1 REVISED CORPORATION CODE OF THE PHILIPPINES

TITLE III. BOARD OF DIRECTORS/TRUSTEES AND In other words, to exercise their powers, they must meet
OFFICERS as directors or trustees and act "at a meeting at which
there is a quorum."
BOARD AS GOVERNING BODY
If they act or give their consent separately or if they act at
CORPORATE POWERS EXERCISED BY BOARD OF a meeting which is not a legal meeting, their action is not
DIRECTORS OR TRUSTEES ACTING AS THE GOVERNING that of a corporation, although all may consent, and the
BODY OF A CORPORATION corporation is not bound.
All corporations being invisible, existing only in
contemplation of law, can only act and contract through EXCEPTIONS
the aid and by means of individuals. A. A contract entered into without a meeting is binding
where the directors happen to be the sole
A corporation can only execute its powers and transact stockholders.
its business through its board of directors, in the case of B. The corporation is bound by a contract entered into
stock corporations, or board of trustees in the case of by a corporate officer such as the general manager,
non-stock corporations, and through its officers and authorized by the board of directors either expressly
agents when authorized by a board resolution or its by- or impliedly, to bind it by contract.
laws, except in the instances when the RCCP requires C. The corporation is also bound by a particular
stockholders' or members' approval for certain specific transaction ratified in a subsequent board meeting.
acts. D. The by-laws of a corporation may create an
executive committee with authority to act on such
The stockholders have residual power over fundamental
specific matters within the competence of the
corporate changes.
board.
BUSINESS JUDGMENT RULE E. A corporation is expressly allowed, subject to
The courts cannot undertake to control the discretion of certain limitations provided in Section 43, to enter
the board of directors about administrative matters as to into a management contract under which it
which they have the legitimate power of action, and delegates the management of its affairs to another
contracts intra vires entered into by the board of corporation for a certain period of time.
directors are binding upon the corporation and courts F. In a close corporation, any action by the directors
will not interfere unless such contracts are so without a meeting or at a meeting improperly held,
unconscionable and oppressive as to amount to a shall, unless the by-laws otherwise provide, be
wanton destruction of the rights of the minority. deemed valid or ratified in the cases mentioned in
Section 100.
As long as it acts in good faith, its orders are not
reviewable by the courts. Its acts or contracts are POWER OF DIRECTORS OR TRUSTEES TO DELEGATE
presumed to be valid and regular. AUTHORITY

LIMITATIONS ON POWER OF BOARD OF DIRECTORS OR A. GENERAL RULE

TRUSTEES In the absence of authority from the board of directors,
A. Limitations or restrictions imposed by the no persons, not even its officers, can validly bind a
Constitution, statutes, articles of incorporation, or corporation.
by-laws of the corporation.
The power to bind the corporation by contracts rests in
B. It cannot perform constituent acts, that is, acts
its board of directors or trustees, but the power may be
involving fundamental changes in the corporation
delegated either expressly or impliedly to other officers
which require the approval or ratification of the
or agents of the corporation appointed by it or to an
stockholders or members.
executive committee.
C. It cannot exercise powers not possessed by the
corporation. The directors or trustees do not themselves exercise
delegated authority so as to be precluded from
MANNER OF EXERCISE OF POWERS OF THE BOARD
delegating power by the maxim that no delegated powers
The board of directors or trustees must act together as a
can be further delegated (delegata potestas non potest
body in a lawful meeting, not individually or separately,
delegare).
in order to bind the corporation by their acts.
B. EXCEPTIONS
1. It has been held that discretionary powers which, by
provisions of law (e.g., election of corporate
2 REVISED CORPORATION CODE OF THE PHILIPPINES

officers, to declare dividends) or the by-laws or by D. Trustees of non-stock educational corporation

the vote of the stockholders, are vested exclusively "shall not be less than five nor more than 15"
in the board of directors or are especially delegated provided that the number "shall be in multiples of
to them, cannot be delegated to subordinate five," with the term of office of 1/5 of their number
officers and agents. But purely ministerial duties expiring every year (Section 106).
connected therewith may be delegated. E. E In a corporation sole, there is no board of trustees
2. There is a limit, even to the power of the directors or as it consists of one member or corporator only.
trustees to delegate authority. They cannot delegate F. In a one person corporation, there is no board of
entire supervision and control of the corporation to directors as the sole stockholder is the director and
others for this is not only unnecessary and contrary president of the corporation.
to usage, but it is inconsistent with Section 22, G. The board of trustees of religious societies shall
which requires that "the corporate powers xxx shall also "be not less than five nor more than 15"
be exercised, all business conducted and all (Section 114).
property of such corporation controlled and held by
its board of directors or trustees." QUALIFICATIONS OF DIRECTORS OR TRUSTEES
3. Neither can the board delegate special powers A. FOR STOCK CORPORATIONS
especially conferred upon it by a resolution of the 1. Must be of legal age and have legal capacity.
stockholders or members of the corporation. 2. Every director (including an incorporating director)
Unquestionably, it may delegate purely ministerial must own at least one share of the capital stock
duties. (Section 22).
4. It is quite clear that the power of the board to 3. The share of stock held by the director must be
delegate authority is subject to restrictions as may registered in his name on the books of the
be provided in the by-laws. corporation.
TERM OF OFFICE OF DIRECTORS OR TRUSTEES (Section 4. Every director must continuously own at least a
22) share of stock during his term; otherwise, he shall
automatically cease to be a director (Section 22).
A. GENERAL RULE 5. No person shall be qualified to be a director, trustee,
It is now expressly provided that directors shall be or officer of any corporation if, within five years prior
elected for a term of one year and until their successors to the election or appointment as such, the person
are elected and qualified. Trustees shall be elected for a was:
term not exceeding three years and until their (a) convicted by final judgment: (1) of an offense
successors are elected and qualified. punishable by imprisonment for a period exceeding
six years; (2) for violating this Code; (3) for violating
B. HOLD-OVER PRINCIPLE the Securities Regulation Code, R.A. No. 8799, July
Upon failure of a quorum at any meeting of the 19, 2000;
stockholders or members called for an election, the (b) found administratively liable for any offense
directorate naturally holds over and continues to involving fraud acts; and
function until another directorate is chosen and (c) by a foreign court or equivalent foreign regulatory
qualified. The failure to elect does not terminate the authority for acts, violations or misconduct similar
terms of incumbent officers nor dissolve the to those enumerated above (Section 26).
corporation.
B. FOR NON-STOCK CORPORATIONS
NUMBER OF DIRECTORS OR TRUSTEES TO BE ELECTED 1. Must be of legal age and have legal capacity.
A. The number of directors in a stock corporation "shall 2. Trustees of non-stock corporations must be
not be more than 15" (Section 13). members in good standing thereof (Section 22).
B. In ordinary non-stock corporations, the number of 3. No person shall be qualified to be a director, trustee,
trustees "may or may not be more than 15" or officer of any corporation if, within five years prior
(Sections 13 and 91). to the election or appointment as such, the person
C. In a close corporation, the articles of incorporation was:
may provide that the business of the corporation (a) convicted by final judgment: (1) of an offense
shall be managed by its stockholders rather than by punishable by imprisonment for a period exceeding
a board of directors in which case no meeting of six years; (2) for violating this Code; (3) for violating
stockholders need be held to elect directors The Securities Regulation Code, RA No. 8799, July
(Section 96). 19, 2000;
3 REVISED CORPORATION CODE OF THE PHILIPPINES

(b) found administratively liable for any offense nominate any director or trustee who possesses all
involving fraud acts; and of the qualifications and none of the
(c) by a foreign court or equivalent foreign regulatory disqualifications set forth in the RCCP.
authority for acts, violations or misconduct similar B. At any meeting called for the election of directors or
to those enumerated above (Section 26). trustees, there must be present the owners of the
majority of the outstanding capital stock, or if there
INDEPENDENT DIRECTOR (Section 22) be no capital stock, a majority of the members
A person who, apart from shareholdings and fees entitled to vote.
received from the corporation, is independent of C. At any meeting called for the election of directors or
management and free from any business or other trustees, the stockholders or members may vote in
relationship which could, or could reasonably be the election either 1) personally by attending the
perceived to materially interfere with the exercise of meeting; 2) through a proxy, or 3) through remote
independent judgment in carrying out the communication or in absentia.
responsibilities as a director. D. Voting in a stock corporation is on the basis of the
The board of corporations vested with public interest number of shares (one share, one vote) and not on
shall have independent directors constituting at least the number of stockholders present in the
20% of such board. stockholders' meeting.
E. E A stockholder cannot be deprived in the articles of
Non-stock corporations vested with public interest are incorporation or in the by-laws of his statutory right
required to have independent trustees (Section 91) to use any of the methods of voting in the election of
constituting at least 20% of such board. directors..
F. No stock delinquent for unpaid subscription shall
CORPORATIONS VESTED WITH PUBLIC INTEREST be voted.
(Section 22) G. Members of non-stock corporations may cast as
many votes as there are trustees to be elected but
A. Corporations covered by Section 17.2 of The
may not cast more than one vote for one candidate.
Securities Regulation Code, R.A No. 8799, July 19,
H. The election must be by ballot if requested by any
2000, namely those whose securities are registered
voting stockholder or member.
with the SEC, corporations listed with an exchange
or with assets of at least P50,000,000 and having I. If a quorum is present, the candidates receiving the
200 or more holders of shares, with at least 100 highest number of votes shall be declared elected.
shares of a class of its equity shares. The law requires only plurality, and not majority of
B. Banks and quasi-banks, NSSLAs, pawnshops, the votes cast at the election.
corporations engaged in money service business, J. In case of failure to hold an election for any reason,
pre-need, trust and insurance companies, and the same shall be reported within 30 days from the
other financial intermediaries. date of the scheduled election. The report shall
C. Other corporations engaged in business vested with specify a new date for the election which shall not
public interest similar to the above, as may be be later than 60 days from the original scheduled
determined by the SEC, after taking into account date.
K. The requisite notice must be given.
relevant factors which are germane to the objective
and purpose of requiring the election of an METHODS OF VOTING IN A STOCK CORPORATION
independent director, such as the extent of minority (Section 23)
ownership, type of financial products or securities A. STRAIGHT VOTING
issued or offered to investors, public interest By this voting method, every stockholder "may vote such
involved in the nature of business operations, and number of shares for as many persons as there are
other analogous factors. directors" to be elected.

B. CUMULATIVE VOTING FOR ONE CANDIDATE

ELECTION OF DIRECTORS/TRUSTEES By this method, a stockholder is allowed to cumulate his
shares and "give one candidate as many votes as the
LIMITATIONS IN THE ELECTION OF DIRECTORS OR
number of directors to be elected multiplied by the
TRUSTEES (Section 23)
number of the shares owned."
A. Except when the exclusive right is reserved for
holders of founders' shares under Section 7, each
stockholder or member shall have the right to
4 REVISED CORPORATION CODE OF THE PHILIPPINES

C. CUMULATIVE VOTING BY DISTRIBUTION ensure the effective monitoring of each officer's

By this method, a stockholder may cumulate his shares separate functions.
by multiplying also the number of his shares by the B. There is no prohibition in the law against a
number of directors to be elected and distribute the stockholder being a director or officer of two or
same among as many candidates as he shall see fit. more corporations.
C. The RCCP does not prohibit a corporate officer from
VOTING IN A NON-STOCK CORPORATION (Section 23) occupying the same position in another corporation
Members of non-stock corporations may cast as many organized for the same purpose. However, such a
votes as there are trustees to be elected but may not cast situation may be prohibited by special law, the
more than one vote for one candidate. This is the manner articles of incorporation, or the by-laws of the
of voting in non-stock corporations unless otherwise corporation.
provided in the articles of incorporation or in the by-laws.
CORPORATE OFFICERS (Section 24)
CORPORATE OFFICERS A. President.
B. Vice-president.
ELECTION OF OFFICERS (Section 24) C. Secretary.
Immediately after their election, the directors of a D. Treasurer.
corporation must formally organize by the election of its E. E General Manager.
officers such as the president, treasurer, secretary and F. Compliance Officer.
such other officers as may be provided for in the by-laws.
REPORT OF ELECTION
The board of directors or trustees formulates the broad
policy of the corporation and directs the conduct of its REPORTS TO BE SUBMITTED TO THE SEC (Section 25)
business operations. But the task of actual management A. Report on the names, nationalities, shareholdings,
and carrying on the details of business operations and and residence addresses of the directors or trustees
corporate policy are delegated to the officers elected by and officers elected, which must be done within 30
it and over whom it exercises supervision. days after the meeting in which they were elected.
The corporate secretary or any other officer of the
The acts of corporate officers within the scope of their corporation shall submit the report to the SEC.
authority are binding on the corporation. However, when B. Report on the non-holding of elections, the reasons
officers exceed their authority, their actions cannot bind therefor and the new date of election, which shall
the corporation, unless it has ratified such acts or is not be later than 60 days from the originally
estopped from disclaiming them. scheduled date, to be submitted within 30 days
COMPENSATION AND TERM OF OFFICE OF OFFICERS from the date of the scheduled election.
C. Report that a director, trustee or officer died,
(Section 24)
resigned or in any manner, ceased to hold office.
It is within the power of the board to fix the salaries of
The corporate secretary, or the director, trustee or
corporate officers whom it appoints (SEC Opinion,
officer of the corporation, or in case of death, the
October 14, 1968) for the power to employ must
heirs of such director, trustee, or officer, shall within
necessarily include the power to grant compensation. It
seven days from knowledge thereof, report in writing
may likewise grant bonuses to them subject to the test of
reasonableness. such fact to the SEC.

POWER OF THE SEC IN CASE OF NON-HOLDING OF

The term of office may be fixed in the by-laws; otherwise,
ELECTION (Section 25)
they shall be deemed elected for one year and until their
successors shall have been elected. They may be If no new date has been designated in the report
removed at any time by the board. submitted to the SEC, or if the rescheduled election is
likewise not held, the SEC may, upon the application of a
POSITIONS CONCURRENTLY HELD BY THE SAME stockholder, member, director or trustee, and after
PERSON (Section 24) verification of the unjustified non-holding of the election,
A. Any two or more positions may be held concurrently summarily order that an election be held. The SEC shall
by the same person except the positions of have the power to issue such orders as may be
president and secretary or president and treasurer appropriate, including orders directing the issuance of a
as they are considered by law as incompatible with notice stating the time and place of the election,
each other due to the very nature appertaining to designated presiding officer, and the record date or
each office. The rationale behind the provision is to
5 REVISED CORPORATION CODE OF THE PHILIPPINES

dates for the determination of stockholders or members director or trustee cannot be removed without cause if
entitled to vote. the effect of such removal is to deprive minority
stockholders or members who united in cumulative
Notwithstanding any provision of the articles of voting to elect such director, of right of representation to
incorporation or by-laws to the contrary, the shares of which they may be entitled under Section 23. This
stock or membership represented at such meeting and proviso is necessary to protect the minority against any
entitled to vote shall constitute a quorum for purposes of abuse by the majority since there is no cumulative voting
conducting an election under this section. in the removal of directors.

GROUNDS FOR DISQUALIFICATION POWER OF THE SEC TO REMOVE DIRECTORS OR

TRUSTEES
GROUNDS FOR DISQUALIFICATION OF DIRECTORS OR
The SEC shall motu proprio or upon a verified complaint,
TRUSTEES OR OFFICERS (Section 26)
after due notice and hearing. order the removal of a
A. If within five years prior to the election or
director or trustee elected despite the disqualification,
appointment as such, the director, trustee, or
or whose disqualification arose or is discovered
officer was convicted by final judgment:
subsequent to an election. The removal of a disqualified
1. Of an offense punishable by imprisonment for a
director shall be without prejudice to other sanctions
period exceeding six years.
that the SEC may impose on the board of directors or
2. For violating the RCCP.
trustees who, with knowledge of the disqualification,
3. For violating The Securities Regulation Code
failed to remove such director or trustee (Section 27).
(SRC), R.A. No. 8799, July 19, 2000.
B. If within five years prior to the election or When, despite the knowledge of the existence of a
appointment as such, the director, trustee, or ground for disqualification as provided in Section 26 of
officer was found administratively liable for any this Code, a director, trustee, or officer willfully holds
offense involving fraudulent acts. office, or willfully conceals such disqualification, such
C. If within five years prior to the election or director, trustee, or officer shall be punished by a fine
appointment as such, the director, trustee or officer ranging from $10,000 to 200,000 at the discretion of the
were found liable by a foreign court or equivalent Court, and shall be permanently disqualified from being
foreign regulatory authority for acts, violations or a director, trustee or officer of any corporation.
misconduct similar to the to those enumerated in
paragraphs (1) and (2) of this section. When the violation of this provision is injurious or
detrimental to the public, the penalty shall be a fine
ranging from $20,000 to 400,000 (Section 160).
REMOVAL OF DIRECTORS/TRUSTEES
REQUISITES FOR REMOVAL OF DIRECTORS OR
POWER OF STOCKHOLDERS OR MEMBERS TO REMOVE
TRUSTEES (Section 27)
DIRECTORS OR TRUSTEES (Section 27)
A. The removal must take place either at a regular
GENERAL RULE meeting of the corporation or at a special meeting
The law does not specify cases for removal of a director called for the purpose.
or trustee nor even require that removal should be for B. There must be previous notice to the stockholders
sufficient cause or reason. The legislative policy is that or members of the corporation of the intention to
the stockholders shall be the ultimate masters, not the propose such removal at the meeting either by
directors, "to make the corporate government written notice or publication as well as the time and
responsible to the owners." If the directors have a right to place of such meeting either by written notice or
continue in office to the completion of their term, in spite publication.
of a change in controlling stockholders, those who C. The removal must be by a vote of the stockholders
acquire control will have to wait or else make some holding or representing 2/3 of the outstanding
bargain with the existing directors to resign in order that capital stock, or if the corporation be a non-stock
they may put in office a new board of directors corporation, by a vote of 2/3 of the members
representing their views or policy. entitled to vote.
D. The special meeting of the stockholders or
B. DIRECTOR OR TRUSTEE ELECTED BY CUMULATIVE members of a corporation for the purpose of
VOTING removal must be called by the secretary on order of
the president or on the written demand of the
A director or trustee may be removed by the prescribed
stockholders representing or holding at least a
vote without cause subject to the limitation that a
6 REVISED CORPORATION CODE OF THE PHILIPPINES

majority of the outstanding capital stock or a FILLING OF VACANCIES IN THE OFFICE OF DIRECTOR
majority of the members entitled to vote. OR TRUSTEE (Section 28)
E. The removal of a director or trustee must be
reported in writing by the corporate secretary, or the A. BY THE STOCKHOLDERS OR MEMBERS
director, trustee or officer of the corporation to the 1. If the vacancy results from the removal by the
SEC within seven days from knowledge thereof stockholders or members or from the expiration of
(Section 25). term
2. If the vacancy is created by reason of an increase in
RESIGNATION OF DIRECTORS OR TRUSTEES the number of directors or trustees. A directorship
The fact that the law requires directors or trustees unless or trusteeship to be filled by reason of an increase in
removed to continue in office until their successors are the number of directors or trustees shall be filled
elected and qualified does not prevent a director or only by an election at a regular or at a special
trustee from resigning at any time. meeting of stockholders or members duly called for
the purpose, or in the same meeting authorizing the
By reason, however, of the fiduciary nature of the increase of directors or trustees if so stated in the
position they occupy, a director cannot resign, as part of notice of the meeting.
fraudulent scheme to prejudice the corporation or its 3. If the vacancy occurs other than by removal or by
stockholders and make profit to his own advantage or at expiration of term, such as death, resignation,
an unreasonable time if the immediate consequence abandonment, or disqualification, if the remaining
would be to leave the interest of the corporation without directors or trustees do not constitute a quorum for
proper care and protection. the purpose of filling the vacancy.
If a director quits under circumstances which 4. If the vacancy may be filled by the remaining
occasioned a deprivation of profits to the corporation, it directors or trustees but the board refers the matter
is but right that he should repair and make good such to the stockholders or members.
loss. The resignation of a director or trustee must be B. BY THE MEMBERS OF THE BOARD
reported in writing by the corporate secretary, or the If still constituting a quorum, at least a majority of the
director, trustee or officer of the corporation to the SEC members are empowered to fill any vacancy occurring in
within seven days from knowledge thereof (Section 25). the board other than by removal by the stockholders or
ABANDONMENT OF OFFICE AND FAILURE TO ATTEND members or by expiration of term.
MEETINGS WHEN ELECTION OF REPLACEMENT SHOULD BE MADE
A. ACCEPTANCE OF INCOMPATIBLE OFFICE IN CASE OF VACANCY (Section 28)
Where a director or trustee in a corporation accepts a A. When the vacancy is due to term expiration, the
position in which his duties are incompatible with those election shall be held no later than the day of such
as such director or trustee, it is presumed that he has expiration at a meeting called for that purpose.
abandoned his office as director or trustee of the B. When the vacancy arises as a result of removal by
corporation. the stockholders or members, the election may be
held on the same day of the meeting authorizing the
B. ABSENCE FOR AN UNREASONABLE LENGTH OF removal and this fact must be so stated in the
TIME agenda and notice of said meeting.
Similarly, where a director absented himself from all C. In all other cases of vacancy, the election must be
meetings for nearly a year and announced his refusal to held no later than 45 days from the time the vacancy
act as an officer and stockholder, there is an arose.
abandonment of his position as director. Abandonment
by a director of all his duties for a number of years must CREATION OF EMERGENCY BOARD (Section 28)
be regarded as an implied resignation of his office as There are cases when the vacancies in the Board are
director. such that the remaining directors or trustees no longer
constitute a quorum but emergency action is required to
FILING OF VACANCIES prevent grave, substantial, and irreparable loss or
damage to the corporation, the vacancy may be
TENURE OF REPLACEMENT DIRECTOR OR TRUSTEE temporarily filled from among the officers of the
corporation by unanimous vote of the remaining
A director or trustee elected to fill a vacancy shall serve directors or trustees.
only for the unexpired term of the predecessor in office.
7 REVISED CORPORATION CODE OF THE PHILIPPINES

The action by the designated director or trustee shall be income tax of the corporation during the preceding
for a limited purpose i.e. emergency action necessary, year.
and for a limited period i.e. the term shall cease within a b. Directors or trustees shall not participate in the
reasonable time from the termination of the emergency determination of their own per diems or
or upon election of the replacement director or trustee, compensation.
whichever comes earlier. c. Corporations vested with public interest shall
submit to their shareholders and the SEC, an annual
The corporation must notify the SEC within three days report of the total compensation of each of their
from the creation of the emergency board, stating therein directors or trustees.
the reason for its creation.
PER DIEMS OF DIRECTORS OR TRUSTEES (Section 29)
REQUISITES FOR THE CREATION OF AN EMERGENCY Whether or not authorized by the by-laws or by the
BOARD (Section 28) stockholders, directors or trustees are entitled to receive
A. The remaining directors or trustees do not per diems. In view of the real distinction between per
constitute a quorum. diems and compensation, the per diems granted to
B. There is a need for emergency action. directors should not be included in their total yearly
C. The action is necessary to prevent grave, compensation for purposes of the 10% limitation.
substantial, and irreparable loss or damage to the
corporation. COMPENSATION OF CORPORATE OFFICERS
D. The temporary replacement must come from the
officers of the corporation. A. CORPORATE OFFICERS WHO ARE NOT DIRECTORS
E. The temporary replacement must be elected by a If they are elected or appointed to perform valuable
unanimous vote of the remaining directors or services for the corporation under circumstances
trustees. indicating an intention and expectation of payment,
F. Notice must be given to the SEC within three days there arises an implied promise on the part of the
from the creation of an emergency board. corporation to pay a reasonable compensation for
services rendered, even in the absence of an express
contract. This principle applies as well to employees
COMPENSATION OF DIRECTORS/TRUSTEES hired by the corporation.

COMPENSATION OF DIRECTORS OR TRUSTEES (Section B. CORPORATE OFFICERS WHO ARE DIRECTORS

29) Directors who are also corporate officers are entitled, in
addition to reasonable per diems as directors, to
A. GENERAL RULE compensation as such corporate officers, and the
Directors or trustees shall not receive compensation as amount thereof may be fixed by mere board resolution in
such directors or trustees, except for reasonable per the absence of provision to the contrary in the by-laws
diems. and subject to the provision of Section 31. It must appear
that the intention is to give them salaries as such
B. EXCEPTIONS
officers. Considering that the board of directors and
1. A private corporation is authorized to provide in its
officers have different functions, the 10% limitation
by-laws for the compensation of directors or
excludes salaries for services rendered by officers (SEC
trustees. In the absence of any provision in the by-
Opinion, August 19, 1992).
laws fixing their compensation, the directors or
trustees, as such, shall not receive any
LIABILITY OF DIRECTORS/TRUSTEES OR
compensation.
OFFICERS
2. When the stockholders, representing at least a
majority of the outstanding capital stock, or a THREE-FOLD DUTIES OF DIRECTORS
majority of the members, vote to grant a. Duty of obedience.
compensation to directors or trustees at a regular or b. Duty of diligence.
special meeting. c. Duty of loyalty.

LIMIT TO COMPENSATION (Section 29) CASES WHEN DIRECTORS OR TRUSTEES OR OFFICERS

a. Where compensation is granted either in the by- ARE SOLIDARILY LIABLE FOR DAMAGES (Section 30)
laws or by the vote of the stockholders, the total a. When a director, trustee, or officer willfully and
yearly compensation of directors, as such, shall in knowingly votes or assents to patently unlawful acts
no case exceed 10% of the net income before of the corporation.
8 REVISED CORPORATION CODE OF THE PHILIPPINES

b. When a director, trustee, or officer is guilty of gross with at least a majority of the independent directors
negligence (not mere want of ordinary prudence) or voting to approve the material contract. e. That in
bad faith in directing the affairs of the corporation. case of an officer, the contract with the officer has
c. When a director, trustee, or officer acquires any been previously authorized by the board of
personal or pecuniary interest in conflict with his directors.
duty as such director, trustee or officer. 2. Not all the conditions set forth in the preceding
d. When a director or officer consents to the issuance enumeration are present but the corporation
of watered stocks or having knowledge of the (through the board) elects not to question the
issuance of the same, does not notify the corporate validity of the contract.
secretary in writing of the fact of issuance. 3. In case of a contract with a self-dealing director,
e. When a director, trustee, or officer has contractually trustee or officer including their spouses and
agreed or stipulated to hold himself personally and relatives within the fourth civil degree of
solidarily liable with the corporation. consanguinity or affinity, where any of the first three
f. When a director, trustee, or officer is made conditions set forth are absent but such contract is
personally liable for his corporate action by specific ratified.
provision of law.
REQUISITES IN RATIFICATION OF CONTRACTS WITH
SELF-DEALING DIRECTORS OR TRUSTEES OR OFFICERS SELF-DEALING DIRECTORS, TRUSTEES OR OFFICERS
(Section 31) INCLUDING THEIR SPOUSES AND RELATIVES (Section
When a director, trustee, or officer including their spouse 31)
and relatives within the fourth civil degree of A contract of the corporation with such directors,
consanguinity or affinity enters into a contract with a trustees or officers including their spouses and relatives
corporation where he is a director, trustee, officer, may be ratified.
stockholder, or member.
a. Any of the first three conditions set forth in
A. GENERAL RULE paragraph 1 of this section is absent.
Section 31 renders voidable at the option of the b. Full disclosure of the adverse interest of the
corporation a contract of such corporation with one or directors or trustees involved is made at such
more of its directors or trustees or officers including their meeting.
spouses and relatives. Being its agents and entrusted c. Vote of the stockholders representing at least 2/3 of
with the management of its affairs, the directors or the outstanding capital stock or of at least 2/3 of the
trustees and other officers of a corporation occupy a members in a meeting called for the purpose.
fiduciary relation towards it, and cannot be allowed to
contract with the corporation, directly or indirectly, or to - Section 31 fails to specify whether the vote of the self-
sell property to it, or purchase property from it, where dealing director or trustee shall be counted in the
they act both for the corporation and for themselves. It meeting for the ratification of the contract. However,
does not require that the corporation suffers injury or Section 52 provides that a director or trustee who has a
damage as a result of the contract. potential interest in any related party transaction must
recuse from voting on the approval of the related party
B. EXCEPTIONS transaction.
In any of the following cases, the contract shall be valid
and cannot be set aside merely because of the d. The contract is fair and reasonable under the
relationship of the parties: circumstances.

1. All the conditions in Section 31 are present to wit: INTERLOCKING DIRECTORS (Section 32)
a. That the presence of such director or trustee in One, some, or all of the directors in one corporation
the board meeting in which the contract was is/are also director/s in another corporation.
approved was not necessary to constitute a quorum CONTRACTS BETWEEN CORPORATIONS WITH
for such meeting. INTERLOCKING DIRECTORS (Section 32)
b. That the vote of such director or trustee was not
necessary for the approval of the contract. Section 32 recognizes as valid a contract between two or
c. That the contract is fair and reasonable under the more corporations which have interlocking directors as
circumstances. long as there is no fraud and the contract is fair and
d. That in the case of corporations vested with reasonable under the circumstances. However, if the
public interest, material contracts are approved by interest of the interlocking director in one corporation is
at least 2/3 of the entire membership of the board, substantial, i.e., his stockholdings exceed 20% of the
9 REVISED CORPORATION CODE OF THE PHILIPPINES

outstanding capital stock and in the other merely a "personal opportunity" where the corporation is
nominal, i.e.. his stockholdings do not exceed 20%, the definitely no longer able to avail itself of the
rules of Section 31 on self-dealing directors shall apply opportunity, which may "arise from financial
insofar as the latter corporation is concerned. insolvency, or from legal restrictions, or from any
other factor which prevents it from acting upon the
CONDITIONS FOR VALIDITY (Section 32) opportunity for its own advantage."
a. There is no fraud and the contract is fair and
reasonable under the circumstances. RATIFICATION BY STOCKHOLDERS OF DISLOYAL ACT
b. If there is substantial interest in both corporations Under Section 33, the guilty director will only be exempt
or if there is nominal interest in both corporations, from liability to the corporation to account for the profits
the contract entered into by interlocking directors he realized if his disloyal act is ratified by the vote of the
cannot be declared voidable. stockholders owning or representing at least 2/3 of the
c. If there is substantial interest in one corporation and outstanding capital stock. There is no similar provision in
nominal interest in another, the contract shall be Section 30. Section 33 is silent on whether the disloyal
subjected to the tests regarding self-dealing director shall be allowed to vote his shares in ratification
directors. of his act. However, Section 52 provides that a director or
trustee who has a potential interest in any related party
DISLOYALTY OF A DIRECTOR transaction must recuse from voting on the approval of
Consists of any act whereby the director is personally the related party transaction.
benefitted at the expense of the corporation. Such act is
a betrayal of the fiduciary relation between the director EXECUTIVE COMMITTEE
and the corporation.
EXECUTIVE COMMITTEE
DOCTRINE OF CORPORATE OPPORTUNITY (Section 33)
It is a body created by the by-laws and composed of not
Under this doctrine, a director who, by virtue of his office,
less than three members of the board which, subject to
acquires for himself a business opportunity which
the statutory limitations, has all the authority of the
should belong to the corporation, thereby obtaining
board of directors to the extent provided in the by-laws.
profits to the prejudice of such corporation, is guilty of
disloyalty and should, therefore, account to the latter for A. NEED FOR AN EXECUTIVE COMMITTEE
all such profits by refunding the same, notwithstanding The board of directors delegates to an executive
that he risked his funds in the venture. committee composed of some members of the board
corporate powers to assure prompt and speedy action
Any profit must be refunded unless ratified by 2/3 votes
and solution to important matters without the need for a
of the outstanding capital stock
board meeting, especially where such meetings cannot
REQUISITES FOR APPLICATION readily be held. Thus, the committee directly manages
a. The opportunity presented itself to the corporation. the operations of the corporation between meetings of
b. The corporation is actually able to avail of the the board, thereby reducing the work load of the latter.
opportunity.
B. EXPRESS PROVISION IN THE BY-LAWS
WHEN DOCTRINE NOT APPLICABLE Under Section 34, the executive committee must be
a. When a director is engaged in a distinct enterprise provided for in the by-laws and composed of not less
of the same general class of business as that which than three members of the board. The committee may
his corporation is engaged in, so long as he acts in act on specific matters within the competence of the
good faith. board, as may be delegated to it by the board or in the by-
b. Where the opportunity is one which is not essential laws, except those matters enumerated with respect to
to the corporation's business, or where the director which only the board duly called and assembled as such
or officer does not exploit opportunity by can act upon.
employment of company's resources, or where the
C. COMMITTEE CONTEMPLATED
director or officer embracing opportunity personally
The "executive committee" referred to in Section 34
is not brought into direct competition with the
should be distinguished from other committees which
corporation. Note that under Section 33, the profits
are within the competence of the board to create at any
must have been obtained by the director to the
time and whose actions require confirmation
prejudice of the corporation.
c. When this property or business opportunity ceases
to be a "corporate opportunity" and transforms into