03 & 04 Board of Directors/Trustees & Election of Board of Directors/Trustees

Question 1

Who shall conduct all business of a corporation?

Answer 1

SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. – Unless otherwise provided in this Code, the board of directors or trustees shall exercise the corporate powers, conduct all business, and control all properties of the corporation.

Question 2

What is the term of directors? How is this different from the term of trustees?

Answer 2

Term: Director - 1yr; Trustee - not more than 3 yrs
Min. Qualifications: Director - registered stockholder with at least 1 share; Trustee - member;

RCC, Sec. 22. […]

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

Each director and trustee shall hold office until the successor is elected and qualified. A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the corporation shall cease to be such.

Question 3

What corporations shall have independent corporations?

Answer 3

Corporations vested with public interest. Independent directors must constitute at least 20% of the board.

RCC Sec. 22. […]

The board of the following corporations vested with public interest shall have independent directors constituting at least twenty percent (20%) of such board:

a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The Securities Regulation Code”, namely those whose securities are registered with the Commission, corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares;

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

c) Other corporations engaged in business vested with public interest similar to the above, as may be determined by the Commission, after taking into account relevant factors which are germane to the objective and purpose of requiring the election of an independent director, such as the extent of minority ownership, type of financial products or securities issued or offered to investors, public interest involved in the nature of business operations, and other analogous factors.

Question 4

Who is an independent director?

Answer 4

RCC Sec. 22. […]

An independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director.

Question 5

How shall independent directors be elected?

Answer 5

RCC Sec. 22. […]

Independent directors must be elected by the shareholders present or entitled to vote in absentia during the election of directors. Independent directors shall be subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number of board memberships and other requirements that the Commission will prescribe to strengthen their independence and align with international best practices.

Question 6

Who shall have the right to nominate the dreictor or trustee of a corporation?

Answer 6

SEC. 23. Election of Directors or Trustees. – Except when the exclusive right is reserved for holders of founders’ shares under Section 7 of this Code, each stockholder or member shall have the right to nominate any director or trustee who possesses all of the qualifications and none of the disqualifications set forth in this Code.

Question 7

Who must be present at all elections of directors or trustees?

Answer 7

Sec. 23. […] At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy, the owners of majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote.

This is the quorum for election of directors/trustees

Question 8

When may stockholders or members vote in absentia?

Answer 8

GR: No voting in absentia or remote communication
XPN1: When so authorized by the bylaws or by majority of the Board
XPN2: If corporaiton is a corporaiton vested with public interest, right is available even when not authorized by bylaws or majority of the board of directors

Sec. 23. […] When so authorized in the bylaws or by a majority of the board of directors, the stockholders or members may also vote through remote communication or in absentia: Provided, That the right to vote through such modes may be exercised in corporations vested with public interest, notwithstanding the absence of a provision in the bylaws of such corporations.

Question 9

Is it proper to consider the meber voting in absentia or through remote communication absent for purposes of quorum?

Answer 9

If authorized or corp with public interest, no, it is not proper.
If unauthorized and not a corp with public interest, yes can be considered absent.

Sec. 23. […] A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum.

Question 10

What is the rule in manner of voting?

Answer 10

GR: Viva voce/show of hands
XPN: Ballow upon request by any SH or M

The election must be by ballot if requested by any voting stockholder or member.

Question 11

How shall stockholders or members distribute their votes for nominated directors or trustees?

Answer 11

SCs:
If N = total number of shares

Total number of votes of SH = N * (Board Seats)

NSCs:
Total number of votes of M = 1 * (Board Seat)
no cumulative voting for nonstock corporations; only 1 vote per person per trustee

RCC Sec. 23. […]

In stock corporations, stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own names in the stock books of the corporation at the time fixed in the bylaws or where the bylaws are silent, at the time of the election.

The said stockholder may:
(a) vote such number of shares for as many persons as there are directors to be elected;
(b) cumulate said shares and give one (1) candidate as many votes as the number of directors to be elected multiplied by the number of the shares owned; or
(c) distribute them on the same principle among as many candidates as may be seen fit:

Provided, That the total number of votes cast shall not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected:

Provided, however, That no delinquent stock shall be voted.

Unless otherwise provided in the articles of incorporation or in the bylaws, members of nonstock corporations may cast as many votes as there are trustees to be elected but may not cast more than one (1) vote for one (1) candidate.

Nominees for directors or trustees receiving the highest number of votes shall be declared elected.

Question 12

What is the procedure in case no election of directors/trustees is held due to lack of quorum?

Answer 12

RCC Sec. 23. […] If no election is held, or the owners of majority of the outstanding capital stock or majority of the members entitled to vote are not present in person, by proxy, or through remote communication or not voting in absentia at the meeting, such meeting may be adjourned and the corporation shall proceed in accordance with Section 25 of this Code.

Sec. 25. […] The non-holding of elections and the reasons therefor shall be reported to the Commission within thirty (30) days from the date of the scheduled election. The report shall specify a new date for the election, which shall not be later than sixty (60) days from the scheduled date.

Question 13

Who shall be the corporate officers? When are they elected? And what are their qualifications?

When is a compliance officer necessary?

Answer 13

SEC. 24. Corporate Officers. – Immediately after their election, the directors of a corporation must formally organize and elect:
(a) a president, who must be a director;
(b) a treasurer, who must be a resident;
(c) a secretary, who must be a citizen and resident of the Philippines; and
(d) such other officers as may be provided in the bylaws.

If the corporation is vested with public interest, the board shall also elect a compliance officer.

The same person may hold two (2) or more positions concurrently, except that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in this Code.

The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors.

Question 14

What is the reportorial requirement to the SEC after the holding of elections?

Answer 14

SEC. 25. Report of Election of Directors, Trustees and Officers, Non-holding of Election and Cessation from Office. – 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 Commission, the names, nationalities, shareholdings, and residence addresses of the directors, trustees, and officers elected.

Question 15

What must be reported to the SEC in case there is failure to elect board of directors?

Answer 15

RCC Sec. 25. […] The non-holding of elections and the reasons therefor shall be reported to the Commission within thirty (30) days from the date of the scheduled election. The report shall specify a new date for the election, which shall not be later than sixty (60) days from the scheduled date.

Question 16

What is the procedure in case no new date has been set for the new schedule of elections?

Answer 16

RCC Sec. 25. […] If no new date has been designated, or if the rescheduled election is likewise not held, the Commission may, upon the application of a stockholder, member, director or trustee, and after verification of the unjustified non-holding of the election, summarily order that an election be held.

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

Notwithstanding any provision of the articles of incorporation or bylaws to the contrary, the shares of stock or membership represented at such meeting and entitled to vote shall constitute a quorum for purposes of conducting an election under this section.

Question 17

What shall be the procedure in case a director, trustee, or officer ceases to hold office?

Answer 17

RCC Sec. 25. […] Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the director, trustee or officer of the corporation, shall, within seven (7) days from knowledge thereof, report in writing such fact to the Commission.

Question 18

What are the grounds for the disqualification of a director or trustee or officer of a corporation?

Answer 18

SEC. 26. Disqualification of Directors, Trustees or Officers. – A person shall be disqualified from being a director, trustee or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was:

(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;

(2) For violating this Code; and

(3) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”;

(b) Found administratively liable for any offense involving fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the Commission, the primary regulatory agency, or the Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings.

Question 19

May stockholders/members remove sitting directors/trustees?

Answer 19

YES. 2/3 Vote SH/M; at reg/spcl mtg; spcl. mtg called by sec.

Sec will call spcl mtg upon: (1) order of president; or (2) written demand by majority SH/M

If Sec. fails/refuses: SH/M signing the written demand may call the meeting; must follow notice requirements

Grounds: with or without cause (applicable only on removal by SH/M)

XPN on removal without cause: cannot deprive minority stockholders of right to representation

SEC. 27. Removal of Directors or Trustees. – Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or in a nonstock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:

Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting.

A special meeting of the stockholders or members for the purpose of removing any director or trustee must be called by the secretary on order of the president, or

upon written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or a majority of the members entitled to vote.

If there is no secretary, or if the secretary, despite demand, fails or refuses to call the special meeting or to give notice thereof, the stockholder or member of the corporation signing the demand may call for the meeting by directly addressing the stockholders or members.

Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code.

Removal may be with or without cause:

Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 23 of this Code.

Question 20

May the SEC order the removal of a director/trustee?

Answer 20

Yes but only on grounds of disqualification.

RCC. Sec. 27. […] The Commission shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election.

The removal of a disqualified director shall be without prejudice to other sanctions that the Commission may impose on the board of directors or trustees who, with knowledge of the disqualification, failed to remove such director or trustee.

Question 21

What is the general rule on vacancies on the Board?

Answer 21

GR: Vacancy on board, may be elected by majority vote of sitting directors/trustees PROVIDED still constitutin a quorum
XPN: No more quorum = must be voted by SH or M in a reg./spec. mtg.

SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. – Any vacancy occurring in the board of directors or trustees other than by removal or by expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders or members in a regular or special meeting called for that purpose.

Question 22

When shall election of board of directors/trustees by SH/M be held?

Answer 22

**Depends on the cause of vacancy:
**Term expiration = no later than the day of such expiration
Removal by SH/M = same day of meeting authorizing removal (must also be stated in the notice)
All other cases of vacancy = no later than 45 days from the time the vacancy arose

Sec. 28. […] When the vacancy is due to term expiration, the election shall be held no later than the day of such expiration at a meeting called for that purpose.

When the vacancy arises as a result of removal by the stockholders or members, the election may be held on the same day of the meeting authorizing the removal and this fact must be so stated in the agenda and notice of said meeting.

In all other cases, the election must be held no later than forty-five (45) days from the time the vacancy arose.

Question 23

When may BOD/T create a emergency board?

Answer 23

Sec. 28. [W]hen the vacancy prevents the remaining directors from constituting a quorum and emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation,

the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees.

The action by the designated director or trustee shall be limited to the emergency action necessary, and

the term shall cease within a reasonable time from the termination of the emergency or upon election of the replacement director or trustee, whichever comes earlier.

The corporation must notify the Commission within three (3) days from the creation of the emergency board, stating therein the reason for its creation.

Question 24

How shall additional board seats be filled?

Answer 24

Sec. 28. […] Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.

In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of this Code shall apply.

Question 25

What is the rule on compensation of directors or trustees?

Answer 25

GR: Reasonable per diems only
XPN: When bylaws fix their compensation OR Majority SH or M will grant their directors/trustees compensation and approve the amount thereof

Limit to amount: yearly compensation shall not exceed 10% of EBIT

SEC. 29. Compensation of Directors or Trustees. – In the absence of any provision in the bylaws fixing their compensation, the directors or trustees shall not receive any compensation in their capacity as such, except for reasonable per diems: Provided however, That the stockholders representing at least a majority of the outstanding capital stock or majority of the members may grant directors or trustees with compensation and approve the amount thereof at a regular or special meeting.

In no case shall the total yearly compensation of directors exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.

Directors or trustees shall not participate in the determination of their own per diems or compensation.

Corporations vested with public interest shall submit to their shareholders and the Commission, an annual report of the total compensation of each of their directors or trustees.

Question 26

When shall directors, trustees or officers be made liable to the corporation for damages to the corporation, shareholders/members, or third persons?

Answer 26

SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

Question 27

What shall be the effect if a director/trustee/or officer acquires an interest adverse to the corporation in respect to a matter reposed on him/her in confidence?

Answer 27

Sec. 30. […] A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the corporation in respect of any matter which has been reposed in them in confidence, and upon which, equity imposes a disability upon themselves to deal in their own behalf; otherwise the said director, trustee, or officer shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

Question 28

What is the rule in case of self-dealing directors?

Answer 28

GR: Contracts are voidable
XPN: Conditions are present

Voidable contracts may be ratified by 2/3 SH or M

SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. – A contract of the corporation with (1) one or more of its directors, trustees, officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of such corporation, unless all the following conditions are present:

(a) 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;

(b) The vote of such director or trustee was not necessary for the approval of the contract;

(c) The contract is fair and reasonable under the circumstances;

(d) In case of corporations vested with public interest, material contracts are approved by at least two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors voting to approve the material contract; and

(e) In case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting and the contract is fair and reasonable under the circumstances.

Question 29

What is the rule in corporate dealings with interlocking directors?

Answer 29

GR: Not invalidated on that ground alone
XPN: D1 has substantial interest (20%) in C1 but nominal interest (n>20%) in C2

SEC. 32. Contracts Between Corporations with Interlocking Directors. – Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two (2) or more corporations having interlocking directors shall not be invalidated on that ground alone:

Provided, That if the interest of the interlocking director in one (1) corporation is substantial and the interest in the other corporation or corporations is merely nominal, the contract shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.

Question 30

When is there disloyalty of a director, and what is the rule?

Answer 30

Disloyalty = acquisition of business opportunity which should belong to corporation
Effect = account and refund profits to corporation
XPN = except when rtified by 2/3 vote of SH

SEC. 33. Disloyalty of a Director. – Where a director, by virtue of such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director must account for and refund to the latter all such profits,

unless the act has been ratified by a vote of the stockholders owning or representing at least two- thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstandingthe fact that the director risked one’s own funds in the venture.

Question 31

May a corporation create an executive, management, or special committee?

Answer 31

Yes but only if bylaws provide.
GR: No executive, management, or special committee
XPN: bylaws provide

Role of executive committee: all functions which board is competent to do, as may be delegated in the bylaws, expect specifed in RCC Sec 34

Role of special committee: determine term, composition, compensation, powers, and responsibility (may be for a temporary or limited period)

SEC. 34. Executive, Management, and Other Special Committees. – If the bylaws so provide, the board may create an executive committee composed of at least three (3) directors.

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 bylaws or by majority vote of the board, except with respect to the:
(a) approval of any action for which shareholders’ approval is alsorequired;
(b) filling of vacancies in the board;
(c) amendment or repeal of bylaws or the adoption of new bylaws;
(d) amendment or repeal of any resolution of the board which by its express terms is not amendable or repealable; and
(e) distribution of cash dividends to the shareholders.

The board of directors may create special committees of temporary or permanent nature and determine the members’ term, composition, compensation, powers, and responsibilities.