1.

Correlation of the Board, Officers, and Stockholders

● Stockholders (or members): They own shares in the company and have a say in major
decisions. They elect the board of directors (for corporations) or trustees (for non-stock
corporations like nonprofits).
● Board of Directors/Trustees: These are the people elected by the stockholders. Their main
job is to oversee the company and appoint officers (e.g., CEO, CFO) to manage daily
operations.
● Officers: These are the people running the company day-to-day. The board oversees them,
but the officers are the ones handling everyday business tasks.

In short: Stockholders elect the board to make big decisions and choose officers to handle daily
tasks.

2. Acts of Management vs. Acts of Ownership

● Acts of management: These are decisions made by the board, like running the company or
making contracts.
● Acts of ownership: These are decisions only the stockholders can make, like selling a large
part of the company or merging with another company. The board must consult the
stockholders when making these kinds of ownership decisions.

3. Corporate Powers and Voting Rights

● One of the most important rights stockholders have is the right to vote. They can vote directly
or through a proxy (someone voting for them) to elect the board of directors or trustees.
● Once the board is elected, stockholders no longer manage the company directly; they trust the
board to handle things based on the law.

4. Business Judgment Rule

● The business judgment rule means that courts generally don’t interfere with the decisions
made by the board of directors, unless those decisions are clearly harmful to the company or
its minority stockholders.
● This is because courts are not experienced in running businesses, and the law assumes the
board knows what's best for the company. However, if a board’s decisions hurt stockholders
badly (especially minority stockholders), courts may step in.

Key takeaway:

The board makes most business decisions, but stockholders get to choose who is on the board. The
business judgment rule protects the board's decision-making unless they act in a way that seriously
harms stockholders.
Section 22: The Board of Directors or Trustees of a Corporation; Qualification
and Term

1. Powers and Duties:

○ The board of directors or trustees has the authority to exercise the corporation's powers,
conduct business, and manage its properties.
2. Election and Terms:
○ Directors: Elected for a one-year term from stockholders listed in the corporation's
records.
○ Trustees: Elected for a term of up to three years from among the members of a non-
stock corporation.
○ Directors and trustees hold office until their successors are elected and qualified. If a
director no longer holds shares or a trustee is no longer a member, they must vacate
their position.
3. Independent Directors:
○ Some corporations (those vested with public interest) must have at least 20% of their
board composed of independent directors. This requirement applies to:
■ Corporations listed under Section 17.2 of the Securities Regulation Code.
■ Financial institutions like banks, pawnshops, and insurance companies.
■ Other corporations with public interest as determined by the Commission.
○ Qualifications of Independent Directors:
■ They should not have any relationships or interests that could compromise their
independent judgment. Their independence is vital to safeguard corporate
governance.
4. Appointment and Role of the Board:
○ The board is responsible for creating corporate policies and managing the corporation’s
affairs. However, certain corporate decisions, especially major ones, still require the
stockholders' approval.
○ Three Levels of Control:
■ Board of Directors: Manages the corporation's general policies and affairs.
■ Officers: Execute board policies and handle day-to-day operations.
■ Stockholders: Hold residual power and make decisions on fundamental
changes, like amendments to the articles of incorporation.

Legal Issues:

1. Derivative Suits:
○ A stockholder may file a lawsuit on behalf of the corporation when the directors breach
their fiduciary duties, or if they refuse to take legal action on the corporation's behalf.
2. Authority to Bind the Corporation:
○ Officers and agents of a corporation need authorization from the board of directors to
enter into binding contracts on behalf of the corporation. Without proper authorization,
actions taken by officers cannot bind the corporation legally.
Practical Example:

● In the case of Subic Water, the company's chairman signed a compromise agreement without
explicit authorization from the board. Therefore, his actions did not bind Subic Water, and the
agreement could not hold the company liable. This highlights the necessity of board approval
for major decisions, especially those involving the company's liabilities.

Qualifications of Directors/Trustees:

1. Stock Corporations: Directors must own at least one share.

2. Non-stock Corporations: Only members can be trustees.
3. General Qualifications: Must be of legal age, capable, and meet additional qualifications set
by the corporation’s by-laws.

Understanding the composition and authority of the board, the necessity of independent directors,
and the limits of authority for corporate officers ensures that corporate governance follows the law
and promotes accountability.

Section 23: Rules for the election of directors or trustees in corporations, both
stock and nonstock

Key Provisions:

1. Nominations and Qualifications: Every stockholder or member has the right to nominate any
individual for the position of director or trustee, provided they meet the qualifications and do
not have any disqualifications as per the Corporation Code.
2. Presence and Quorum:
○ A majority of the outstanding capital stockholders (in stock corporations) or a majority of
the voting members (in nonstock corporations) must be present, either in person or
through a representative (proxy) for elections to proceed.
○ Voting can also be conducted remotely or in absentia if authorized in the bylaws or
approved by a majority of the board of directors.
○ Remote participants or those voting in absentia are counted as present for quorum
purposes.
3. Election by Ballot: If requested by any voting stockholder or member, the election must be
conducted by ballot.
4. Voting in Stock Corporations:
○ Stockholders have the right to vote according to the number of shares they own, which
are recorded in the company's stock books.
○ Stockholders can distribute their votes among multiple candidates or give all their votes
to one candidate (cumulative voting). However, the total votes cast cannot exceed the
number of shares they own multiplied by the number of directors to be elected.
 ○ Delinquent stock (i.e., shares on which required payments have not been made)
cannot be voted.
5. Voting in Nonstock Corporations:
○ Members can cast as many votes as there are trustees to be elected but can only cast
one vote per candidate.
6. Declaration of Winners: Nominees who receive the highest number of votes are declared
elected as directors or trustees.
7. Failure to Hold Elections: If an election is not held or a quorum is not met, the meeting may
be adjourned, and the corporation will proceed as per Section 25 of the Corporation Code.

Summary of Requirements for Elections:

1. Majority Presence: Majority of voting stockholders or members must be present or

represented by proxy.
2. Remote Voting: Allowed if authorized by bylaws or board approval; stockholders or members
participating remotely count for quorum.
3. Election by Ballot: Required if requested by any stockholder or member.
4. Limit on Votes in Stock Corporations: Total votes cannot exceed the shares owned
multiplied by the number of directors to be elected.
5. Limit on Votes in Nonstock Corporations: Members cannot vote more than once for a
single candidate.
6. Highest Votes Win: Candidates with the most votes are elected as directors or trustees.

This section ensures that elections are fair and transparent, giving all eligible stockholders and
members the opportunity to participate and vote according to their shares or membership rights.

Section 24: Corporate Officers

This section of the Corporation Code specifies the corporate officers required and their election by the
board of directors. Key details include:

Required Corporate Officers:

1. President:
○ Must be a director.
○ Need not be a Filipino citizen or resident of the Philippines.
2. Treasurer:
○ May or may not be a director.
○ Must be a resident of the Philippines but need not be a Filipino citizen.
3. Secretary:
○ May or may not be a director.
○ Must be both a Filipino citizen and resident.
4. Compliance Officer:
○ Required if the corporation is vested with public interest.
5. Other Officers:
○ As may be provided by the corporation’s bylaws.
Concurrent Positions:

● The same individual may hold two or more positions, except for President and Secretary or
President and Treasurer, unless otherwise provided in the Corporation Code.

Corporate officers manage the corporation and perform duties as outlined in the bylaws or as decided
by the board of directors.

Corporate Officer vs. Corporate Employee:

● Corporate Officer: The position must be provided for in the Corporation Code or the bylaws of
the corporation.
● Corporate Employee: Employed by the action of a managing officer (not necessarily stated in
the bylaws or code).

Problem: Legitimacy of Creating Assistant Vice President (AVP) Positions

In the provided case:

● The board of directors of F Corp. created new positions for Assistant Vice Presidents (AVPs)
and elected certain members to those positions. The former president questioned the legality
of these actions, particularly regarding the creation of new positions and the payment of
salaries.

Was the Creation of AVP Positions Valid?

● Yes, the board of directors acted within its authority by creating the AVP positions. According
to the bylaws of F Corp., the board is empowered to create new corporate offices as needed
for the operation of the corporation. The board has the right to elect individuals to these
positions and fix their remuneration.

Quorum for Board Meetings:

● General Rule: A majority of the directors or trustees (50% + 1) constitutes a quorum for
corporate business.
○ Example: If there are 15 directors, a quorum requires 8 members. A majority of those
present (at least 5 out of 8) is needed for a valid corporate act, except for the election of
officers, which requires a majority of the full board (in this case, at least 8 votes).
● Exception: If the articles of incorporation or bylaws specify a greater majority, the higher
number must be met for quorum and decision-making.

For example, if the articles or bylaws state that 10 members are needed for a quorum (rather than the
default 8), and only 8 or 9 attend, the meeting would be invalid.
Conclusion:

● The board's creation of the AVP positions is legal based on the corporation’s bylaws, which
authorize the board to create and fill corporate positions as necessary.

Section 25: Report of Election of Directors, Trustees, and Officers

Key Requirements:

1. Report Submission:
○ Corporations must submit a report to the Securities and Exchange Commission (SEC)
within 30 days after the election of directors, trustees, and officers.
○ The report should include the names, nationalities, shareholdings, and residence
addresses of those elected.
2. Non-Holding of Elections:
○ If an election is not held, the corporation must report this to the SEC within 30 days
from the scheduled election date.
○ The report must include the reasons for not holding the election and must propose a
new date for the election (within 60 days from the originally scheduled date).
3. Failure to Hold Election:
○ If no new election date is set or if the rescheduled election is not held, the SEC, upon
application by a stockholder, member, director, or trustee, can order an election.
○ The SEC can also issue other appropriate orders, such as notifying the time and place
of the election and specifying who is entitled to vote.
4. Quorum:
○ Even if the articles of incorporation or bylaws specify otherwise, those present at a
meeting held under this section and entitled to vote shall constitute a quorum.
5. Cessation from Office:
○ If a director, trustee, or officer dies, resigns, or ceases to hold office for any reason, the
corporation must report this to the SEC within 7 days of becoming aware.

Objective:

The purpose of this reporting requirement is to provide public information about a corporation’s key
officers, business status, and financial condition. This transparency is meant to assist anyone dealing
with or intending to do business with the corporation in assessing its business responsibility and
financial resources.

Problem: Filing a Case Against C Bank

In this scenario, P, Inc. filed a case against C Bank regarding the mishandling of checks. However, C
Bank questioned the authority of P, Inc. to file the suit, arguing that the filing was not authorized by
the company’s board of directors. The bank referenced an excerpt from P, Inc.’s board meeting
minutes showing no authorization for the lawsuit.
Key Points:

● The power to sue and be sued is vested in the board of directors of a corporation.
● There was no proof that the election of P, Inc.’s officers in 1982 was reported to the SEC, as
required under Section 25. The last recorded election in the SEC’s General Information Sheet
was from 1981.
● Without proper board authorization or proof of valid officer election, the court ruled that P, Inc.
lacked the authority to sue, and the action failed.

Conclusion:

The absence of a board resolution authorizing the filing of the case meant that P, Inc. could not
properly pursue legal action. The board must expressly grant authority to file lawsuits, and failure to
report updated officers to the SEC, as mandated by the Corporation Code, weakens the corporation's
legal standing in such matters.

Section 26: Disqualification of Directors, Trustees, or Officers

This section outlines the circumstances under which a person can be disqualified from being elected
or appointed as a director, trustee, or officer in a corporation. The disqualification applies if, within five
years prior to election or during the person's tenure, certain legal or administrative violations
occurred.

Grounds for Disqualification:

1. Criminal Conviction:
○ The person has been convicted by final judgment of an offense punishable by
imprisonment exceeding six (6) years.
○ The conviction may occur either within five years prior to the election/appointment or
during the tenure as a director, trustee, or officer.
2. Violation of the Corporation Code:
○ The person has been convicted by final judgment for violating the Corporation Code
(Republic Act No. 11232).
○ The conviction may occur within five years prior to the election/appointment or during
the tenure.
3. Violation of the Securities Regulation Code (RA 8799):
○ The person has been convicted for violating the Securities Regulation Code.
○ The conviction may happen within five years prior to the election/appointment or
during the tenure.
 4. Administrative Liability for Fraudulent Acts:
○ The person has been found administratively liable for any offense involving fraudulent
acts under:
■ The Corporation Code (RA 11232),
■ The Securities Regulation Code (RA 8799), or
■ Other laws, rules, or regulations enforced by the SEC.
○ This liability may arise within five years prior to the election/appointment or during the
tenure.
5. Foreign Court or Regulatory Authority:
○ The person has been convicted or found administratively liable by a foreign court or
equivalent foreign regulatory authority for acts or violations similar to the above.
○ This applies to actions within five years prior to the election/appointment or during the
tenure.
6. Refusal to Allow Corporate Record Inspection:
○ The person has been found administratively liable by final judgment for refusing to allow
inspection and/or reproduction of corporate records.
○ This applies whether the offense occurred within five years prior to the
election/appointment or during the tenure.

Disqualification vs. Removal:

● Disqualification refers to a person's inability to be elected or appointed due to specific legal

conditions (e.g., criminal conviction or administrative liabilities).
● Removal involves taking someone who is already serving as a director, trustee, or officer out
of their position, typically due to an act committed while in office.

While disqualification bars a person from assuming the role, removal occurs after a person has
already been placed in the position but is later deemed unfit to continue due to misconduct or
disqualification criteria being met.

Purpose:

Section 26 ensures that individuals in leadership roles within corporations uphold high standards of
integrity and responsibility. It provides a mechanism to prevent those with criminal or fraudulent
backgrounds from serving, thereby promoting good corporate governance and protecting the public
interest.

Section 27: Removal of Directors or Trustees

This section details the procedure and requirements for removing a director or trustee from a
corporation. It specifies the power and process for removal, which lies primarily with the stockholders
or members of the corporation.
Key Points of Removal:

1. Who Can Remove a Director/Trustee:

○ Stockholders holding at least two-thirds (2/3) of the outstanding capital stock in a
stock corporation.
○ In a non-stock corporation, two-thirds (2/3) of the members entitled to vote.
○ The Securities and Exchange Commission (SEC) can also order the removal of a
director or trustee if they were elected despite disqualification or if the disqualification
arises later.
2. When Removal Can Occur:
○ The removal must occur during a regular meeting or a special meeting called for that
purpose.
○ Stockholders or members must receive prior notice of the intention to propose the
removal at the meeting.
3. Special Meeting for Removal:
○ The secretary is responsible for calling a special meeting, either on the order of the
president or upon the written request of the stockholders or members representing a
majority of the outstanding capital stock or voting members.
○ If the secretary fails to do so, the stockholders or members can call the meeting
themselves by directly addressing the other members.
4. Notice Requirements:
○ The notice of the meeting must include the time and place and the intention to propose
the removal.
○ Notice can be given through publication or written notice as required by the
Corporation Code.

5. Cause vs. No Cause for Removal:

○ Removal can be with or without cause.
○ However, removal without cause cannot be used to deprive minority stockholders or
members of their right to representation under Section 23 of the Corporation Code.

SEC's Role:

● The SEC can order the removal of a director or trustee who was elected despite being
disqualified or whose disqualification arose later. This removal is without prejudice to other
penalties the SEC may impose on the board for not acting on the disqualification.
Requirements for Valid Removal:

1. Meeting: The removal must take place during a validly called regular or special meeting.
2. Vote: At least two-thirds of the stockholders or members entitled to vote must agree to the
removal.
3. Prior Notice: Stockholders or members must receive prior notice of the intention to propose
the removal.
4. Special Meeting Call: A special meeting for removal can be called by the secretary or
stockholders holding a majority.

Example Case: Valid Removal of X and Y

In the problem regarding Z Corp., the removal of X and Y as directors was valid. The special meeting
was properly called, and the stockholders present voted more than the required two-thirds majority to
remove them. X and Y did not contest the meeting’s validity, and the stockholders' vote exceeded the
necessary 333.33 shares (with 400 shares voting in favor). Since the meeting followed the proper
procedures, the removal was lawful, and X’s removal as a corporate officer was validly executed by
the board.

Section 28

1. Quorum and Dead Members: Dead members are not counted in determining the quorum.
This is because, upon their death, members automatically lose their rights and interests in the
corporation. Therefore, only the living member-trustees should be considered for the quorum.
In this situation, X School has 11 living members out of the original 15, and 7 attended the
meeting, which constitutes a quorum.
2. Filling Vacancies: According to Section 28 of the Revised Corporation Code, vacancies in the
board can be filled by the remaining trustees if they still constitute a quorum. In X School's
case, the 7 remaining trustees do constitute a quorum, so they could have filled the vacancies.
However, the by-laws of X School require that vacancies be filled by a majority vote of the
remaining trustees, not by the members.
3. Validity of Election in Members' Meeting: Even though the members and trustees are the
same individuals, the by-laws specifically state that vacancies in the board must be filled by the
trustees acting as a board, not by the members in their capacity as stockholders or members
in an annual meeting. Thus, the election of A, B, C, and D during the annual meeting is invalid
because it was held during a members’ meeting, not a board meeting.
Conclusion:

The dead members should not be counted for quorum purposes. However, the election of the new
trustees (A, B, C, and D) is invalid because it took place during the annual members' meeting instead
of a proper board of trustees meeting, as required by X School's by-laws. For the election to be valid,
the remaining trustees should have convened as a board to fill the vacancies.

Section 29

Analysis:

1. Prohibition on Compensation for Directors:

○ Section 29 of the Revised Corporation Code provides that directors or trustees cannot
receive compensation in their capacity as directors or trustees, except for
reasonable per diems. This means they are generally not paid for their services as
board members, unless it is fixed by the corporation's by-laws or approved by the
stockholders representing at least a majority of the outstanding capital stock at a regular
or special stockholders' meeting. Even in those cases, the total compensation cannot
exceed 10% of the net income before income tax of the corporation from the preceding
year.
2. Compensation as Corporate Officers:
○ The rule prohibiting compensation for directors does not apply if they are receiving
compensation in a different capacity, such as corporate officers. In this case, X, Y, and
Z were granted compensation for their roles as Chairman, Vice-Chairman, Treasurer,
and Secretary of W Corp., not for their roles as board members.
○ Section 29 is specifically concerned with compensation in the directors' capacity as
such. When directors also hold positions as officers, they may be compensated for their
duties as officers, provided there is a valid board resolution or by-law provision.
3. Resolution No. 48, s. 1986:
○ The board passed a resolution granting X, Y, and Z monthly compensation as officers of
the corporation. Since this compensation is for their officer roles and not as directors,
the prohibition on compensation for directors does not apply.
○ A key legal point here is that compensation given to board members in their capacity as
officers is not subject to the 10% cap on compensation for directors under Section 29.
This means X, Y, and Z could lawfully receive compensation for their work as officers.
4. Falsification Claim:
○ The issue raised by A, B, and C, the minority stockholders, regarding the falsification
claim revolves around the submission of W Corp.’s income statement with the SEC,
where the compensation was reported for the fiscal year 1985-1986. A, B, and C argued
that the resolution was passed on June 1, 1986, which falls outside the fiscal year
ending April 30, 1986.
○ If X, Y, and Z backdated the resolution to make it appear as though it was passed within
the fiscal year, this could potentially support a charge of falsification. However, whether
they are entitled to compensation as officers is separate from the issue of
falsification. As long as the compensation is valid under the by-laws and based on
 their officer roles, they are entitled to it. The falsification issue would focus on whether
they misrepresented the timing of the decision to grant compensation.

Conclusion:

X, Y, and Z are entitled to compensation as corporate officers, as the prohibition under Section 29
does not apply to compensation for roles beyond their directorial duties. However, the issue of
falsification could still be pursued if there was intentional misrepresentation regarding when the
compensation was granted.

Section 30: Liability of Directors, Trustees, or Officers

This provision outlines the personal liability of directors, trustees, and officers for certain acts that
harm the corporation, its stockholders, or other parties.

Key Points:

1. Joint and Several Liability: Directors or trustees who:

○ Willfully and knowingly vote for or approve unlawful acts of the corporation,
○ Act with gross negligence or bad faith in managing the corporation's affairs,
○ Acquire personal or pecuniary interests that conflict with their duties,
2. are held personally liable for all resulting damages. This liability is joint and several, meaning
they share responsibility equally and can be sued individually or as a group.
3. Conflict of Interest:
○ A director, trustee, or officer cannot acquire any personal interest adverse to the
corporation on matters entrusted to them. If they do, they must account for the profits to
the corporation, as they are considered trustees for the corporation regarding such
profits.
○ This prohibition applies to situations where directors/officers exploit corporate
opportunities for their personal gain, which would otherwise belong to the corporation.

The Doctrine of Corporate Opportunity:

This doctrine prevents corporate directors from taking business opportunities for personal gain that
should rightfully belong to the corporation. It holds them liable if they exploit such opportunities or act
in bad faith, leading to damage to the corporation.

Bad Faith and Gross Negligence:

● Bad Faith: This involves intentional dishonesty, a conscious disregard for duties, or a failure to
act in accordance with the corporation's interests, often with malice or ill will.
● Gross Negligence: This is more than mere carelessness; it involves a willful or reckless
disregard for the consequences of one's actions, showing an absence of even slight care or
diligence.
Examples of Solidary Liability:

Directors, trustees, or officers may be held personally liable in certain instances:

● When they vote for or approve unlawful acts,

● When they act in bad faith or with gross negligence,
● When they engage in conflicts of interest to the detriment of the corporation.

Other situations include:

● Issuing watered-down stocks,

● Contractually agreeing to be personally liable,
● When a specific law makes them personally liable.

Requisites for Personal Liability:

Before a director or officer can be held liable, two things must happen:

1. The complaint must clearly allege that the director or officer committed unlawful acts, gross
negligence, or bad faith.
2. There must be clear and convincing proof of these actions.

Business Judgment Rule:

If a director or officer makes a poor decision that results in losses, but the decision was made in good
faith and without negligence or malice, they cannot be held liable. Courts will not second-guess
honest decisions made in the best interests of the corporation.

Conclusion:

Directors and officers must act in good faith, avoid conflicts of interest, and exercise proper care in
their roles. When they fail to do so through bad faith or gross negligence, they can be held personally
liable for damages, but they are protected from liability if their actions stem from a reasonable
business judgment made in good faith.

Section 31 of the Revised Corporation Code: Dealings of Directors, Trustees, or

Officers with the Corporation

This provision governs contracts between a corporation and its directors, trustees, officers, or their
close relatives, aiming to prevent conflicts of interest and protect the corporation's interests.

Key Points:

1. Voidable Contracts:
○ Any contract between the corporation and its directors, trustees, officers, or their
relatives (up to the fourth degree) is voidable at the corporation's option unless specific
conditions are met.
 2. Conditions for Validity: The contract is valid if: a) The presence of the director/trustee in the
board meeting wasn't needed for a quorum. b) Their vote wasn't necessary for contract
approval. c) The contract is fair and reasonable. d) For corporations with public interest,
material contracts require at least two-thirds board approval, including a majority of
independent directors. e) For officers, the contract must be previously authorized by the board.
3. Ratification: If the above conditions are not met, the contract can still be ratified by a vote of
stockholders representing two-thirds of the outstanding capital stock or membership, provided
there is full disclosure of the directors' adverse interests.

Self-Dealing Directors or Trustees or Officers

● General Rule: Contracts involving self-dealing are voidable to prevent potential abuse of
power and conflicts of interest.

Problem Case: Y and X Corp.

Context: Y, a director and auditor of X Corp., entered into a dealership agreement to distribute
cement in Mindanao. However, conflicts arose when X Corp. decided not to comply with the
agreement and instead made another exclusive deal with a different distributor.

Analysis of the Dealership Agreement:

1. Validity of the Contract:

○ The dealership agreement is voidable because Y, being a self-dealing director, cannot
act in his own interest at the corporation's expense without fulfilling the required
conditions for validity.
2. Fairness of the Contract:
○ The fixed price of P9.70 per bag for five years was not deemed fair or reasonable,
especially given the expected volatility in cement prices. This indicates a breach of Y's
fiduciary duty to act in the corporation's best interest.
3. Ratification:
○ There is no evidence that stockholders ratified the agreement or were fully informed of
its terms. Without ratification and considering the unfairness of the contract, it cannot be
enforced.

Conclusion:

The dealership agreement between Y and X Corp. is not valid and enforceable due to the self-
dealing nature of the transaction, the lack of fairness in the contract terms, and the absence of proper
ratification by the stockholders. Y’s actions constituted disloyalty to the corporation, and thus he
cannot benefit from the agreement.
Section 32: Contracts Between Corporations with Interlocking Directors

This provision addresses the legality of contracts between corporations that share common directors,
known as interlocking directors, while emphasizing the importance of fairness and the avoidance of
fraud.

Key Points:

1. General Rule:
○ Contracts between two or more corporations with interlocking directors are not
invalidated solely because of the presence of interlocking directors, except in cases of
fraud.
2. Conditions for Validity: To be valid, the contract must:
○ Not involve fraud.
○ Be fair and reasonable under the circumstances.
3. Exception:
○ If an interlocking director has a substantial interest in one corporation (defined as
stockholdings exceeding 20% of the outstanding capital stock) and only a nominal
interest in another, the contract is subject to the rules in Section 31, which require
greater scrutiny to avoid conflicts of interest.

Definitions:

● Interlocking Directors: Individuals who serve on the boards of multiple corporations.

● Substantial Interest: Ownership of more than 20% of a corporation's outstanding capital
stock.

Implications:

● The provision promotes business flexibility by allowing intercorporate contracts as long as

they are fair and free from fraud, ensuring that corporate governance maintains ethical
standards.
● It highlights the need for transparency and careful consideration when significant interests are
involved, to protect minority shareholders and uphold fiduciary duties.

Section 33: Disloyalty of a Director

This section addresses the obligations of a director who misappropriates a business opportunity that
should rightfully belong to the corporation.

Key Points:

1. Duty to Account:
○ If a director uses their position to acquire a business opportunity intended for the
corporation, they must account for and refund any profits obtained from that
opportunity to the corporation.
 2. Doctrine of Corporate Opportunity:
○ This doctrine asserts that opportunities arising from a director's position should be
pursued by the corporation, not the individual director. If a director takes such an
opportunity for themselves, they are obligated to return the profits to the corporation.
3. Risking Personal Funds:
○ The obligation to refund profits applies even if the director used their own funds for the
venture. Their personal investment does not absolve them of the duty to the
corporation.
4. Ratification:
○ The corporation can ratify the director's actions if at least two-thirds (2/3) of the
stockholders, owning or representing the outstanding capital stock, approve the act.
This ratification allows the director to retain the profits if the shareholders agree to it.

Implications:

● This provision reinforces the fiduciary duty of directors to act in the best interests of the
corporation and its shareholders.
● It protects the corporation from potential exploitation by its directors and ensures accountability
for any misuse of their position.

Section 34: Executive, Management, and Other Special Committees

This section outlines the powers and limitations of an executive committee within a corporation, as
well as the ability of the board of directors to create special committees.

Key Points:

1. Creation of Executive Committee:

○ The board may establish an executive committee composed of at least three directors if
permitted by the bylaws.
○ This committee can act on specific matters delegated to it, except for certain limitations.
2. Limitations on Powers: The executive committee cannot:
○ Approve actions requiring shareholders' approval.
○ Fill vacancies on the board.
○ Amend or repeal bylaws or adopt new ones.
○ Amend or repeal resolutions that are non-amendable.
○ Distribute cash dividends to shareholders.
3. Quorum and Decision-Making:
○ The committee acts by majority vote of its members on matters within the competence
of the board.
4. Special Committees:
○ The board can also create temporary or permanent special committees, determining
their composition, powers, and responsibilities.
Application to the Problem:

In the scenario with F Corp., the question is whether the board acted within its powers in creating an
executive committee.

Conclusion:

● The bylaws of F Corp. did not explicitly allow for the creation of an executive committee.
● However, the court found that the board's actions were not necessarily illegal or unlawful:
○ The nature and functions of the executive committee were not clearly defined, making it
difficult to determine if its creation was duplicative of existing roles.
○ The board has the inherent authority to create positions and manage the corporation's
affairs, regardless of the absence of specific provisions in the bylaws.

Summary:

While the bylaws did not explicitly support the establishment of an executive committee, the board of
directors retains the authority to manage the corporation and create necessary positions. Thus, the
actions taken by the board could be upheld despite the lack of specific bylaw provisions regarding the
executive committee.