NOTES

CORPORATIONS
* CC – Corporation Code
* RCC – Revised Corporation Code (RA 11232)

BOARD OF DIRECTORS (TITLE III, RCC)

✓ The board of directors/trustees (BOD/BOT) is the governing body of a corporation.
✓ Since a corporation is an artificial being, it can only act through individuals. However,
these individuals must act as a body. They cannot, on their own, bind the corporation.
✓ The board of directors or trustees shall:
1. Exercise the corporate powers;
2. Conduct all business; and
3. Control all properties of the corporation. (Sec. 22, RCC)

DOCTRINE OF CENTRALIZED MANAGEMENT

✓ General Rule: The Doctrine of Centralized Management states that all corporate powers
are exercised by the BOD or BOT.
Exception: The doctrine is not applicable to the following instances:
1. In case of delegation to the Executive Committee duly authorized in the by-
laws;
2. Authorization pursuant to a contracted manager which may be an individual,
a partnership, or another corporation; and
3. In case of close corporations, the stockholders may manage the business of the
corporation instead of a board of directors, if the articles of incorporation so
provide

BUSINESS JUDGMENT RULE

✓ Questions of policy or management are left solely to the honest decision of officers and
directors of a corporation.
✓ As such, 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 not reviewable by the courts or the SEC.
✓ The directors are also not liable to the stockholders in performing such acts.
✓ 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.

INDEPENDENT DIRECTOR
✓ An “independent director” shall mean a person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other individual having a relationship with
the corporation, which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
✓ The board of the following corporations vested with public interest shall have
independent directors constituting at least twenty percent (20%) of such board (Sec. 22,
RCC):
1. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise
known as “The Securities Regulation Code”;
- Namely those:
a. Whose securities are registered with the SEC;
b. Corporations listed with an exchange or with assets of at least Fifty
million pesos (P50,000,000.00); and
c. Those having two hundred (200) or more holders of shares, each
holding at least one hundred (100) shares of a class of its equity
shares;
 2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, pre-need, trust and insurance companies, and other financial
intermediaries; and
3. Other corporations engaged in business vested with public interest similar to
the above, as may be determined by the SEC.

TENURE OF OFFICE
✓ BOD: They shall be elected for a term of 1 year.
✓ BOT: They shall be elected for a term not exceeding three (3) years.
✓ Under the CC, the term for trustees is 1 year.
✓ If no election is held, the directors and officers will continue to occupy position even after
the lapse of their term under a Hold-Over Capacity until their successors are elected and
qualified.

QUALIFICATIONS
✓ The following are the qualifications of directors/trustees:
1. For stock corporations, he must be the owner of at least 1 share of stock which
shall stand in his name on the books of the corporation.
- Any director who ceases to be the owner of at least 1 share of stock shall
also cease to be a director.
2. For non-stock corporations, he must be a member of the corporation.
3. Must not have been convicted by final judgment of an offense punishable by
imprisonment for period exceeding 6 years or a violation of the Corporation
Code, committed within 5 years prior to the date of his election.
4. Must be of legal age.
5. Other qualifications as may be prescribed in special laws or regulations or in
the by-laws of the corporation.

Note: The RCC removed the residency requirement as to the BOD/BOT

✓ General Rule: There is no citizenship requirement demanded of the members of the

BOD/BOT.
Exception: Such requirement may be provided by other laws for corporations not
organized under the RCC.
✓ Example: For domestic banks, under the General Banking Act, at least 2/3 of
the board must be citizens of the Philippines.

DISQUALIFICATIONS (Sec. 26, RCC)

✓ 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:
1. Convicted by final judgment:
a. Of an offense punishable by imprisonment for a period exceeding six
(6) years;
b. For violating the RCC; and
c. For violating Republic Act No. 8799, otherwise known as “The
Securities Regulation Code;”
2. Found administratively liable for any offense involving fraudulent acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations
or misconduct similar to those enumerated in paragraphs (1) and (2) above.

ELECTION (Sec. 23, RCC)

✓ 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 the RCC.
- This is subject to the exclusive right reserved for holders of founders’ shares.
✓ They are elected at a meeting called for that purpose.
✓ At all elections of directors or trustees, there must be present, the owners of majority of
the outstanding capital stock (Quorum), or if there be no capital stock, a majority of
the members entitled to vote.
- They can be present either:
1. In person; or
2. Through a representative authorized to act by written proxy,
- 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.
✓ The election must be by ballot if requested by any voting stockholder or member.
- If there is no such request, the manner for the election as provided for in the
by-laws will be followed.
✓ The candidates receiving the highest number of votes shall be declared elected.
✓ No delinquent stock shall be voted.
- A stock becomes delinquent upon failure of the holder to pay the unpaid
subscription or balance.
✓ Methods of Voting:
1. Stock Corporation - 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.
- The said stockholder may:
a. Straight Voting - Vote such number of shares for as many
persons as there are directors to be elected.
- Here, you multiply the number of shares owned by the
number of directors to be elected.
- Number of Share x Number of Directors

Illustration: Carlo owns 100 shares in X Corporation. If there

are 5 directors to be elected, X is entitled to 500 votes.

Q: How did we get 500?

A: 100 shares x 5 directors to be elected

Here, he can choose from the candidates, the 5 that he wants to

be elected and he can give them 100 votes each. Under this
method, the votes are distributed among the 5 without
preference.

Let’s say there are 20 candidates, but Carlo only chose Ana, Bea,
Ejay, Niko and Angelo as the candidates he wanted to be
elected. Thus, under straight voting, he can give them 100 votes
each.

b. Cumulative voting for one candidate – a stockholder is

allowed to concentrate his votes and give one candidate as many
votes as he is entitled to.

Illustration: Carlo is entitled to 500 votes. Under this method,

Carlo can give all his votes to a single candidate. So he can all his
500 votes to Ana or he can give all the 500 to Angelo.

c. Cumulative voting by distribution – a stockholder may

cumulate his shares by distributing the same among as many
candidates as he shall see fit.
 Illustration: Carlo is entitled to 500 votes. Under this method,
he can give: Ana=50 votes, Bea=150 votes, Ejay=100 votes, and
Niko=200 votes.

Here, Carlo is allowed any combination provided the total

number of votes cast by him does not exceed 500.

- The right to cumulative voting is a statutory right. It is provided for

by the RCC. (Sec. 23, RCC)
- As such, the corporation cannot restrict the use of such right.
- Minority stockholders can use cumulative voting so as to have a
representation in the board. Here, they can cumulate their votes in a
single candidate so he/she can represent them in the board of directors.
2. Non-Stock Corporation - members of nonstock corporations may cast as
many votes as there are trustees to be elected but may not cast more than 1 vote
for 1 candidate.
- Nominees for directors or trustees receiving the highest number of
votes shall be declared elected.

Illustration: Carlo is a member of X Corporation, a non-stock

corporation. There are 5 trustees to be elected. As such, he is only
entitled to 5 votes.

Here, he can give the said votes to the 5 candidates he wishes to be

elected. Thus, he can give Ana, Bea, Ejay, Niko and Angelo 1 vote each.
Carlo cannot give 2 votes to Ana or Angelo.

✓ Q: What happens after the election is held?

A: The names, nationalities, shareholdings, and residence addresses of the directors,
trustees, and officers elected shall be submitted to the SEC.
- When? Within thirty (30) days after the election.
- Who will submit? The secretary or any other officer of the corporation.
✓ Q: What happens 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?
A: The meeting for the election may be adjourned.
- The non-holding of elections and the reasons therefor shall be reported to the
SEC.
- When shall it be reported? Within thirty (30) days after 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.
- Q: What happens if no new date has been designated, or if the rescheduled
election is likewise not held?
A: The SEC, upon the application of a stockholder, member, director or trustee,
and after verification of the unjustified non-holding of the election, may
summarily order that an election be held.

REMOVAL OF DIRECTORS/TRUSTEES (Sec. 27, RCC)

✓ Requisites for Removal:
1. It must take place either at a regular meeting of the corporation or at a special
meeting called for the purpose.
- For the special meeting, it must be:
a. Called by the secretary on order of the president; or
b. 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.
 -Q: What is the remedy if there is no secretary, or if the secretary, despite
demand, fails or refuses to call the special meeting or to give notice
thereof?
A: The stockholder or member of the corporation signing the demand
may call for the meeting by directly addressing the stockholders or
members.
2. There must be previous notice to stockholders or members of the corporation
of the intention to propose such removal at the meeting.
- 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.
3. Vote required:
- Stock corporation: a vote of the stockholders holding or representing
at least two-thirds (2/3) of the outstanding capital stock.
- Non-stock corporation: a vote of at least two-thirds (2/3) of the
members entitled to vote.
4. The removal may be with or without cause.
- Exception: 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 the RCC, the SEC may order the removal of a director/trustee.
- The SEC can do so motu proprio (on its own) or upon verified complaint.
- It must be after due notice and hearing.

VACANCIES (Sec. 28, RCC)

✓ Vacancy is created by:
1. Expiration of term;
2. Removal; and
3. Increase in the number of directors or trustees; and
4. Grounds other than #s 1-3, such as death, resignation, withdrawal, or
disqualification.
✓ How are vacancies filled:
1. Expiration of term, Removal and Increase in the number of directors or
trustees: must be filled by the stockholders or members in a regular or special
meeting called for that purpose.
- When should they hold the election:
a. Expiration of term - no later than the day of such expiration at
a meeting called for that purpose
b.Removal - 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.
2. Other grounds: may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum.
- If there is no longer any quorum, the vacancy shall be filled through a
regular or special meeting called for that purpose.
- The election shall be held no later than forty-five (45) days from the
time the vacancy arose.
✓ A director or trustee elected to fill a vacancy shall be referred to as replacement director
or trustee and shall serve only for the unexpired term of the predecessor in office.
✓ Under the RCC, the concept of an Emergency Board, in case of vacancies, was introduced.
- Requisites:
1. The vacancy prevents the remaining directors from constituting a
quorum;
2. Emergency action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation;
3. The vacancy may be temporarily filled from among the officers of the
corporation;
 4. The appointment must be made by unanimous vote of the remaining
directors or trustees; and,
5. 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 SEC within three (3) days from the creation
of the emergency board, stating therein the reason for its creation.

COMPENSATION (Sec. 29, RCC)

✓ General Rule: the directors or trustees shall not receive any compensation in their
capacity as such, except for reasonable per diems.
Exception:
1. If there is a provision in their by-laws providing for their compensation; or
2. If 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.
✓ Limitation: 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.

CORPORATE OFFICERS (Sec. 24, RCC)

✓ Immediately after their election, the directors of a corporation must formally organize and
elect:
1. A president, who must be a director;
2. A treasurer, who must be a resident of the Philippines;
3. A secretary, who must be a citizen and resident of the Philippines; and
4. Such other officers as may be provided in the bylaws.

THREE-FOLD DUTIES OF DRECTORS/TRUSTEES and THEIR LIABILITIES

✓ The directors’ character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned.
- As agents entrusted with the management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary relation, and in this sense
the relation is one of trust.
✓ The following are the three-fold duties of a director/trustee:
1. Duty of Obedience;
2. Duty of Diligence; and
3. Duty of Loyalty.
✓ Liability of directors/trustees for official acts:
- General Rule: The officers of a corporation are not personally liable for their
official acts.
- Exceptions:
1. Instances under Sec. 30, RCC;
2. If they assent to or vote for the issuance of watered stocks, or failed to
object in writing;
3. Expressly or impliedly assumed the liability of the corporation; and
4. Express provision of law.
✓ Duty of Obedience – the directors/trustees to be elected shall perform the duties enjoined
on them by law and the by-laws of the corporation.
- They cannot exceed the powers and authority given to them by law, their AOI
and by-laws, otherwise, they shall be held liable.
 ✓ Duty of Diligence – Directors/trustees who:
1. Willfully and knowingly vote for or assent to patently unlawful acts of the
corporation;
2. Are guilty of gross negligence; or
3. Are guilty of bad faith in directing the affairs of the corporation,

Shall be liable solidarily for all the damages resulting therefrom suffered by the
corporation, its stockholders and other persons.
✓ Duty of Loyalty - 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. (Sec. 30, par. 2, RCC)
- Instances of Conflict of Interes:
1. Self-dealing directors;
2. Fixing their own compensation;
3. Interlocking directors;
4. Seizing corporate opportunity; and
5. Using inside information.

SELF DEALING DIRECTORS (Sec. 31, RCC)

✓ These are directors who personally enter into a contract with the corporation.
✓ This involves 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.
- The RCC expanded the coverage of self-dealing provision to spouses and
relatives within the fourth civil degree of consanguinity or affinity of the
directors, trustees, officers.
- Illustration: Ana is a director of X Corporation. X Corporation is engaged in
the restaurant business. Ana is also the owner of a vegetable dealership
business, who delivers fresh vegetables to restaurants.

Ana becomes a self-dealing director if X Corporation enters into an agreement

with her business for the delivery of vegetables to the restaurants owned by X
Corporation.
✓ These contracts are VOIDABLE, at the option of the corporation, unless the following
conditions are present:
1. 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. The vote of such director or trustee was not necessary for the approval of the
contract;
3. The contract is fair and reasonable under the circumstances;
4. 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
5. In case of an officer, the contract has been previously authorized by the board
of directors.
✓ Where any of the first three (3) conditions is absent, in the case of a contract with a
director or trustee, such contract may be ratified by:
- (Stock) The vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock; or
- (Non-Stock) The vote of at least two-thirds (2/3) of the members in a
meeting called for the purpose.
 - 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.

INTERLOCKING DIRECTORS (Sec. 32, RCC)

✓ This happens when one, some, or all of the directors of a corporation, are also directors of
another corporation.
✓ Illustration: Ana and Feliza are both directors of X Corporation and Y Corporation. Here,
they are considered as interlocking directors of X Corporation and Y Corporation.
✓ A contract between two (2) or more corporations having interlocking directors are
considered as VALID and shall not be invalidated on that ground alone.
✓ However, 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 on self-dealing directors (Sec. 31, RCC) as to the
corporation where the share of the interlocking director is merely nominal.
- Stockholdings exceeding twenty (20%) percent of the outstanding capital
stock shall be considered substantial for purposes of interlocking directors.

Illustration:

X Corporation and Y Corporation entered into a contract with each other. Ana
is a director in both corporations; thus, Ana is considered as an interlocking
director.

Here, the contract between X Corporation and Y Corporation is valid and

cannot be voided based on the presence of an interlocking director alone.

However, let us say that Ana owns 35% of shares in X Corporation while she
owns only 10% shares in Y Corporation.

Q: Will the rules under self-dealing directors apply?

A: Yes, because the interest of Ana in X Corporation is substantial (exceeded
20%) while her interest in Y Corporation is merely nominal (did not exceed
20%).

Q: What will happen now?

A: We follow the rules under Sec. 31, RCC.
- These contracts are VOIDABLE, at the option of the corporation,
unless the following conditions are present:
1. 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. The vote of such director or trustee was not necessary for the
approval of the contract;
3. The contract is fair and reasonable under the circumstances;
4. 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
5. In case of an officer, the contract has been previously authorized by
the board of directors.
- Where any of the first three (3) conditions is absent, in the case of a
contract with a director or trustee, such contract may be ratified by:
1. (Stock) The vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock; or
2. (Non-Stock) The vote of at least two-thirds (2/3) of the members
in a meeting called for the purpose.
 - 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.

DISLOYALTY OF A DIRECTOR (Sec. 33, RCC)

✓ A director is disloyal where, by virtue of such office, the director acquires a business
opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation. (Doctrine of Corporate Opportunity)
✓ Effect: the director must account for and refund to the latter all such profits.
- Exception: If 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, there
is no need to account and refund.
✓ This provision shall be applicable, notwithstanding the fact that the director risked one’s
own funds in the venture.

EXECUTIVE COMMITTEE (Sec. 34, RCC)

✓ A body created by the by-laws and composed of at least three (3) members directors
which, subject to the statutory limitations, has all the authority of the board to the extent
provided in the board resolution or by-laws.
✓ The BOD can create such as long as the by-laws of the corporation allows it to do so.
✓ They may act on matters as may be delegated to it in the by-laws or as delegated by the
BOD by majority vote.
✓ Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, except with respect to the:
1. Approval of any action for which shareholders’ approval is also required;
2. Filling of vacancies in the board;
3. Amendment or repeal of bylaws or the adoption of new by-laws;
4. Amendment or repeal of any resolution of the board which by its express terms
is not amendable or repealable; and
5. Distribution of cash dividends to the shareholders.

QUORUM (Sec. 52, RCC)

✓ Majority of the directors or trustees as stated in the articles of incorporation shall
constitute a quorum to transact corporate business.
✓ Every decision reached by at least a majority of the directors or trustees constituting a
quorum, except for the election of officers which shall require the vote of a majority of all
the members of the board, shall be valid as a corporate act.

MEETINGS OF DIRECTORS (Sec. 52, RCC)

✓ Regular meetings of the board of directors or trustees of every corporation shall be held
monthly, unless the by-laws provide otherwise.
✓ Special meetings of the board of directors or trustees may be held at any time upon the
call of the president or as provided in the by-laws.
✓ Where: Meetings of directors or trustees of corporations may be held anywhere in or
outside of the Philippines, unless the by-laws provide otherwise.
✓ Notice of regular or special meetings stating the date, time and place of the meeting must
be sent to every director or trustee at least two (2) days prior to the scheduled meeting,
unless a longer time is provided in the by-laws.
- A director or trustee may waive this requirement, either expressly or impliedly.
✓ Directors or trustees who cannot physically attend or vote at board meetings can
participate and vote through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them reasonable
opportunities to participate.
✓ Directors or trustees cannot attend or vote by proxy at board meetings.
✓ A director or trustee who has a potential interest in any related party transaction must
refuse from voting on the approval of the related party transaction without prejudice to
compliance with the requirements of Section 31 of the RCC.
 ✓ Who presides:
1. The chairman; or
2. In the chairman’s absence, the president shall preside at all meetings of the
directors or trustees as well as of the stockholders or members, unless the by-
laws provide otherwise.

References:
1. Sundiang, Sr. and Aquino. 2017. “Reviewer on Commercial Law.”
2. Soriano. 2011. “Notes on Business Law.”
3. Divina. “Highlights of the Revised Corporation Code.”
4. Comparative Matrix of the Corporation Code and the Revised Corporation Code
(https://www.sec.gov.ph/wp-content/uploads/2019/11/2019Legislation_Revised-
Corporation-Code-Comparative-Matrix_as-of-March-22-2019.pdf)
5. UST Golden Notes. 2018. Mercantile Law Reviewer
6. Divina. “Highlights of the Revised Corporation Code.”
7. RA 11232