Quiz No.

13 – The Revised Corporation Code (Board of Directors to Stockholders)

I
The Board of Directors of Seiko Corporation, acting on a standing authority of the stockholders
to amend the by-laws, so amended the by-laws disqualifying any of its stockholders, who is also
a stockholder and director of a competitor, from being elected to the board of directors. Assunta
Estrada, a stockholder holding shares sufficient to assure her of a seat in the board, filed a
petition with the Securities and Exchange Commission for the declaration of nullity of the
amended by-laws. She alleged, among other things, that as a stockholder, she had acquired rights
inherent in stock ownership such as the right to vote and be voted for in the election of directors.
Is her petition tenable? (10%)

Answer: Aquino, pp. 247-248

No. Her petition is not tenable. It is true that a stockholder has the right to vote and be voted for
in the election of directors. However, such right does not mean that a stockholder has vested
right to be elected to the board of directors. The election process prescribed under the
Corporation Code should be followed and a stockholder cannot force other stockholders to elect
her as director.

Her contention that the by-laws is null and void is not tenable either. Corporations have the
power to make by-laws declaring a person employed in the service of a rival company ineligible
for election to its board of directors. It is well-settled that a director who is ineligible cannot be
elected as such. In addition, a director is subject to removal if a ground for disqualification
exists. One such ground is a provision that a stockholder is disqualified if his business is in
competition with or antagonistic to the other corporation. (1998 Bar)

II
At the annual meeting of ABC Corporation for the election of five directors as provided for in
the article of incorporation, A, B, C, D, E, F, and G, were nominated. A, B, C, D, and E received
the highest number of votes and were proclaimed elected. F received ten votes less than E.
Subsequently, E sold all his shares to F. At the next Board of Directors’ meeting following the
transfer of shares in the books of the Corporation, both E and F appeared. E claimed that
notwithstanding the sale of his shares to F, he remained a director since the Corporation Code
provides that directors “shall hold office for one year and until their successors are elected and
qualified.” On the other hand, F claimed that since he would have been elected as director had it
not been for E’s nomination and election, he (F) should now be considered as a director as he
had acquired the shares of E. Decide with reasons. (10%)

Answer: Aquino, p. 248

E is disqualified to continue as director. Section 23, par. 2 of the Corporation Code provides that
“every director must own at least one share of the capital stock of the corporation of which he is
a director, which share shall stand in his name in the books of the corporation. Any director who
ceases to be the owner of at least one share in the capital stock of the corporation of which he is a
director shall thereby cease to be a director.” The requirement of owning at least one share is a
continuing requirement. E became disqualified when he sold all his shares of the corporation. He
thus ceased to be a director.

F’s claim is also untenable because a director should be duly elected as such and he was never
elected to be a director in the said meeting. (1984 Bar).

III
If the minority stockholders in a stock corporation cumulate their votes so that they could be
assured of being represented in the Board of Directors, what assurance do they have that the
director or directors representing them would not be removed, considering that under the
Corporation Code, a director may be removed from office with or without cause by the vote of
stockholders holding or representing at least 2/3 of the outstanding capital stock? (10%)

Answer: Aquino, p. 293

Assurance is provided for under Section 28 of the Corporation Code because although removal
of a director with or without cause is allowed, it contains a proviso to the effect that such
removal, if without cause, cannot be used to deprive the minority stockholders of their right to
representation through the use of cumulative voting. Therefore, the minority stockholders who
cumulate their votes to elect a representative to the Board of Directors can be assured of his
continuance in office during his term, unless he gives just cause for his removal. (1983 Bar)

IV
Primero, Segundo, Tercero, Pedro, and Juan are the original members of the Board of Directors
of a stock corporation. The only interest of Primero is that 50% of the corporation’s stocks were
pledged to him. Pedro and Juan died in a vehicular accident.

Primero, Segundo, and Tercero held an emergency board meeting to fill up the vacancy in the
board. Primero and Tercero were able to push the selection of Cuatro and Cinco as new directors
over the strong objections of Segundo who, as corporation president, wanted two others as board
members.

At another board meeting, the four members of Primero’s group voted for Seis as the 6th director.
When the six-member board convened, it decided by a five to one to replace President Segundo
with Tercero as the new President. Was the election of Tercero as new President valid? Why?
(10%)

Answer: Aquino, 298

No. The election of Tercero as new President is not valid. In the first place, the election of the
three new members of the board was not valid because Primero was not validly elected as a
director since he was not a stockholder. Upon the death of Pedro and Juan, only two remained as
duly elected directors, namely, Segundo and Tercero. They could not fill the vacancies because
they do not constitute a quorum. Hence, any action of the illegally constituted board is not valid.
(1986 Bar).

V
After many difficult years, which called for sacrifices on the part of the company’s directors,
ABC Manufacturing, Inc. was finally earning substantial profits. Thus, the President proposed to
the Board of Directors that the directors be paid a bonus equivalent to 15% of the company’s net
income before tax during the preceding year. The president’s proposal was unanimously
approved by the Board. A stockholder of ABC questioned the bonus. Does he have grounds to
object? (10%)

Answer: Aquino, p. 302

Yes, the stockholder has a valid and legal ground to object to the payment to the directors of a
bonus equivalent to 15% of the company’s net income. Section 30 of the Corporation Code
provides that the total annual compensation of the directors, in the preceding year, cannot exceed
10% of the company’s net income before income tax. (1991 Bar).

VI
ABC Piggery, Inc. is engaged in raising and selling hogs in the local market. Mr. De Dios, one of
its directors, while traveling abroad, met a leather goods manufacturer who was interested in
buying pig skins from the Philippines. Mr. De Dios set up a separate company and starting
exporting pig skins to his foreign contact but the pig skins exported were not sourced from ABC.
His fellow directors from ABC complained that he should have given this business to ABC. How
would you decide this matter? (10%)

Answer: Aquino, p. 330

I would decide in favor of Mr. De Dios. There is no conflict between the business of ABC, Inc.
and the separate company of Mr. De Dios. ABC is engaged in raising and selling hogs in the
local market while the company of Mr. De Dios is engaged in the export of pig skins. It cannot
be said that the opportunity to export pig skins belongs to the corporation which is only engaged
in hog raising. (1991 Bar).

VII
Under the Articles of Incorporation of Manila Industrial Corporation, its principal place of
business shall be in Pasig, Metro Manila. The principal corporate offices are at the Ortigas
Center, Pasig, Metro Manila while its factory processing leather products, is in Manila. The
corporation holds its annual stockholders’ meeting at the Manila Hotel in Manila, and its board
of directors’ meeting at a hotel in Makati, Metro Manila. The by-laws are silent as to the place of
meeting of the stockholders and directors.

a. Who shall preside at the meeting of the directors? (4%)

Answer: Aquino, p. 452

a. The President presides over the meeting of the directors unless a separate position, like a
Chairman of the Board is provided in the By-laws. If there is a Chairman of the
Corporation, he is usually the presiding officer in board meetings. (Section 54,
Corporation Code).
b. Yes, Section 51 of the Corporation Code provides that the annual stockholders’ meeting
shall be held in the city or municipality where the principal office of the corporation is
located. However, the law also provides that Metro Manila is considered a city or
municipality. Nevertheless, the Articles of Incorporation in the present case is specific
that the principal place of business of Manila Industrial Corporation is Pasig, Metro
Manila. Hence, it is believed that the holding of the annual stockholders’ meeting in
Manila was not proper. It would have been different if the principal office provided for in
the Articles of Incorporation is Metro Manila. In such case, the meeting can be conducted
in any place within Metro Manila. (Note the contrary view that the statement in Section
51 that “Metro Manila shall, for purposes of Section 51, be considered a city or
municipality” justifies the holding of the meeting in any place in Metro Manila even if
the Articles of Incorporation specifies a specific place in Metro Manila. However, the
requirement in SEC Memorandum Circular No. 3, Series of 2006 is that a specific place
should be designated. If so designated, it is believed that the meeting should be held in
such specific place.)
c. No. Section 53 of the Corporation Code allows the Board of Directors to hold its meeting
anywhere in or outside the Philippines. The holding of the board meeting in Makati was
therefore proper and the validity of the resolutions adopted by the Board in that meeting
cannot be questioned. (1993 Bar).

VIII
AA, a minority stockholder, filed a suit against BB, CC, CC, and EE, the holders of majority
shares of MOP Corporation, for alleged misappropriation of corporate funds. The complaint
averred, inter alia, that MOP Corporation is the corporation in whose behalf and for whose
benefit the derivative suit is brought. In their capacity as members of the Board of Director, the
majority stockholders adopted a resolution authorizing MOP Corporation to withdraw the suit.
Pursuant to said resolution, the corporate counsel filed a Motion to Dismiss in the name of the
MOP Corporation. Should the motion be granted or denied? Reason briefly. (10%)

Answer: 2004 Bar Exam

No. All the requisites for a valid derivative suit exist in this case. First, AA was exempt from
exhausting his remedies within the corporation, and did not have to make a demand on the Board
of Directors for the latter to sue. Here, such a demand would be futile, since the directors who
comprise the majority (namely, BB, CC, DD and EE) are the ones guilty of the wrong
complained of. Second, AA appears to be stockholder at the time the alleged misappropriation of
corporate funds. Third, the suit is brought on behalf and for the benefit of MOP Corporation. In
this connection, it was held in Conmart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991) that to grant to
the corporation concerned the right of withdrawing or dismissing the suit, at the instance of the
majority stockholders and directors who themselves are the persons alleged to have committed
the breach of trust against the interest of the corporation would be to emasculate the right of
minority stockholders to seek redress for the corporation. Filing such action as a derivative suit
even by a lone stockholder is one of the protections extended by law to minority stockholders
against abuses of the majority.

IX
A Korean national joined a corporation which is engaged in the furniture manufacturing
business. He was elected to the Board of Directors. To complement its furniture manufacturing
business, the corporation also engaged in the logging business. With the additional logging
activity, can the Korean national still be a member of the Board of Directors? Explain (10%)

Answer: 2005 Bar Exam

The Korean National can still be a member of the Board of Directors as long as sixty percent
(60%) of the Board of Directors are Filipinos. Corporations that are sixty percent (60%) owned
by Filipinos can engaged in the business of exploration, development and utilization of natural
resources (Art. XII, Sec. 2, 1987 Constitution). The election of aliens as members of the Board
of Directors engaging in partially-nationalized activities is allowed in proportion to their
allowable participation or share in the capital of such entities (Sec. 2-A, Anti Dummy Law)
Nothing in the facts shows that more than forty percent (40%) of the Board of Directors are
foreigners.

X
Leonardo is the Chairman and President, while Raphael is a Director of NT Corporation. On one
occasion, NT Corp., represented by Leonardo and A Enterprises, a single proprietorship owned
by Raphael, entered into a dealership agreement whereby NT Corp. appointed A Enterprises as
exclusive distributor of its products in Northern Luzon. Is the dealership agreement valid?
Explain. (10%)

Answer: 1996 Bar

The dealership agreement is valid PROVIDED the following conditions under Section 32 of BP
68 are complied with. The law provides that a contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such corporation, unless all the
following conditions are present: 1) that the presence of such director or trustee in the board
meeting in which the contract was approved was not necessary to constitute a quorum for such
meeting; 2) that the vote of such director or trustee was not necessary for the approval of the
contract; 3) that the contract is fair and reasonable under the circumstances; and 4) that in case of
an officer, the contract has been previously authorized by the board of directors.