Y, and Z in their
W Corp., sometime on June 1, 1986 in the principal capacity as officers of W Corn's and not as board
office of W Corp., a Special Board Meeting was held. members.
Prior to aforesaid Special Board Meeting, copies of
notice thereof, were distributed to all Board Members. Limitation on compensation
The notice allegedly indicated that the meeting to be In no case shall the total yearly compensation of
held on June 1, 1986 included Item No. 6 which states: directors, as such directors, exceed 10% of the net
Possible implementation of Art. Ill, Sec. 6 of the income before income tax of the corporation during the
Amended By-Laws of W Corp. on compensation of all preceding year.
officers of the corporation.
Note:
In said meeting, the Board of Trustees passed Directors or trustees shall not participate in the
Resolution No.48s. 1986, granting monthly determination of their own per diems or compensation.
 incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities, and vice
Note: versa.
Corporations vested with public interest shall
submit to their shareholders and the Commission, an There are times, however, when solidary liabilities
annual report of the total compensation of each of their may be incurred and the veil of corporate fiction may be
directors or trustees. pierced. Exceptional circumstances warranting such
disregard of a separate personality are summarized as
follows:
SEC. 30. Liability of Directors, Trustees or Officers.
- Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the 1. When directors and trustees or, in appropriate case,
corporation or who are guilty of gross negligence the officers of a corporation:
or bad faith in directing the affairs of the (a) vote for or assent to patently unlawful acts of the
corporation or acquire any personal or corporation:
pecuniary interest in conflict with their duty as such (b) act in bad faith or with gross negligence in directing
directors or trustees shall be liable jointly and the corporate affairs:
severally for all damages resulting therefrom (c) are guilty of conflict of interest to the prejudice of the
suffered by the corporation, its stockholders or coronation its stockholder or members and other
members and other persons. persons;
2. When a director or officer has consented to the
A Director, Trustee or Officer shall not attempt issuance of watered down stocks or who, having
to acquire, or acquire any interest adverse to the knowledge thereof, did not forthwith file with the
corporation in respect of any matter which has been corporate secretary his written objection thereto;
reposed in them in confidence, and upon which, 3. When a director, trustee or officer has contractually
equity imposes a disability upon themselves to deal agreed or stipulated to hold himself personally and
in their own behalf; otherwise, the said director, solidarily liable with the corporation; or
trustee or officer shall be liable as a trustee for the 4. When a director, trustee or officer is made, by specific
corporation and must account for the profits which provision of law, personally liable for his corporate
otherwise would have accrued to the corporation. action.

Doctrine of corporate opportunity

Section 31 (Now Section 30, Revised Requisites:
Corporation Code) lays down the "doctrine of Before a director or officer of a corporation can
corporate opportunity" and holds personally liable be held personally liable for corporate obligations,
corporate directors found guilty of gross negligence or however, the following requisites must concur:
bad faith in directing the affairs of the corporation, which 1. The complainant must allege in the complaint that the
results in damage or injury to the corporation, its director or officer assented to patently unlawful acts of
stockholders or members, and other persons. the corporation, or that the officer was guilty of gross
negligence or bad faith; and
Bad faith implies breach of faith and willful failure to 2. The complainant must clearly and convincingly prove
respond to plain and well understood obligation. It does such unlawful acts, negligence or bad faith
not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity Error in business judgment
and conscious doing of wrong; it means breach of a
known duty through some motive or interest or ill will. It If the cause of the losses is merely an error in
partakes of the nature of fraud, business judgment. Not amounting to bad faith or
negligence, directors and/or officers are not liable. For
Gross negligence, on the other hand, is the want of them to be held accountable, the mismanagement and
even slight care, acting or omitting to act in a situation the resulting losses on account thereof are not the only
where there is duty to act, not inadvertently but willfully matters to be proven; itis likewise necessary to show
and intentionally, with a conscious indifference to that the directors and/or officers acted in bad faith and
consequences insofar as other persons may be with malice in doing the assailed acts. Bad faith does
affected. It evinces a thoughtless disregard of not simply connote bad judgment or negligence; it
consequences without exerting any effort to avoid them; imports a dishonest purpose or some moral obliquity
the want or absence of or failure to exercise slight care and conscious doing of a wrong, a breach of a known
or diligence, or the entire absence of care. duty through some motive or interest or ill-will partaking
of the nature of fraud.

Examples when solidary liability attach to the

directors, officers or employees Questions of policy or of management are left
solely to the honest decision of the board as the
It is basic that a corporation is a juridical entity with business manager of the corporation, and the court is
legal personality separate and distinct from those acting without authority to substitute its judgment for that of the
for and in its behalf and, in general, from the people board, and as long as it acts in good faith and in the
comprising it. The general rule is that obligations exercise of honest judgment in the interest of the
corporation, its orders are not reviewable by the courts. 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,
SEC.31. Dealings of Directors, Trustees or Officers with at least a majority of the independent directors
with the Corporation. - A contract of the corporation voting to approve the material contract; and
with one (1) or more of its directors, trustees, 5. That in case of an officer, the contract has been
officers or their spouses and relatives within the previously authorized by the board of directors
fourth civil degree of consanguinity or affinity is
voidable, at the option of such corporation, unless
all the following conditions are present: Problem:
Y and X Corp. entered into a dealership agreement
whereby Y was obligated to act as the exclusive
(a) The presence of such director or trustee in the distributor of X Corp. of its cement products in the entire
board meeting in which the contract was approved Mindanao area for a term of 5 years Right after Y
was not necessary to constitute a quorum for such entered into the aforesaid dealership agreement, he
meeting; placed an advertisement in a newspaper the fact of his
(b) The vote of such director or trustee was not being the exclusive dealer of X Corp.'s white cement
necessary for the approval of the contract; products in Mindanao area and was even congratulated
(c) The contract is fair and reasonable under the by his business associates, so much so, he was asked
circumstances; by some of his businessmen friends and close
(d) In case of corporations vested with public associates if they can be his sub-dealer in the Mindanao
interest, material contracts are approved by at least area.
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; Relying heavily on the dealership agreement, Y
and entered into a written agreement with several hardware
(e) In case of an officer, the contract has been stores in the Cities of Davao and Cagayan de Oro which
previously authorized by the board of directors. would thus enable him to sell his allocation of 20,000
bags regular supply of the said commodity. After Y was
assured by his supposed buyer that his allocation of
Where any of the first three (3) conditions set forth 20,000 bags of white cement can be disposed of, he
in the preceding paragraph is absent, in the case of informed X Corp that he is making the necessary
a contract with a director or trustee, such contract preparation for the opening of the requisite letter of
may be ratified by the vote of the stockholders credit to cover the price of the due initial delivery,
representing at least two-thirds (2/3) of the looking forward to X Corp.'s duty to comply with the
outstanding capital stock or of at least two-thirds dealership agreement. In reply to the aforesaid letter of
(2/3) of the members in a meeting called for the Y, X Corp. replied that the board of directors of X Corp.
purpose: Provided, That full disclosure of the decided to impose some conditions
adverse interest of the directors or trustees
involved is made ats such meeting and the contract Several demands to comply with the dealership
is fair and reasonable under the circumstances agreement were made by Y to X Corp., however, X
Corp. refused to comply with the same, and Y, by force
of circumstances, was constrained to cancel his
SELF-DEALING DIRECTORS OR TRUSTEES OR agreement for the supply of white cement with third
OFFICERS parties, which were concluded in anticipation of, and
A contract of the corporation with one or more pursuant to the said dealership agreement.
of its directors or trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity Notwithstanding that the dealership agreement
or affinity. between Y and X Corp. which was in force and
subsisting. X Corp., in violation of, and with evident
intention not to be bound by the terms and conditions
General Rule: thereof, entered into an exclusive dealership agreement
A contract of the corporation with one or more with a certain C for the marketing of white cement in
of its directors or trustees, officers or their spouses and Mindanao.
relatives within the fourth civil degree of consanguinity
or affinity is voidable, at the option of such corporation.
Is the "dealership agreement" a valid and enforceable
contract?
Exceptions: Answer:
1. That 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; Under the Corporation Code, all corporate
2. That the vote of such director or trustee was not powers shall be exercised by the Board of Directors,
necessary for the approval of the contract; except as otherwise provided by law.Although it cannot
3. That the contract is fair and reasonable under the completely abdicate its power and responsibility to act
circumstances; for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In corporation, the fact that the other party to the contract
the absence of such express delegation, a contract was a Director and Auditor of X Corp. changes the
entered into by its President, on behalf of the whole situation. First of all, the Court believed that the
corporation, may still bind the corporation if the board contract was neither fair nor reasonable. The
should ratify the same expressly or impliedly. "dealership agreement" entered into was to sell and
Furthermore, even in the absence of express or implied supply to Y 20,000 bags of white cement per month, for
authority by ratification, the President as such may, as five years, at the fixed price of P9.70 per bag. Y is a
a general rule, bind the corporation by a contract in the businessman himself and must have known, or at least
ordinary course of business, provided the same is must be presumed to know, that at that time, prices of
reasonable under the circumstances. These rules are commodities in general, and white cement in particular,
basic, but are all general and thus quite flexible. They were not stable and were expected to rise. At the time
apply where the President or other officer, purportedly of the contract, X Corp. had not even commenced the
acting for the corporation, is dealing with a third person, manufacture of white cement, the reason why delivery
ie, a person outside the corporation. was not to begin until 14 months later. He must have
known that within that period of six years, there would
be a considerable rise in the price of white cement. No
The situation is quite different where a director or provision was made in the "dealership agreement" to
officer is dealing with his own corporation. In the instant allow for an increase in price mutually acceptable to the
case Y was not an ordinary stockholder; he was a parties. Instead, the price was pegged at P9.70 per bag
member of the Board of Directors and Auditor of the for the whole 5 years of the contract. Fairness on his
corporation as well. He was what is often referred to as part as a director of the corporation from whom he was
a self-dealing" director. to buy the cement, would require such a provision. In
fact, this unfairness in the contract is also a basis which
renders a contract entered into by the President, without
A director of a corporation holds a position of authority from the Board of Directors, void or voidable,
trust and as such, he owes a duty of loyalty to his although it may have been in the ordinary course of
corporation. In case his interests conflict with those of business. We believe that the fixed price of P9.70 per
the corporation, he cannot sacrifice the latter to his own bag for a period of 5 years was not fair and reasonable.
advantage and benefit. As corporate managers, Y, himself, when he subsequently entered into contracts
directors are committed to seek the maximum amount to resell the cement to his "new dealers" stipulated as
of profits for the corporation. This trust relationship "is follows:
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 The price of white cement shall be mutually determined
interests of the stockholders." In the case of Gokongwei by us but in no case shall the same be less than P14.00
v. Securities and Exchange Commission, this Court per bag (94 lbs).
quoted with favor from Pepper v. Litton, thus:
All of these contracts were entered into soon after
his "dealership agreement" with X Corp., and in each
He cannot by the intervention of a corporate one of them he protected himself from any increase in
entity violate the ancient precept against serving two the market price of white cement.
masters. He cannot utilize his inside information and his Why did he not protect the corporation in the same
strategic position for his own preferment. He cannot manner when he entered into the "dealership
violate rules of fair play by doing indirectly through the agreement"? For that matter, why did the President and
corporation what he could not do directly, He cannot use the Chairman of the Board not do so either? As director,
his power for his personal advantage and to the especially since he was the other party in interest Y's
detriment of the stockholders and creditors no matter bounden duty was to act in such a manner as not to
how absolute in terms that power may be and no matter unduly prejudice the corporation. In the light of the
how meticulous he is to satisfy technical requirements. circumstances of this case, it is to us quite clear that he
For that power is at all times subject to the equitable was guilty of disloyalty to the corporation; he was
limitation that it may not be exercised for the attempting, in effect, to enrich himself at the expense of
aggrandizement, preference, or advantage of the the corporation. There is no showing that the
fiduciary to the exclusion or detriment of the cestuis. stockholders ratified the "dealership agreement" or that
.. they were fully aware of its provisions. The contract was
therefore not valid and this Court cannot allow him to
reap the fruits of his disloyalty.
On the other hand, a director's contract with his
corporation is not in all instances void or voidable. lf the
contract is fair and reasonable under the circumstances RATIFICATION by stockholders on self-dealing
it may be ratified by the stockholders provided a full directors or trustees, or officers
disclosure of his adverse interest is made.
A contract of the corporation with directors or
trustees or officers may be ratified by the vote of the
Granting arguendo that the "dealership agreement" stockholders representing at least two- thirds (2/3) of
involved here would be valid and enforceable if entered the outstanding capital stock or of at least two-thirds
into with a person other than a director or officer of the (2/3) of the members in a meeting called for the
purpose. prejudice of such corporation, the director must
account for and refund to the latter all such profits,
The requisites are: unless the act has been ratified by a vote of the
1. Any of the first three conditions set forth in the first stockholders owning or representing at least two-
paragraph of the above section is absent; thirds (2/3) of the outstanding capital stock. This
2. Full disclosure of the adverse interest of the directors provision shall be applicable, notwithstanding the
or trustees involved is made at such meeting; and fact that the director risked one's own funds in the
3. That the contract is fair and reasonable under the venture.
circumstances

Doctrine of Corporate Opportunity

SEC.32. Contracts Between Corporations with A director, by virtue of his office, acquires for
Interlocking Directors – Except in cases of fraud, himself a business opportunity which should belong to
and provided the contract is fair and reasonable the corporation, thereby obtaining profits to the
under the circumstances, a contract between two prejudice of such corporation, he must account to the
(2) or more corporations having interlocking latter for all such profits by refunding the same.
directors shall not be invalidated on that ground
alone: Provided, That if the interest of the
interlocking director in one (1) corporation is Note:
substantial and the interest in the other corporation The doctrine shall be applicable, notwithstanding the
or corporations is merely nominal, the contract fact that the director risked his own funds in the venture.
shall be subject to the provisions of the preceding
section insofar as the latter corporation or
corporations are concerned. Ratification by the stockholders
The act of a director violating the doctrine of
corporate opportunity can be ratified by a vote of the
Stockholdings exceeding twenty percent (20%) of stockholders owning or representing at least two-thirds
the outstanding capital stock shall be considered (2/3) of the outstanding capital stock.
substantial for purposes of interlocking directors.
SEC. 34. Executive, Management, and Other Special
Interlocking Directors Committees.- If the bylaws so provide, the board
These are the members of the board of may create an executive committee composed of at
directors in a certain corporation who are also directors least three (3) directors. Said committee may act, by
in another corporation. majority vote of all its members, on such specific
matters within the competence of the board, as may
be delegated to it in the bylaws or by majority vote
General rule: of the board, except with respect to the: (a) approval
A contract between two or more corporations of any action for which shareholders' approval is
having interlocking directors shall not be invalidated on also required; (b) filling of vacancies in the board;
that ground alone (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
Requisites: is not amendable or repealable; and (e) distribution
1. The contract is not fraudulent; and of cash dividends to the shareholders.
2. The contract is fair and reasonable under the
circumstances. The board of directors may create special
committees of temporary or permanent nature and
determine the members' term, composition,
Exception: compensation, powers, and responsibilities.
If the interest of the interlocking director in one
corporation is substantial and his interest in the other Executive Committee
corporation or corporations is merely nominal, he shall It is a body created by the by-laws and
be subject to the provisions of section 31 insofar as the composed of not less than three members of the board
latter corporation or corporations are concerned. which, subject to the statutory limitations, has all the
authority of the board of directors to the extent provided
in the by- laws.
Substantial interest
Stockholdings exceeding twenty percent (20%)
of the outstanding capital stock shall be considered Limitations on the powers of the executive
substantial for purposes of interlocking directors. committee
1. Approval of any action for which shareholders'
approval is also required;
SEC. 33. Disloyalty of a Director. - Where a director, 2. Filing of vacancies in the board;
by virtue of such office, acquires a business 3. Amendment or repeal of by-laws or the
opportunity which should belong to the adoption of new by-laws;
corporation, thereby obtaining profits to the 4. Amendment or repeal of any resolution of the
 board which by its express terms is not Section 34, Revised Corporation Code) which is as
amendable or repealable; and powerful as the board of directors and in effect acting
5. Distribution of cash dividends to the for the board itself, should be distinguished from other
shareholders. committees which are within the competency of the
board to create at any time and whose actions require
ratification and confirmation by the board. Another
Quorum required of the executive committee reason is that the Board of Directors has the power to
The committee may act, by majority vote of all create positions not provided for in F Corp.'s bylaws
its members, on such specific matters within the since the board is the corporation's governing body,
competence of the board. clearly upholding the power of its board to exercise its
prerogatives in managing the business affairs of the
corporation
Problem:
C, F Corp.'s former president, wrote a letter to
the corporation's Board of Directors questioning the Note:
board's creation of the positions of Assistant Vice- The board of directors may create special
Presidents (AVPs) for Corporate Planning, Operations, committees of temporary or permanent nature and
Finance and Administration, with a monthly determine the members' term, composition,
remuneration of P13,050 each, and the election thereto compensation, powers, and responsibilities.
of certain members of the board.

In his aforesaid letter, C requested the board to

take necessary action/actions to recover from those
elected to the aforementioned positions the salaries
they have received.

Subsequently, C, purportedly in representation

of F Corp. and its stockholders, among which is X Corp,
filed with the SEC a petition which he describes as a
derivative suit against G, H, I, J, K, L, M, N, and 0 who
were then the incumbent members of F Corp.'s Board
of Directors, for alleged acts of mismanagement
detrimental to the interest of the corporation and its
shareholders at large, namely:

1. creation of an executive committee composed of 7

members of the board with compensation of P500 for
each member per meeting, an office which, to C, is not
provided for in the by-laws of the corporation and whose
function merely duplicates those of the President and
General Manager;

Did F Corp.'s Board of Directors acted within its powers

in creating the executive committee?

Answer:

Unfortunately, the bylaws of the corporation are

silent as to the creation by its board of directors of an
executive committee. Under Section 35 of the
Corporation Code (Now Section 34, Revised
Corporation Code), the creation of an executive
committee must be provided for in the bylaws of the
corporation.

Notwithstanding the silence of F Corp.'s bylaws on

the matter, we cannot rule that the creation of the
executive committee by the board of directors is illegal
or unlawful. One reason is the absence of a showing
as to the true nature and functions of said executive
committee considering that the "executive committee,"
referred to in Section 35 of the Corporation Code (Now