MIDTERM NOTES

Levels of Control in a Corporation: [Citibank vs CA]

1.Board of Directors- responsible for corporate policies and the general management of the
business affairs of the corporation
2.Officers- who in theory execute the policies laid down by the board
3.Stockholders: who have the residual power over fundamental corporate changes, like
amendments of the articles of incorporation.

I. The Board of Directors:

DOCTRINE OF CENTRALIZED MANAGEMENT: The board of directors or trustees shall exercise
the corporate powers, conduct all business, and control all properties of the corporation. (Section
22, RCC)
 Corporations exercise their powers through their governing boards. (Ago Realty and
Development Corporation v. Ago, G.R. No. 210906, October 16, 2019)
XPN: The doctrine is not applicable to the following instances:
1. In case of delegation to the Executive Committee duly authorized in the by-laws;
2. Authorization pursuant to a contracted manager which may be an individual, a
partnership, or another corporation; and
3. In case of close corporations, the stockholders may manage the business of the corporation
instead of a board of directors, if the articles of incorporation so provide.

Q:How are Corporate Powers delegated?

A: Corporate powers may be directly conferred upon corporate officers or agents by statute,
the articles of incorporation, the by-laws or by resolution or other act of the board of
directors. In addition, an officer who is not a director may also appoint other agents when
so authorized by the by-laws or by the board of directors.[Citibank vs C]

BUSINESS JUDGEMENT RULE: Questions of policy or management are left solely to the honest
decision of officers and directors of a corporation and the courts are without authority to
substitute their judgment for the judgment of the board of directors.
GR: stockholders cannot interfere with the board in conducting the business affairs of
the corporation.
XPNs: 1. When the act is unconscionable and oppressive as to amount to wanton
destruction to the rights of the minority; (Ong v Tiu, G.R. No. 144476, 18 Apr. 2003)
2. When there is bad faith or gross negligence by the directors; (Republic Communications
Inc. v. CA, G.R. No. 135074, 29 Jan. 1999)
3. To declare dividends when there is no surplus profit or to declare dividends out of re appraisal
surplus; (Divina, 2020)
4 To pay compensation to directors, as the power is lodged with the stockholders; (Ibid.)
5. To support a request for a new stock and transfer book on the pretext that the original is lost
(when in fact it is not) and declare entries in the supposed lost stock and transfer book as
invalid. (Ibid., citing Provident International Resources v. Venus, G.R. No. 167041, 17 June 2008)

Requirements for Application of Business Judgment Rule

1. Presence of a business decision including decisions on policy management and administration;
 2. The decision must be intra vires and must comply with the procedural and substantive
requirements of law;
3. Good faith;
4. Due care in making the decision; and
5. The director must not have personal interest or nor self-dealing or otherwise on breach of the
duty of loyalty. (Villanueva, 2018)

CASE: FILIPINAS PORT SERVICES v. VICTORIANO GO, et al G.R. No. 161886 (2007)
****A shareholder filed a derivative suit on the ground that the corporation incurred damages
when the Board increased the salary of President/Secretary and Treasure and created an
executive committee who have same functions of that of a President and Gen. Managers.
In applying the doctrine of business judgment rule, the court held that the BoD have
power to create positions not provided for in the by-laws of the corporation since the board is the
governing body pursuant to Sec. 22 of Corporation Code. THUS, the BoD has the sole authority
to determine policies, enter into contracts, and conduct the ordinary business of the corporation
within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant
provisions of law. [the power to create offices and increase salaries are within the normal and
ordinary business of a corporation and within the prerogative of the boards]
Doctrine: If the cause of the losses is merely error in business judgment, not
amounting to bad faith or negligence, directors and/or officers are not liable. For them
to be held accountable, the mismanagement and the resulting losses on account thereof are
not the only matters to be proven; it is likewise necessary to show that the directors
and/or officers acted in bad faith and with malice in doing the assailed acts.
Requisites before a derivative suit can be filed by a stockholder:
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the suit
[ real-party-in-interest is the corporation and not the shareholder]

*** For (2), where the corporation is under the complete control of the principal defendants, as
here, there is no necessity of making a demand upon the directors.

Doctrine of ratification or estoppel: The corporation may ratify the unauthorized act of its
corporate officer.
Ratification means that the principal voluntarily adopts, confirms and gives sanction to some
unauthorized act of its agent on its behalf. It is this voluntary choice, knowingly made,
which amounts to a ratification of what was theretofore unauthorized and becomes
the authorized act of the party so making the ratification. [ex: a corporate officer enters a
significant contract without board approval. If the board later ratifies this action, it becomes as
binding as if it had been authorized initially.]
The theory of corporate ratification is predicated on the right of a corporation to
contract, and any ratification or adoption is equivalent to a grant of prior
authority. Implied ratification may take the form of silence, acquiescence, acts consistent
with approval of the act, or acceptance or retention of benefits. Ratification has the effect
of placing the principal in a position as if he or she signed the original contract. (University
of Mindanao, Inc. v. BSP, G.R. No. 194964-65, 11 January 2016)
Estoppel prevents a party (usually the corporation or shareholders) from denying the authority
or validity of an action if they previously, through their words, conduct, or inaction, allowed or
impliedly sanctioned that action. [ ex: A director represents that they have authority to
execute a lease on behalf of the corporation. If the corporation does not object or correct this, a
third-party landlord may rely on this representation. Estoppel then bars the corporation from
later denying the director’s authority if the landlord suffers financial loss.]

Qualifications of the board members (Sec. 22, 26, RCCP)

Sec.22-Continuing Requirement. A director who ceases to own at least one (1) share
of stock or a trustee who ceases to be a member of the corporation shall cease to be
such.
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) Securities Regulation Code (RA 8799)
(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 Philippine Competition Commission may impose
in its promotion of good corporate governance or as a sanction in its administrative proceedings

Election of the board members (Sec. 23,25 and 91 RCCP)

Notice of Meeting: must be in accordance with the form and mode

under the laws

The owners of the majority of the outstanding capital stock or the majority of the members
entitled to vote must be present, either in person or by a representative authorized to act by a
written proxy. If voting through remote communication or in absentia will be allowed, such voter,
voting through said means, shall be deemed present for purposes of counting the majority/quorum.

The meeting must be presided by the officer indicated

under the bylaws.

The election must be by ballot if requested by any voting

stockholder or member

If no election is held, or the owners of majority of the outstanding capital stock or majority of
the members entitled to vote are not present in person, by proxy, or through remote
communication or not voting in absentia at the meeting, such meeting may be adjourned and
the corporation shall proceed in accordance with Section 25 of this Code.

Within 30 days after the election, the secretary, or any other officer of the corporation,
shall submit to the Commission, the names, nationalities, shareholdings, and residence addresses
of the directors, trustees and officers elected

Non-holding of elections and the reasons therefor shall be reported to the Commission within 30
days from the date of the scheduled election. The report shall specify a new date for the election, which
shall not be later than 60 days from the scheduled date.

Methods of Voting
A. Voting in Stock Corporations. Stockholders entitled to vote shall have the right to vote the
number of shares of stock standing in their own names in the stock books of the corporation at
the time fixed in the bylaws or where the bylaws are silent, at the time of the election. The said
stockholder may:
(a) Straight voting : vote such number of shares for as many persons as there are
directors to be elected;
(b) Cumulative voting for one candidate :cumulate said shares and give one (1)
candidate as many votes as the number of directors to be elected multiplied by the
number of the shares owned; or
(c) Cumulative voting by distribution: cumulate his shares by multiplying the number
of his shares by the number of directors to be elected and distribute the same among as
many candidates as he shall see fit. (Sec. 23, RCC)
EXAMPLE: A owns 100 shares of stock in ABC Corp. There are ten (10) directors to be elected. A
has in his power to cast 1,000 votes.
1. Straight voting: A may give 100 votes for each candidate.
2. Cumulative voting for one candidate: A may give 1,000 votes to one preferred candidate.
3. Cumulative voting by distribution: A may give 500 votes each to two candidates.
Note:
- The total number of votes cast shall not exceed the number of shares owned by the
stockholders as shown in the books of the corporation multiplied by the whole
number of directors to be elected.
- Stockholders entitled to vote shall have the right to vote the number of shares of stock
standing in their own names in the stock books of the corporation at the time
fixed in the bylaws or where the bylaws are silent, at the time of the election;
- No delinquent stock shall be voted.

QUESTION. Dennis subscribed to 10,000 shares of XYZ Corporation with a par value of P100 per
share. However, he paid only 25% of the subscription or P250,000.00. No call has been made on
the unpaid subscription. How many shares is Dennis entitled to vote at the annual meeting of the
stockholders of XYZ? 10,000 shares. [2013 Bar]

B. Voting in Nonstock Corporations. Unless otherwise provided in the AOI 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. Nominees for directors or
trustees receiving the highest number of votes shall be declared elected.
 Election of Trustees. The number of trustees shall be fixed in the articles of
incorporation or bylaws which may or may not be more than 15. (Sec. 91)
 Trustee Must be a Member. Except with respect to independent trustees of nonstock
corporations vested with public interest, only a member of the corporation shall be
elected as trustee. Unless otherwise provided in the articles of incorporation or the
bylaws, the members may directly elect officers of a nonstock corporation.
QUESTION. EFG Foundation, Inc., a non-profit organization, scheduled an election for its six
member Board of Trustees. X, Y and Z, who are minority members of the foundation, wish to
exercise cumulative voting in order to protect their interest, although the Foundation's Articles
and By-laws are silent on the matter. As to each of the three, what is the maximum number of
votes that he/she can cast? 6 (2011 Bar)

Who are Independent directors? (Sec 22)

- 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.

Corporations Required to Have an Independent Director. The board of the following

corporations vested with public interest shall have independent directors constituting at least
twenty percent (20%) of such board:
i. Corporations covered by Section 17.2 of Republic Act No. 8799, namely: a) those
whose securities are registered with the Commission, corporations listed with an
exchange OR with assets of at least Fifty million pesos (P50,000,000.00) AND ii)
having two hundred [200) or more holders of shares, each holding at least one
hundred (100) shares of a class of its equity shares.

ii. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service
business, pre-need, trust and insurance companies, and other financial intermediaries;
and

iii. Other corporations engaged in business vested with public interest similar to the
above, as may be determined by the Commission.
QUESTION. Two years since it began to operate, a corporation has amassed assets valued at
over PHP60,000,000.00. It also has 250 shareholders, each holding at least 150 shares. Under
the Revised Corporation Code, is the corporation required to have an independent director?
Explain briefly. [2020/21 Bar]
A: Yes, the corporation is required to have an independent director. The board of a corporation
vested with public interest with assets of at least Fifty million pesos (P50,000,000.00) and have
two hundred [200) or more holders of shares, each holding at least one hundred (100) shares of
a class of its equity shares shall have independent directors constituting at least twenty percent
(20%) of such board. (Sec. 22, RCC) Here, the corporation meets all the elements of a
corporation required to have an independent director.

Quorum requirement in board meetings; voting requirements .Unless otherwise provided

in this Code or in the bylaws, a quorum shall consist of the stockholders representing a majority
of the outstanding capital stock or a majority of the members in the case of nonstock
corporations. (Sec. 51, RCC)
For stock corporations, the quorum is based on the number of outstanding voting
stocks while for non-stock corporations, only those who are actual,living members with
voting rights shall be counted in determining the existence of a quorum, unless some
other basis is provided by the By-Laws of the corporation. The qualification "with voting
rights" simply recognizes the power of a non-stock corporation to (Mary Lim v. Moldex
Land, Inc., G.R. No. 206038, 25 Jan. 2017)
GR: stock and transfer book are sole basis of determing shareholding for purposes of
quorum.
XpN: When the stock and transfer book is inaccurate and deficient, it cannot be the sole basis of
determining the shareholdings for purposes of quorum. The AOI may be used as a basis in
determining the shareholdings. (Lanuza, et al. v. CA, et al., G.R. No. 131394, 28 Mar. 2005)

Quorum in Elections Ordered by the SEC. 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 section 23.

Term, Holdover, and Removal – Sections 22 and 27

Term of Directors/Trustees. Directors shall be elected for a term of 1 year from among the
holders of stocks registered in the corporation’s books (sec. 22) , while trustees shall be
elected for a term not exceeding three (3) years from among the members of the corporation.
(sec. 91)

Holdover Principle. Each director and trustee shall hold office until the successor is
elected and qualified. The principle is applicable provided that the failure to elect the new set
of directors/trustees was due to valid and justifiable reasons. In relation thereto, hold over is
not indefinite and that the corporation must still hold its election for directors and officers.

Remedy in Case of Unjustified Non-holding of the Election. If no new date has been
designated, or if the rescheduled election is likewise not held, the Commission may, upon the
application of a stockholder, member, director or trustee, and after verification of the
unjustified non-holding of the election, summarily order that an election be held.
Viz. SEC OGC Opinion No. 19-12: Any stockholder or member may petition the Commission
to order the calling of a meeting by giving proper notice required by the Code or by the by-laws.

Power of the Securities and Exchange Commission. The Commission shall have the power
to issue such orders as may be appropriate, including orders directing the issuance of a notice
stating the time and place of the election, designated presiding officer, and the record date or
dates for the determination of stockholders or members entitled to vote. (sec.23)

Removal of Directors or Trustees. Any director or trustee of a corporation may be removed

from office by a vote of the stockholders holding or representing at least 2/3 of the
outstanding capital stock, or in a nonstock corporation, by a vote of at least 2/3 of the
members entitled to vote. (sec. 27)

Meeting is Required When Removing Directors or Trustees. Removal 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 stockholders or members of the corporation
of the intention to propose such removal at the meeting.
Notice of Meeting Must Be Published. Notice of the time and place of such meeting, as well
as of the intention to propose such removal, must be given by publication or by written notice
prescribed in the RCC.
Removal May Be Without Cause. Removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may be entitled
under Section 23 of the RCC.

The SEC Can Order the Removal of a Disqualified Director or Trustee. 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.8. vacancies in the board (Sec. 28)
9. compensation of board members (Sec. 29, RCC
P)