10. Directors, Trustees and Officers

CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G. HOFILEA

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

DIRECTORS, TRUSTEES AND OFFICERS Board of Directors is the body which:

1. Exercises all powers provided for under the Corporation Code; 2. Conducts all business of the corporation; 3. Controls and holds all property of the corporation.

Its members have been characterized as trustees or directors clothed with a fiduciary character. It is clearly separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003).

Atty. Hofilea There must be a minimum of five (5) directors and a maximum of fifteen (15).

I. DOCTRINE OF CENTRALIZED MANAGEMENT: Powers of Board of Directors (Section 23) Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the

corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

Doctrine of Centralized Management1 o General Rule: The corporations consent is that of its

Board of Directors. o Exception: Specified instances in the Corporation Code

where the particular exercise of the corporate power by the Board, in order to be binding and effective, requires the consent or ratification of the stockholders or members, and also on the part of the State.

o Right of Appraisal: It should be noted that although for efficiency of running of corporate affairs the rule of majority has been adopted in the case of stockholders and members, the Corporation Code still recognizes that in certain instances a dissenting stockholder whose contractual expectation has either been frustrated or altered by the decision of the majority, should be given the right not have to stay within the confines of the corporate contractual relationship. In such instances, the dissenting stockholder is granted an option to withdraw from such relationship, by the exercise of the right of appraisal.

o Courts Attitude Towards the Boards Exercise of Power: The Board of a corporation has sole authority to

1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.



determine policy and conduct the ordinary business of the corporation within the scope of its charter. As long as the board acts honestly and the contract does not defraud or abuse the rights of the minority, the courts will not interfere in their judgments and transactions. The minority members of the board and the minority stockholders cannot come to court upon allegations of want of judgment or lack of efficiency on the part of the majority and change the course of the administration of corporate affairs.

Section 23 expressly provides that the corporate powers of all corporations shall be exercised by the Board of Directors. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).1

o The source of power of the Board of Directors is primarily and directly vested by law; it is not a delegated power from the stockholders or members of the corporation.2

Just as a natural person may authorize another to do certain acts in his behalf, so may the Board of Directors validly delegate some of its functions to individual officers or agents appointed by it.

1 Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Gamboa v. Victoriano, 90 SCRA 40 (1979); Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA 221 (2007); Republic v. Coalbrine International, 617 SCRA 491 (2010). 2 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

o Thus, contracts or acts of a corporation must be made either by the Board of Directors or by a corporate agent duly authorized by the board.

o Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, are held not binding on the corporation.

Atty. Hofilea The one share required to be held by a director is a qualifying share and in practice is ignorable.

A. Rationale for Centralized Management Doctrine:

The raison detre behind the conferment of 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 appointment of corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business. Filipinas Port Services v. Go, 518 SCRA 453 (2007).

Filipinas Port Services v. Go

Facts: Filports Board of Directors (herein respondents) enacted a resolution creating six new positions. People were elected into said 6



offices and given a monthly salary. They also increased the salaries of the Chairman and other officers. Eliodoro Cruz (previous board director) wrote a letter to the Board questioning these decisions, saying that the Board was not authorized to do so by the companys by-laws as required by Section 35 of the Corporation Code. Issue: Whether or not the Board of Directors had the power to create the assailed positions Held: YES. While the by-laws do not expressly provide for the boards authority to create an executive committee, the Court cannot deem that the positions created automatically formed an executive committee. The executive committee referred to in Sec. 35 means a committee that has equal powers with the board and must be distinguished from other committees that can be created and controlled by the board. In this case, the positions created are ordinary positions were created in accordance with the regular business of Filport; thus, it is entirely within the boards power to create them and provide remuneration therefor. Plus, Cruz himself moved to create the positions of AVPS for Finance, Operations, and Administration during his incumbency as Filport president. Doctrine: As per Section 23 of the Corporation Code, the corporate powers of all corporations formed under the code shall be exercised by the board, and all property owned and business conducted by the corporation shall also be held and controlled by the board. The board is the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter. However, the authority of the board is restricted to the

management of the corporations regular business affairs, unless more extensive power is expressly conferred.

A corporation is an artificial being and can only exercise its powers and transact its business through the instrumentalities of its Board of Directors, and through its officers and agents, when authorized by resolution or by its by-laws. Examples:

o Consequently, when legal counsel was clothed with authority through formal board resolution, his acts bind the corporation which must be held bound the actuations of its counsel of record. De Liano v. Court of Appeals, 370 SCRA 349 (2001).

o The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a special act of the board of directors. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).

B. Theories on Source of Board Power

1. Theory of Original Power The source of the power of the Board comes directly from the law, and the Board is originally and directly granted corporate power as the embodiment of the corporation. This theory has no democratic notions but actually is more akin to the principles of autocracy.

a. Accordingly there is little for the stockholders to do beyond electing directors, making by-laws and exercising certain other special powers defined by law.



These notions are in accordance with the mandate of Section 23 of the Corporation Code.

b. Under the theory of original power, the Board is vested with the legal or naked title to the properties and business enterprise of the corporation, being viewed as a medium or the corpus, with the stockholders being considered as the beneficiaries, and thereby a fiduciary relationship established between the Board as the trustee, and the stockholders as the beneficiaries.

c. Atty. Hofilea the Board of Directors vis--vis the stockholders have a fiduciary/trust relationship.

2. Theory of Delegated Power the authority exercised by the Board is viewed as delegated to them by stockholders. Under such theory, the source of primary theory can override the decisions of its delegates.

a. Such theory promotes the notion of agency in the corporate set-up, where the real sources of power are the stockholders or members, and the representatives thereof would be the Board. It is also consistent with notions in Property Law that as a general rule, the owners exercise ultimate power and disposition over the subject matter to which he holds title. The stockholders or members are the real owners of the corporation, and to them the corporate powers must belong, and that the Board of Directors or Trustees merely act as their agents or representatives.

Delegated Powers Coming from the Stockholders: The Board of Directors is a creation of the stockholders and controls and directs the affairs of the corporation by delegation of the

stockholders. By drawing themselves the powers of the corporation, they occupy positions of trusteeship in relation to the stockholders. Angeles v. Santos, 64 Phil. 697 (1937).

Angeles v. Santos

Facts: A complaint was instituted by Angeles, de Lara, Bernabe, as stockholders and member of the minority of the Board of Directors, for and in behalf of the corporation, Paraaque Rice Mill, Inc., against Santos, Mayuga, Pascual, and Rodriguez who constitute the majority of the Board of Directors. Generally, the allegations consists of denial of Santos as president of the Corporation to give access to the corporations books which was then necessary because (1) de Lara was conducting an investigation, (2) such books should have been in the hands of the treasurer (Bernabe) and not the president, and (3) that the defendants had been disposing of the assets of the corporation without authority from the Board. The court issued an ex parte order of receivership appointing Melchor de Lara as receiver but the defendants objected claiming that the Court had no jurisdiction over the Paraaque Rice Mill, Inc., because it had not been include as party defendant in this case and that, therefore the court could not properly appoint a receiver of the corporation pendente lite. Issue: Whether or not the trial court was without jurisdiction to appoint a receiver and should have dismissed the case Held: NO. That the action was properly instituted by the plaintiff as stockholders for and in behalf of the corporation Paraaque Rice Mill, Inc. and the lower court committed no reveiwable error in appointing a



receiver of the corporation pendente lite. Doctrine: Where a majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that intra-corporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress the injuries of the minority stockholders against the wrongdoing of the majority.

One of the most important rights of a qualified shareholder or member is the right to vote for the directors or trustees who are to manage the corporate affairs. The right to choose the persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes and goals of the corporation may be achieved. Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law. Tan v. Sycip, 499 SCRA 216 (2006).

Tan v. Sycip

Facts: Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular members, who also

constitute the board of trustees. During the annual members meeting held on April 6, 1998, there were only eleven (11) living member-trustees, as four (4) had already died. Out of the eleven, seven (7) attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees. Issue: Whether or not the meeting was null and void for lack of quorum Held: NO. Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum. Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. The dead members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members meeting, conducted with six members present, was valid (as to other resolutions). HOWEVER, the election of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members (where a majority of the Board were present), not of the board of trustees. We cannot ignore the GCHS bylaw provision, which



specifically prescribes that vacancies in the board must be filled up by the remaining trustees who must sit as a board in order to validly elect the new ones. Doctrine: Membership in and all rights arising from a non-stock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. The determination of whether or not dead members are entitled to exercise their voting rights (through their executor or administrator) depends on the articles of incorporation or bylaws.

Atty. Hofilea if you push the point that the directors are the agents of the stockholders, there may be complications because in agency, the principal can override the agent. However, in the case of corporations, the stockholders (principal) are not allowed to overrule or supplant the decisions of the Board of Directors (agent).

C. Board Must Act As a Body (Section 25) Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings.

Atty. Hofilea the secretary as a matter of policy should not also be the treasurer. This was laid down via a SEC rule and not found in the Corporation Code.

General Rule: The grant of corporate power is to the board as a body, and not to the individual members. The corporation can be bound only by the collective act of the board.

o The rationale for this rule is the public policy, that it makes better management practice for the board to sit down, to discuss corporate affairs, and decide on the basis of their consensus.1

1 The SEC has opined that directors and trustees can only exercise their power as a board, not individually. They shall meet and counsel each other and any determination affecting the corporation shall be arrived at only after



Exception: A corporation can be bound even by the act of its officers, but always because of the act or default of, or as an implied authority coming from the Board.

1. Directors or Trustees Cannot Act Individually to Bind the Corporation

Contracts or acts of corporation must be made either by the Board of Directors or by a corporate agent duly authorized by the Board. Absent such valid delegation, the rule is that the declaration of an individual director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, are held not binding on the corporation.1

2. Ratification by the Board does not need formal meeting A corporation, through its Board of Directors, should act in the

manner and within the formalities prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the Board of Directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183 (1995).

consultation at a meeting of the board attended by at least a quorum. SEC Opinion, 10 March 1972, SEC FOLIO 1960-1976, at p. 526. 1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

A Director-Treasurer has no power to bind the company even in transactions that are pursuant to the primary purpose its corporation, especially when the by-laws specifically provided that the acts entered into can only be done by the Board of Directors. Ramirez v. Orientalist Co., 38 Phil. 634 (1918).

o The implication is clear in reference to outsiders dealing with the corporation, that not all corporate actions need formal board approval. The board need not come together and act as a body to perform a corporate act. In many cases no act is required of the members of the board in order to bind the corporation; the fact that they know of a particular corporate transaction or contract, and they stayed silent about it, or worse, they allowed the corporation to gain by the transaction or contract, would already bind the corporation.2

Between the act of the Board as a body affirming informally the perfection of a contract entered into in behalf of the corporation by a senior officer, and the subsequent formal board resolution rejecting the same contract, the former must prevail under the doctrine of estoppel. Acua v. Batac Producers Cooperative Marketing Assn., 20 SCRA 526 [1967]).

Exercise of the powers of the Board of Directors may either be express and formal through the adoption of a board resolution in a meeting called for the purpose, or it may be implied where the Board collectively and knowingly allows the President to enter into important contracts in the pursuit of the business of




the corporation. Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 (1967).

Board of Liquidators v. Heirs of Maximo M. Kalaw

Facts: National Coconut Corporation (NACOCO) through its Kalaw entered into several contracts involving copra trading activities which became unprofitable. NACOCO suffered losses NACOCO herein alleges that under the by-laws of the corporation, the general manager only has the power to perform or execute on behalf of the corporation upon prior approval of the Board all contracts necessary and essential to the proper accomplishment for which the Corporation was organized. Issue: Whether or not Kalaw and the rest of the board were guilty negligence and bad faith and/or breach of trust for having entered into the unprofitable contracts Held: NO. Under the circumstances, Kalaws acts were valid corporate acts. Evidence shows that it was the practice of the corporation to allow its general manager to negotiate contracts, in its copra trading for and in NACOCOs behalf, without prior board approval. The Court ruled that if the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But [in this case] the board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval Doctrine: There are 2 ways by which corporate actions may come about through its Board of Directors:

1. The board may empower or authorize the act or contract

2. Ratification from the board

3. Directors or Trustees cannot bind the Board in a Stockholders or Members Meeting

See Tan v. Sycip, 499 SCRA 216 (2006). 4. Directors or Trustees Cannot Attend or Act by Proxy or

Alternate1 On account of their responsibility to the corporation, and by the

fact that they were elected into the Board based on their personal qualifications, business acumen and background, directors or trustees cannot validly act by proxy.

The SEC has ruled that alternate directors are not allowed by law, since directors are required to exercise their judgment and discretion in running the affairs of the corporation and cannot be substituted by others because their position is one of trust and confidence.2

D. Effects of Bogus Board: The acts or contracts effected by a bogus board would be void pursuant to Article 1318 of Civil Code3 because of the lack of consent. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997).

1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 SEC Opinions, dated 27 May 1970 and 25 April 2985, addressed to Polyphosphates, Inc. 3 Article 1318. There is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. (1261)



E. Executive Committee (Section 35) Section 35. Executive committee. The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.

Ultimate power must remain with the Board of Directors, and it would be against corporate principle to empower the Executive Committee with authority that the Board itself cannot countermand.1

It is within the power of the Board of Directors to authorize any person or committee to undertake corporate acts. The board has power to constitute even an executive committee, even when no such committee is provided for in the articles and by-laws of the corporation. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).


General Rule: The Board can overrule the decisions of an executive committee.

Exception: UNLESS, such contract has been executed by the third party involved, or rights have already vested on third parties.

II. BUSINESS JUDGMENT RULE:

Business Judgment Rule The corporate principle recognizing corporate power and competence to be lodged primarily with the Board of Directors.

Established is the principle that when a resolution is passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them," adding that "[i]t is a well-known rule of law that questions of policy or management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment [for that] of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts." Montelibano v. Bacolod-Murcia Miling Co., 5 SCRA 36 (1962).

Montelibano v. Bacolod-Murcia Miling Co., Inc.

Facts: The Bacolod-Murica Milling entered into Milling Contracts with Montelibano and Gonzaga & Co. (planters). The contract provided that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. This was amended to give the planters an



increased participation of 60%. Years later, Bacolod denied the 5% share increase of Petitioner citing that it had no consideration, thus its considered a donation a ultra vires act. Issue: Whether or not the Resolution is valid and binding on the corporation and the planters Held: YES. The amended contract has the same consideration as the main contract at it was just attached to the latter. there is no rational explanation for the company's assenting to the further concessions asked by the planters before the contracts were signed, except as further inducement for the planters to agree to the extension of the contract period, to allow the company now to retract such concessions would be to sanction a fraud upon the planters who relied on such additional stipulations. As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. Such is not an ultra vires act. Doctrine: The court also reiterated the rule that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment with that of the Board of Directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are nor reviewable by the courts.

Theoretical Basis for the Business Judgment Rule: The

recognition of the corporation merely as an association of individuals who thereby do not give up through the medium of

the corporation their management prerogatives/control on business matters over to the state. PSE v. Court of Appeals, 281 SCRA 232 (1997).

PSE v. Court of Appeals

Facts: Puerto Azul Land Inc. (PALI), a domestic real estate corporation, made an application to the SEC for the purpose of having its stocks listed in order for it to be sold in the public. A year after a permit to sell was granted, heirs of the former President Marcos claimed that President Marcos was the legal owner of certain properties forming part of the Puerto Azul Beach Hotel Complex which PALI claims to be among its assets. The PSE, taking into consideration these claims, rejected the application for listing. In response, PALI sought the decision of the SEC which then reversed the decision of the PSE and ordered the latter to list the PALI stocks. Issue: Whether or not the SEC acted arbitrarily in reversing the decision of the PSE and ordering the listing of PALI stocks Held: YES. The PSE is engaged in a business imbued with high public interest and is under the control and supervision of the SEC. Though under such control and supervision by the SEC, the PSE cannot be questioned on matters of internal management, policies, and administration in the absence of bad faith. In fact, in the decision rendered by the board of the PSE, was found of good standing by the court. PSE was correct in denying the listing of the PALI stocks since there were various allegations against the listing. Taking all these into consideration, the PSE deemed that PALI stocks are not for the best



interest of the investing public and will deteriorate the high standards and goodwill upheld by the PSE. Doctrine: Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are reviewable by the courts. A. BJR First Branch: Resolutions approved, contracts and transactions entered into, by the Board of Directors within the powers of the corporation cannot be reversed by the Courts, not even on the behest of the stockholders of the corporation.1

The Board of Directors is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts. Estacio v. Pampanga I Electric Cooperative, Inc., 596 SCRA 542 (2009).

Questions of policy and management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. Cua, Jr. v. Tan, 607 SCRA 645 (2009).

No court can, as an integral part of resolving the issues between squabbling stockholders, order the corporation to undertake certain corporate acts, since it would be in violation of the business judgment rule. Ong Yong v. Tiu, 401 SCRA 1 (2003),


citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p. 288.

Ong Yong v. Tiu

Facts: The Tiu family members are the owners of First Landlink Asia Development Corporation (FLADC). One of the corporations projects is the construction of Masagana Citimall in Pasay City. However, due to financial difficulties (they were indebted to PNB for P190 million), the Tius feared that the construction would not be finished. So to prevent the foreclosure of the mortgage on the two lots where the mall was being built, they invited the Ongs to invest in FLADC. The two parties entered into a Presubscription Agreement whereby each of them would hold 1,000,000 shares each and be entitled to nominate certain officers. The Tius contributed a building and two lots, while the Ongs contributed P100M. Two years later, the Tuis filed for rescission of the Presubscription Agremement because the Ongs refused to issue them their shares of stock and from assuming positions of VP and Treasurer to which they were entitled to nominate. The Ongs contended that they could not issue the new shares to the Tius because the latter did not pay the capital gains tax and the documentary stamp tax of the lots. And because of this, the SEC would not approve the valuation of the property contribution of the Tius. The Court of Appeals ordered liquidation of FLADC to enforce rescission of the contract which was granted only to prevent squabbles and numerous litigations between the parties.



Issue: Whether or not the Court of Appeals erred in ordering liquidation Held: YES. The Tius also argued that the rescission would not result into liquidation because their case is actually a petition to decrease the capital stock. As provided in Section 122 of the Corporation Code, distribution of any of its assets or property is permitted only after lawful dissolution and payment of all debts and liabilities. An exception is by decrease of capital stock. So the Tius claim that they do not violate the liquidation procedures under the law. They were asking the court to compel FLADC to file a petition with SEC to approve the decrease in capital stock. The Supreme Court ruled that it has no right to intrude into the internal affairs of the corporation so it cannot compel FLADC to file the petition. Decreasing a corporations authorized capital stock is an amendment of the Articles of Incorporation, a decision that only the stockholders and the directors can make. Doctrine: See above. B. BJR Second Branch: General Rule: Directors and officers acting within such business judgment cannot be held personally liable for the consequences of such acts. However, when the directors or trustees violate their duties, they can be held personally liable. This is consistent with the Law on Agency.1

Exceptions: 1. When the director willfully and knowingly vote for patently

unlawful acts of the corporation;2

1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Section 31, Corporation Code.

2. When he is guilty of gross negligence or bad faith in directing the affairs of the corporation;3

3. When he acquires any personal or pecuniary interest in conflict with his duty as such directors.4

The above-enumerated exceptions when directors, trustees and corporate officers may be held personally liable for corporate acts, provide also the three (3) instances when courts are authorized to supplant the decision of the board, which is deemed to be biased and may prove detrimental to the corporation. Examples:

Directors and officers who purport to act for the corporation, keep within the lawful scope of their authority and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts, which are properly attributed to the corporation alone. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).

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. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or

3 Ibid. 4 Sections 31 and 34, Corporation Code.



interest or ill-will partaking of the nature of fraud. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).

III. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS

The doctrine of estoppel or ratification (as well as the doctrine of apparent authority), is premised on a reliance in good faith by a third party that the representative of the corporation has proper authority as generally derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by habit, custom, acquiescence in the general course of business. The nature of the transaction and the circumstances under which the transaction is pursued are looked into by the courts to determine the proper application of the estoppel doctrine.1

A. Theory of Estoppel or Ratification

The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered into by its officer with a third party who in good faith, relied on the authority of the former as manager to act on behalf of the corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).

Lipat v. Pacific Banking Corp.


Facts: Spouses Lipat (Alfredo and Estelita) owns Belas Export Trading (BET), a single proprietorship engaged in garment manufacturing in Quezon City. The Lipats also owned the Mystical Fashions in the United States, which sells goods imported from the Philippines through BET. Estelita designated her daughter, Teresita, to manage BET in the Philippines while she was managing Mystical Fashions in the United States. In order to facilitate the convenient operation of BET, Estelita executed a special power of attorney appointing Teresita as her attorney-in-fact to obtain loans. By virtue of this SPA, Teresita obtained a sizeable loan from Pacific Bank. Three months after the loan, BET was incorporated into a family corporation named Belas Export Corporation (BEC), engaged in the same business and utilized the same properties. The loan was restructured in the name of BEC and secured with Lipats property. BEC defaulted, and the bank foreclosed on the real mortgage and Eugenio Trinidad was the highest bidder. The spouses Lipat claim that the loan obtained by Teresita were ultra vires acts because they were executed without the requisite board resolution of the Board of Directors of BEC. Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot evade payments because they and the BEC are one and the same, the latter being a family corporation. Respondent Trinidad further claimed that he was a buyer in good faith and for value and that petitioners are estopped from denying BECs existence after holding themselves out as a corporation. Issue: Whether or not petitioners are estopped from asserting that the acts were ultra vires for not being supported by Board Resolutions.



Held: YES. Firstly, it could not have been possible for BEC to release a board resolution no business or stockholders meetings were conducted nor were there election of officers held since its incorporation. In fact, not a single board resolution was passed by the corporate board and it was Estelita Lipat and/or Teresita Lipat who decided business matters. Secondly, the principle of estoppel precludes petitioners from denying the validity of the transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET and BEC. Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the manager of both BEC and BET and had been deciding business matters in the absence of Estelita Lipat. Further, the export bills secured by BEC were for the benefit of Mystical Fashion owned by Estelita Lipat. Hence, Pacific Bank cannot be faulted for relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. Doctrine: While the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in its board of directors, subject to the articles of incorporation,

by-laws, or relevant provisions of law, yet, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees, or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business. Apparent authority, is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.

In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which it relates. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973).



The ratificatory act that would bind the corporation would have to come from the Board of Directors or a properly authorized representative.1

o The admission by counsel on behalf of the corporation of the latters culpability for personal loans obtained by its corporate officers cannot be given legal effect when the admission was without any enabling act or attendant ratification of corporate act, as would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).

o Acts done in excess of corporate officers scope of authority cannot bind the corporation. However, when subsequently a compromise agreement was on behalf of the corporation being represented by its President acting pursuant to a Board of Directors resolution, such constituted as a confirmatory act signifying ratification of all prior acts of its officers. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004).

B. Doctrine of Laches or Stale Demands

The principle of laches or stale demands provides that the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier, or the negligence or omission to assert a right within a reasonable time, warrants a presumption


that the party entitled to assert it either has abandoned it or declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).

C. Doctrine of Apparent Authority: Article 1883, Civil Code.

If a corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts, it will be estopped to deny such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents. Francisco v. GSIS, 7 SCRA 577 (1963).2

o The Doctrine of Apparent Authority must proceed from the nature of the position held by the corporate officer in question in that he represents the will of the corporation through the Board of Directors.3

Francisco v. GSIS

Facts: Trinidad J. Francisco, in consideration of a loan, mortgaged parcel of land with 21 bungalows known as Vic-Mari Compound. In January 1959, GSIS extrajudicially foreclosed the mortgage on the ground that up to that date the Francisco was in arrears on her monthly installments. On the same date, Atty. Vicente Franciscos (father of Trinidad) request was approved by the GSIS board which was sent in the form of a telegram with the signature of Rodolfo Andal, general manager of GSIS. The defendant received the said amount however it did not, take over the administration of the compound as agreed upon.

2 United Coconut Planters Bank v. Planters Products, Inc., 672 SCRA 285 (2012). 3 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.



Thus, the Franciscos continued to administer the same, but remitting the proceeds to the GSIS. Subsequently, letters were sent asking the plaintiff for a proposal for the payment of her indebtedness, since the one-year period for redemption had expired. In reply, Atty. Francisco protested against this, saying that they have already accepted his offer and that he has already commenced his part on the terms of his contract. Issue: Whether or not the compromise made is binding upon defendant corporation. Held: YES. The compromise made through the telegrams is binding. There was apparent authority that of the GM, Andal. Even assuming there was a mistake in the telegram, GSIS notified the Franciscos too late and only after having received several remittances. There was also notice to the GSIS, because Vicente attached the disputed telegram in replying to that which was sent by GSIS. Notice to an officer with regard to matters within his authority is tantamount to notice to the corporation. There was thus implied ratification. Doctrine: Persons transacting with corporations need not disbelieve every act of its officers, especially those regular on their face. They are entitled to rely upon external manifestations of corporate consent. And if a corporation knowingly permits its officers to do acts with apparent authority, it is estopped from denying such authority.

For the Doctrine of Apparent Authority to apply, the party invoking the same must prove the following:1

1. The acts of the purported corporate officer or agent justifying belief in the agency by the principal corporation.

2. Knowledge thereof by the principal corporation (i.e. its Board of Directors) which is sought to be held; and

3. Reliance thereon by the principal corporation (i.e. its Board of Directors) consistent with ordinary care and prudence.

Under Article 1910 of the New Civil Code,2 acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying themThus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the Corporation. Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc., 436 SCRA 235 (2004).

o Atty. Hofilea what was unique here, which the presidents action was not binding, is that there was a limit to the authority of the president to sell in connection with the land.

1 Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc., 436 SCRA 235 (2004) as cited in Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Article 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority. As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly. (1727)



Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc.

Facts: Roxas Electric and Construction Company Inc (RECCI) owned 2 parcels of land, Lot B1 and Lot B2. RECCIs Board of Directors issued a resolution authorizing the corporation through its President, Roberto Roxas, to sell B2 and to sign and execute the necessary documents. Roxas sold B2 to Woodchild Holdings Inc (WHI) through its President, Jonathan Dy. In the Deed of Absolute Sale, Roxas also granted WHI a right of way over B1 and an option to purchase certain portions thereof in case the need arose as earlier requested by WHI. After Roxas died, WHI demanded that RECCI sell a portion of B1 but it refused claiming it never authorized Roxas to do so. Issue: Whether or not RECCI is estopped from claiming that Roxas had not authority to sell B1. Held: NO. For the principle of apparent authority to apply, the WHI was burdened to prove the following: (a) the acts of RECCI justifying belief in the agency by the WHI; (b) knowledge by RECCI which is sought to be held; and, (c) reliance thereon by WHI consistent with ordinary care and prudence. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent. There is no evidence of specific acts made by the RECCI showing or indicating that it had full knowledge of any representations made by Roxas to WHI that it had authorized Roxas to grant WHI an option to buy B1, or to create a burden or lien thereon. There is no implied ratification when RECCI received the P5M purchase price for B2.

Doctrine: For an act of the principal to be considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name.

Ratification is based on waiver (intentional relinquishment of a known right). Ratification cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent. If writing is required to grant an authority to do a particular act, ratification of that act must also be in writing.

The general rule remains that, in the absence of authority from

the Board of Directors, no person, not even its officers, can validly bind a corporation. If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from denying such officers authorityUnmistakably, the Courts directive in Yao Ka Sin Trading is that a corporation should first prove by clear evidence that its corporate officer is not in fact authorized to act on its behalf before the burden of evidence shifts to the other party to prove, by previous specific acts, that an officer was clothes by the corporation with apparent authority. Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009).

Westmont Bank v. Inland Construction and Dev. Corp.

Facts: Inland Construction and Development Corp. executed real estate mortgages over its 3 properties and 3 promissory notes for the loans it



obtained from Westmont Bank. A Deed of Assignment, Conveyance and Release was executed by Aranda (President of Inland) wherein he assigns all his rights and interest in Hanil-Gonzalez Corp in favour of Abrantes. In the deed, the obligations of Inland (including that with Westmont Bank) shall be transferred to Abrantes. Westmont Banks Account officer, Calo, signed for its conformity to the deed. Inland then filed a complaint for injunction in the Regional Trial against Westmont Bank when the latter foreclosed the properties mortgaged by Inland. In their Answer, the bank claimed that it had no knowledge of such assignment of obligation and did not conform to it. Issue: Whether or not Westmont Bank is bound by the deed of Assignment Held: YES. Calo (signee in the deed of assignment) was the one assigned to transact on behalf of the Bank with respect to the loan transactions with Inland. Because of this, it is presumed that he had the authority to sign for the bank in the Deed of Assignment. The Court stated that if a corporation consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority it will be estopped from denying such officers authority. The burden of proof is set upon the Corporation. In this case the Bank failed to discharge its primary burden of proving that Calo was not authorized to bind it. Doctrine: The Court stated that if a corporation consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority it will be estopped from denying such officers authority. The burden of proof is set upon the Corporation.

o If a corporation knowingly permits one of its officers to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. Soler v. Court of Appeals, 358 SCRA 57 (2001); Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000)

o The authority of a corporate officer dealing with third persons may be actual or apparent . . . the principal is liable for the obligations contracted by the agent. The agents apparent representation yields to the principal's true representation and the contract is considered as entered into between the principal and the third person. First Philippine Intl Bank v. Court of Appeals, 252 SCRA 259 (1996).

Victim Standing for doctrine to apply the doctrine of apparent authority cannot apply to benefit a party who deals with the corporation aware of the corporate representatives lack of authority.1

o Apparent authority is determined only by the acts of the principal and not by the acts of the agent. There can be no apparent authority of an agent without acts or conduct on the part of the principal; such acts must have been known and relied upon in good faith as a result of the exercise of reasonable prudence by a third party as claimant and such acts or conduct must have




produced a change of position to the third partys detriment.

o Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997).

Apparent authority may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act, or, in other words the apparent authority to act in general with which is clothes them; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003). Examples:

When an officer in a banking corporation arrange a credit line agreement and forwards the same to the legal department at its head officer, and the bank did no disaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004).

A corporation cannot disown its Presidents act of applying to the bank for credit accommodation, simply on the ground that it never authorized the President by the lack of any formal board resolution. The following placed the corporation and its Board of Directors in estoppel in pais: Firstly, the by-laws provides for the powers of the President, which includes, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks; secondly, there were already previous

transaction of discounting the checks involving the same personalities wherein any enabling resolution from the Board was dispensed with and yet the bank was able to collect from the corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).

Per its Secretarys Certificate, the foundation had given its President ostensible and apparent authority to inter alia deal with the respondent Bank, and therefore the foundation is estopped from questioning the Presidents authority to obtain the subject loans from the respondent Bank. Lapulapu Foundation, Inc., v. Court of Appeals, 421 SCRA 328 (2004).

A verbal promise given by the Chairman and President of the company to the general manager and chief operating officer to give the latter unlimited sick leave and vacation leave benefits and its cash conversion upon his retirement or resignation, when not an integral part of the companys rules and policies, is not binding on the company when it is without the approval of the Board of Directors. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).

The acceptance of the offer to purchase by the clerk of the branch of the bank, and the representation that the manager had already approved the sale (which in fact was not true), cannot bind the bank to the contract of sale, it being obvious that such a clerk is not among the bank officers upon whom putative authority may be reposed by a third party. There is, thus, no legal basis to bind the bank into any valid contract of sale with the buyers, given the absolute absence of any approval or consent by any responsible officer of the bank. DBP v. Ong, 460 SCRA 170 (2005).



Rationale for the Doctrine of Apparent Authority: Naturally, the third person has little or no information as to what occurs in corporate meeting; and he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Solutas authority. Indeed, the public has the right to rely on the trustworthiness of bank officers and their acts. Associated Bank v. Pronstroller, 558 SCRA 113 (2008).

Associated Bank v. Pronstroller

Facts: The Spouses Vaca executed a Real Estate Mortgage in favor of Associated Bank over their parcel of residential land in Green Meadows Subdivision. Eventually, the property was foreclosed and sold at public auction with Associated Bank as the highest bidder. However, the Vacas commenced an action for the nullification of the real estate mortgage and the foreclosure sale. Pending its resolution in the Supreme Court, Associated Bank negotiated with the Spouses Pronstroller through Atty. Jose Soluta, the banks Vice President and member of its Board of Directors. Letter agreements were executed whereby the Spouses Pronstrollers would give a downpayment (first letter agreement), and then given an extension to pay the balance which would be given upon delivery of the property subsequent to the resolution of the Vaca case with such property being free from occupants (embodied in the second

letter agreement). Later, the bank reorganised its management and Atty. Dayday replaced Atty. Soluta. Atty. Dayday informed Spouses Pronstroller that their deposit would be forfeited because the second letter agreement was a mistake because Atty. Soluta had no authority to give an extension. Issue: Whether or not Associated Bank is bound by the Letter-Agreement signed by Atty. Soluta under the doctrine of apparent authority. Held: YES. Undoubtedly, the Associated Bank had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. Doctrine: The doctrine of apparent authority, with special reference to banks, had long been recognized in this jurisdiction. Apparent authority is derived not merely from practice. Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.



Atty. Hofilea the by-laws do not always have all the details of the officers but it is a good place to start to determine whether the officer you are dealing with has authority or not to deal with you regarding the matter. Absent this, you can ask the company to provide you with a Board Resolution authorizing a particular person to deal with you and under what limitations.

IV. Qualifications of Directors/Trustees (Sections 23 and 27) Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

1. Qualifications

The fact that a director is only holding the share as a nominee of another person does not disqualify him as a director. What the law requires is that he has legal title to the share. Under the old Corporation Law it was required that every director must own "in his own right" at least one share of the capital stock of the corporation. Under the present Section 23 of the Corporation Code, it requires only that the share of a director "shall stand in his name on the books of the corporation."1

The 1-share requirement is a continuing requirement 2. Rules on Additional Qualifications and Disqualifications The qualifications provided for in the law are only minimum

qualifications; additional qualifications and disqualifications can be provided for but only by proper provisions in the by-laws of the corporation. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).

o Atty. Hofilea other qualifications may be found from the laws (e.g. Philippine resident, possess legal capacity). As a general rule, citizenship is not a requirement to be a director of a corporation. However, it may be a requirement in cases directors of corporate public utilities operating on a franchise.

Gokongwei, Jr. v. Securities and Exchange Commission

Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a president and stockholder of Robina Corp. and Consolidated Foods Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice




Cream, Poultry and Hog Feeds and many more), filed a petition for declaration of nullity of amended by-laws, cancellation of certificate of filing of the amended-by laws, injunction and damages against the majority of the members of the Board of Directors of the SMC based on the following grounds:

Corporations have no inherent power to disqualify a stockholder from being elected as director depriving him of his vested right because he is an officer of a competitor company.

The corporation has been investing corporate funds in other corporations and business outside of the primary purpose of the corporation

Issue: Whether or not the corporation has the power to disqualify a competitor from being elected to the board of directors as a reasonable exercise of corporate authority Held: YES. Any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least 2/3 of the subscribed capital stock of the corporation. It cannot be said that prior to this, Gokongwei has a vested right to vote and be voted for in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. Every person who buys a stock with a corporation impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law. Doctrine: The authority of a corporation to prescribe qualifications of

directors is expressly conferred by law. Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. And under section 21 of the Corporation Law, a corporation may prescribe in its by-laws the qualifications, duties and compensation of directors, officers and employees ...

A director must own at least one share of stock. Pea v. Court of Appeals, 193 SCRA 717 (1991).1

The law does not require that a Vice-President be a stockholder. Baguio v. Court of Appeals, 226 SCRA 366 (1993).

Beneficial ownership under VTA no longer qualifies. Lee v. Court of Appeals, 205 SCRA 752 (1992).

Lee v. Court of Appeals

Facts: Herein petitioners were served summons in accordance with a third party complaint filed against Alfa Integrated Textile Mills of which Lee and Lacdao was president and vice president respectively. They claim that the summons for Alfa was erroneously served upon them considering that the management of Alfa had been transferred to Development Bank of the Philippines. They claim that the voting trust agreement between Alfa and DBP vests all management and control of Alfa to the DBP. DBP claimed that it was not authorized to receive summons on behalf of Alfa since DBP had not taken over the company which has a separate and distinct corporate personality and existence.

1 Also Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).



Issue: Whether or not the execution of the voting trust agreement by Lee and Lacdao whereby all their shares to the corporation have been transferred to the trustee deprives the stockholder of their positions as directors of the corporation. Held: YES. Lee and Lacdao, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through assignment and delivery in favor of DBP, as trustee. Consequently, Lee and Lacdao ceased to own at least one outstanding share in their names on the books of Alfa as required under Section 23 of the new Corporation code. They also ceased to have anything to do with the management of the enterprise, they ceased to be directors. Hence, the transfer of their shares to the DBP created vacancies in their respective positions as directors of Alfa. In the absence of a showing that DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of Alfa, Lee and Lacdao could no longer deemed to retain their status as officers of Alfa. Hence, the service of summons to Alfa through Lee and Lacbao was invalid. Doctrine: A voting trust agreement results in the separation of the voting rights of a stockholder from his other rights. This may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other. With the omission of the phrase "in his own right" [in the new corporation code] the election of trustees and other persons who in fact are not the beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized. Hence, this is a clear indication that in order to be eligible as a

director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation.

3. Rule on Corporate Stockholders1 In cases of corporate stockholders or corporate members of a

corporation, such entities cannot be qualified to be elected as such to the board of the corporation. A corporation cannot act by itself but only through its officers and agents, and as such a corporation cannot attend personally board meetings of the corporation wherein it is elected as a director, but only through representative or a proxy, which would contravene the established rule that a director may not be represented by a proxy at a meeting of the board.2

In the case of corporate stockholders or corporate members, their representation in the board can be achieved by making their individual representatives trustees of the shares or membership, which would then make them stockholders or members of record, and thereby qualified to be elected to the board, but at the same time maintaining legal responsibility of trustees to the corporate stockholder or members.

4. Disqualifications Section 27. Disqualification of directors, trustees or officers. No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election

1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Section 26, Corporation Code.



or appointment, shall qualify as a director, trustee or officer of any corporation.

Punishable by imprisonment or a period exceeding 6 years: regardless of your actual sentence, so long as the crime was punishable by a period exceeding 6 years, you will be disqualified once convicted.

Conviction of a violation of the Corporation Code: since it is only the Court who can determine if you have violated the Code, then you probably need to have been convicted of such violation in order to be considered disqualified.

V. Election of Directors and Trustees A. Directors (Sections 24 and 26) Section 24. Election of directors or trustees. At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the

number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.

Entitle to Vote Do you include in counting, for purposes of a majority present in a meeting, those delinquent stockholders? Does this phrase apply to stock corporations?

By ballot it is not necessary that a majority of the stockholders agree that the election be by ballot. So long as one (any) shareholder requests for the election to be conducted by ballot, then such should be done.

Atty. Hofilea the number of seats for directors must be maintained. It cannot be altered beyond that prescribed by the articles of incorporation. However, in reality, if no one objects



then the stockholders can choose to just fill some of the seats and not all.

1. Cumulative Voting1 Cumulative Voting v. Straight Voting

o Cumulative voting is a voting procedure wherein a stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.

o Straight voting allows a simple majority of the shareholders to elect the entire board of directors leaving the minority shareholders unrepresented. Under straight voting, each shareholder simply votes the number of shares he owns for each director nominated.

Section 24 of the Corporation Code expressly provides for cumulative voting in the election of the directors of stock corporations. The provisions for cumulative voting are mandatory.

The policy of cumulative voting is to allow minority stockholders the capacity to be able to elect representatives to the board of directors.2

o No exception is provided for in Section 24 so that the articles may not provide for restriction or suppression of the principle of cumulative voting in stock corporations.

1 Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Glazer, Glazer, & Grofman, Cumulative Voting In Corporate Elections: Introducing Strategy into the Equation, 35 S. CAROLINA L. REV. 295 (1934).

Cumulative voting is reckoned to be equitable since it allows stockholders the opportunity for representation on the board of directors in proportion to their holdings. Such minority representation is believed not to interfere with the principle of majority rule since the number of directors elected by each group will vary with its proportion of ownership.

o On the other hand, the system of cumulative voting has been criticized by other sectors because in tends to partisan representation in the board, which is inconsistent with the notion that a director properly represents all interest groups in the corporate setting.

2. Report on Election of Directors, Trustees and Officers

Section 26. Report of election of directors, trustees and officers. Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission.

The provisions of Section 26 of the Corporation Code are deemed to be mandatory and jurisdictional. And the determination of who are the legal directors and officers of the



corporation is conditioned upon the reports submitted to the SEC pursuant to said section.1

Since under Section 26 of the Corporation Code all corporations are mandated to submit a formal report to the SEC on the changes in their directors and officers, then only those dire

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10. Directors, Trustees and Officers

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