10. Directors, Trustees and Officers

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

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

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

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

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

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

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

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

• Doctrine of Centralized Management1 o General Rule: The corporation’s consent is that of its

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

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

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

o Court’s Attitude Towards the Board’s Exercise of Power: The Board of a corporation has sole authority to

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



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

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

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

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

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

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

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

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

A. Rationale for “Centralized Management” Doctrine:

• The raison d’etre behind the conferment of corporate powers on the Board of Directors is not lost on the Court – indeed, the concentration in the Board of the powers of control of corporate business and appointment of corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business. Filipinas Port Services v. Go, 518 SCRA 453 (2007).

Filipinas Port Services v. Go

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



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

management of the corporation’s regular business affairs, unless more extensive power is expressly conferred.

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

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

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

B. Theories on Source of Board Power

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

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



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

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

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

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

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

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

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

Angeles v. Santos

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



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

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

Tan v. Sycip

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

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



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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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




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

Board of Liquidators v. Heirs of Maximo M. Kalaw

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

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

2. Ratification from the board

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

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

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

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

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

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

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



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

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

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


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

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

II. BUSINESS JUDGMENT RULE:

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

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

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

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



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

• Theoretical Basis for the Business Judgment Rule: The

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

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

PSE v. Court of Appeals

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



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

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

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

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


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

Ong Yong v. Tiu

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



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

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

unlawful acts of the corporation;2

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

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

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

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

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

• If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or

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



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

III. COUNTER-‐VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS

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

A. Theory of Estoppel or Ratification

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

Lipat v. Pacific Banking Corp.


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



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

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

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



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

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

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

B. Doctrine of Laches or “Stale Demands”

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


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

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

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

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

Francisco v. GSIS

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

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



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

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

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

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

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

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

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

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



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

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

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

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

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

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

Westmont Bank v. Inland Construction and Dev. Corp.

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



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

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

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

• “Victim Standing” for doctrine to apply à the doctrine of apparent authority cannot apply to benefit a party who deals with the corporation aware of the corporate representative’s lack of authority.1

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




produced a change of position to the third party’s detriment.

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

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

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

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

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

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

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

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



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

Associated Bank v. Pronstroller

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

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



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

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

1. Qualifications

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

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

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

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

Gokongwei, Jr. v. Securities and Exchange Commission

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




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

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

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

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

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

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

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

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

Lee v. Court of Appeals

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

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



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

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

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

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

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

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

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



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

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

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

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

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

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

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

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



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

1. Cumulative Voting1 • Cumulative Voting v. Straight Voting

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

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

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

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

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

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

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

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

2. Report on Election of Directors, Trustees and Officers

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

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



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

• Since under Section 26 of the Corporation Code all corporations are mandated to submit a formal report to the SEC on the changes in their directors and officers, then only those directors and officers appearing in such report (General Information Sheet) to the SEC are deemed legally constituted to bind the corporation, especially in the bringing of suits in behalf of the corporation. Premium Marble Resources v. Court of Appeals, 264 SCRA 11 (1996).

Premium Marble Resources v. Court of Appeals

Facts: The case began when Premium Marble Resources Inc., assisted by Atty. Arnulfo Dumadag as counsel, filed an action for damages against International Corporate Bank. Later, the same corporation, i.e., Premium, but this time represented by Siguion Reyna, Montecillio and Ongsiako Law Office as counsel, filed a motion to dismiss the action of petitioners on the ground that the filing of the case was without authority from its duly constituted board of directors as shown by the excerpt of the minutes of the Premium’s board of directors’ meeting. In its opposition to the motion to dismiss, Premium thru Atty. Dumadag contended that the persons who signed the board resolution namely Belen, Jr., Nograles & Reyes, are not directors of the corporation and were allegedly former officers and stockholders of Premium who were dismissed for various irregularities and fraudulent acts; that Siguion


Reyna Law office is the lawyer of Belen and Nograles and not of Premium and that the Articles of Incorporation of Premium shows that Belen, Nograles and Reyes are not majority stockholders. Issue: Whether or not the filing of the case for damages against private respondent bank (International Corporate Bank) was authorized by a duly constituted Board of Directors of the petitioner corporation Held: NO. The Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner however, failed to show proof that this election was reported to the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981. The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not been fully substantiated. Hence, the court agrees with the finding of the Court of Appeals, that in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Doctrine: By the express mandate of the Corporation Code (Section 26), all corporations duly organized pursuant thereto are required to submit within the period therein stated (30 days) to the Securities and Exchange Commission the names, nationalities and residences of the directors, trustees and officer selected.



• The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a board of directors whose members have stood for election, and who have actually been elected by the stockholders, on an annual basis. Only in that way can the directors’ continued accountability to the shareholders, and the legitimacy of their decisions that bind the corporation’s stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do not own. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).

Valle Verde Country Club, Inc. v. Africa

Facts: The Valle Verde Country Club (VVCC) has a 9-‐member Board of Directors. From 1997 to 2001, the requisite quorum for holding of the stockholders’ meeting could not be obtained so the directors continued to serve in hold-‐over capacity. In 1998, two directors resigned and were replaced. Africa questions the election of the two directors with the Securities and Exchange Commission for allegedly being in contravention of Section 29 of the Corporation Code which states that all vacancies that occur other than by removal by the stockholders or expiration of term may be filled by the vote of at least a majority of the remaining directors (if still constituting a quorum). However if the vacancy was caused by either removal by the stockholders or expiration of term, then it must be filled by a vote of the stockholders. Anyone who would fill the vacancy prior to such will only serve for the unexpired term. Africa points out that since Makalintal’s term had already expired with the lapse of the one-‐year term provided in Section

23, there is no more “unexpired term” during which Ramirez could serve. VVCC on the other hand alleges that a member’s term shall be for one year and until his successor is elected and qualified; otherwise stated, a member’s term expires only when his successor to the Board is elected and qualified. Issue: Whether or not the remaining directors of a corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-‐over director Held: NO. Makalintal’s term of office began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his resignation on November 10, 1998. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired. His resignation as a holdover director did not change the nature of the vacancy (i.e. vacancy by expiration of term of director); the vacancy due to the expiration of Makalintal’s term had been created long before his resignation. As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintal’s one-‐year term had already expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining members of its board of directors. Doctrine: It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it



shall be the corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member’s term.

• Corporations are required under Section 26 of the Corporation Code to submit to the SEC within thirty (30) days after the election the names, nationalities, and residences of the directors, trustees and officers of the Corporation. In order to keep stockholders and the public transacting business with domestic corporation properly informed of their organization operational status, the SEC has issued the rule requiring the filing of the General Information Sheet. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).

• When the names of some of the directors who signed the board resolution does not appear in the General Information Sheet filed with the SEC, then there is doubt whether they were indeed duly elected members of the Board legally constituted to bring suit in behalf of the Corporation. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).

B. CUMULATIVE VOTING (Section 24)

• Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation, 35 South Carolina L. Rev. 295

• See previous sections. C. Trustee (Sections 92 and 138) Section 92. Election and term of trustees. Unless otherwise provided in the articles of incorporation or the by-‐laws, the board of trustees of non-‐stock corporations, which may be

more than fifteen (15) in number as may be fixed in their articles of incorporation or by-‐laws, shall, as soon as organized, so classify themselves that the term of office of one-‐ third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-‐third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation. Unless otherwise provided in the articles of incorporation or the by-‐laws, officers of a non-‐stock corporation may be directly elected by the members. (n) Section 138. Designation of governing boards. The provisions of specific provisions of this Code to the contrary notwithstanding, non-‐stock or special corporations may, through their articles of incorporation or their by-‐laws, designate their governing boards by any name other than as board of trustees. (n)

• In non-‐stock corporations, the default rule in the election of trustees is straight voting. Unlike the mandatory rule for cumulative voting for stock corporations, in non-‐stock corporations, it is possible to provide for other types of voting in



either the articles of incorporation or the by-‐laws of the corporation.1

VI. Vacancy in Board (Section 29) Section 29. Vacancies in the office of director or trustee. Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members 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 in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. A 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.

• A by-‐law provision or company practice of giving a stockholder a permanent seat in the Board would be against the provision of Sections 28 and 29 of Corporation Code which requires member of the board of corporations to be elected. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).


• The theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not only by the expiration of a member’s term, the successor “so elected to fill in a vacancy shall be elected only for the unexpired term of his predecessors in office. The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation’s operations; yet, in recognition of the stockholders’ right to elect the members of the board, it limited the period during which the successor shall serve only to the “unexpired term of his predecessor in office.” Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).

• Any position in the board 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.2

VII. Term of Office, Hold-‐over Principle

• “Hold-‐over” à a situation that arises when no successor is cleared due to valid and justifiable reason, and the incumbent holds over and continues to function until another officer is chosen and qualified.3

o A hold-‐over situation does not disqualify an incumbent officer from seeking another term in office.

2 Section 39, Corporation Code. 3 SEC Opinion No. 06-‐18, 20 March 2006



o In the event no new board is elected and qualified after the original one-‐year term of the board of directors, then under the hold-‐over principle, the existing board, if still constituting a quorum, is still a legitimate board with full authority to bind the corporation.1

o Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors, hold-‐over until qualification of their successors. Government v. El Hogar Filipino, 50 Phil. 399 (1927).

• The remedy is quo warranto to question the legality and proper qualification of persons elected to the board. Ponce v. Encarnacion, 94 Phil. 81 (1953).

• The remaining members of a corporation’s board of directors cannot elect another director to fill in a vacancy caused by the resignation of a hold-‐over director. The holdover period is not part of the term of office of a member of the board of directors. Consequently, when during the holdover period, a director resigns from the board, the vacancy can only be filled-‐up by the stockholders, since there is no term left to fill-‐up pursuant to the provisions of Section 29 of the Corporation which mandates that a vacancy occurring in the board of directors caused by the expiration of a member’s term shall be filled by the

1 The Corporation Code does not require the taking of an oath of office to qualify the elected directors and officers. Election alone does not make the person elected, a director but there must be an acceptance, either express or implied, although he is rebuttably presumed to accept upon notification, or enters upon the duties of an office after his election or appointment. SEC Opinion, 21 January 1986, XX SEC QUARTERLY BULLETIN (Nos. 1 & 2, March & June, 1986).

corporation’s stockholders. That a director continues to serve after one year from his election (i.e., on a holdover capacity), cannot be considered as extending his term. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).

1. Non-‐Permanency of Board Seat • A by-‐law provision or company practice of giving a stockholder a

permanent seat in the Board would be against the provision of Sections 28 and 29 of Corporation Code which requires member of the board of corporations to be elected. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).

• The mandatory requirements for an annual election of the Board of Directors is an aspect of good corporate governance, in that it subjects the directors to a periodic review of the performance of their duties and responsibilities, thereby making them more responsive to the interests of the stockholders whose mandate they must win annually. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).

VIII. Removal of Directors or Trustees (Section 28) Section 28. 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 if the corporation be a non-‐stock 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 of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-‐stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. 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 24 of this Code.

1. Removal of Directors and Trustees • General Rule: Any director may be removed from office by a

vote of the stockholders holding or representing two-‐third (2/3) of the outstanding capital stock.

o When removal is for cause, the 2/3 vote is the minimum to remove a director.

o When removal is without cause, the 2/3 vote is also enough to remove a director.

• Exception: When the director is elected by the minority through cumulative voting, he may not be removed without cause even if there is a 2/3 vote.

• A stockholders’ meeting called for the removal of a director is valid only when called by at least two-‐ thirds of the outstanding capital stock. Roxas v. De la Rosa, 49 Phil. 609 (1926).

2. Board Has No Power to Discipline or Remove One of Their Own • Only stockholders or members have the power to remove the

directors or trustees elected by them, as laid down in Section 28 of Corporation Code. Raniel v. Jochico, 517 SCRA 221, 230 (2007).

o It is implied in Section 28 that since the power to remove directors is vested with the stockholders, then such power cannot be exercised by the Board, whether that be pursuant to a resolution passed by the Board or even when such power of removal is granted to the Board by provisions in the articles of incorporation and/or by-‐laws of the corporation. Such provision in the articles or by-‐laws is null and void for being contrary to law and public policy.1

3. What Constitutes “Cause” as Basis for Removal? • The Corporation Code does not define the “cause” that can be a

legal basis for removal of a member of the Board. What is clear is that “for cause” goes into the three duties of a director and officer – loyalty, obedience and diligence.

• The provisions under Section 28 are mandatory (i.e. notice) and failure to comply with the procedure, even if the removal




resolution was approved by at least 2/3 of the outstanding capital stock, would make such removal void.1

IX. Directors’ or Trustees’ Meetings (Sections 49, 53, 54 and 92) Section 49. Kinds of meetings. Meetings of directors, trustees, stockholders, or members may be regular or special. (n) Section 53. Regular and special meetings of directors or trustees. 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. 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 one (1) day prior to the scheduled meeting, unless otherwise provided by the by-‐laws. A director or trustee may waive this requirement, either expressly or impliedly. (n) Section 54. Who shall preside at meetings.


The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-‐laws provide otherwise. (n) A. Requisites for a Valid Board Meeting

1. Meeting of the directors or trustees duly assembled as a board, at the place, time and manner provided in the by-‐laws;

• A director or trustee cannot attend nor be represented in a board meeting by proxy.2

• SEC Memorandum Circular No. 15, series of 2001, pursuant to the terms of the Code of Commerce, embodies the guidelines for the conduct of teleconferencing and videoconferencing (i.e., conferences or meetings through electronic medium or telecommunications where the participants who are not physically present are located at different local or international places) of board of directors, providing for safeguards to ensure the integrity of the meeting, the proper recording of the minutes thereof and the safekeeping of the electronic recording mechanism as part of the records of the corporation.3

• SEC held that a trustee may now be allowed to vote through the internet, provided that the internet medium to be used is akin to or similar to the one being used in videoconferencing or teleconferencing, where a participant can see or hear the actual proceedings of a board meeting and actively participate in the

2 SEC Opinion, 7 February 1994, XXVIII SEC Quarterly Bulletin 4 (No. 3, March 1994) 3 Likewise, Section 15 of the General Banking Law of 2000 provides that the meeting of the board of directors of banks may be conducted through modern technologies such as, but not limited to, teleconferencing and videoconferencing.



deliberation of the Board; but that a trustee may not validly vote by email along, which was deemed an inadequate medium because a user-‐participant’s role in such case is passive considering that his access to the entire proceedings is limited to the information in print transmitted through the internet.1

• The SEC has opined that the Corporation Code does not confer upon any stockholder the right to attend board meeting and that the allowance of stockholders to attend board meeting is upon the discretion of the board itself.2

2. Presence of the required quorum; and 3. Decision of the majority of the quorum or, in other cases, a

majority of the entire board. B. Quorum

• The quorum in the meeting of the Board shall be the presence of a majority of the number of directors as fixed in the articles of incorporation. The required vote to pass a resolution shall be a majority vote of the directors present at such meeting where quorum is achieved.3

• For stock corporations, the “quorum” referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For non-‐stock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members’

1 SEC Opinion No. 26, addressed to Ms. Jaycel E. Sato; SEC Opinion No. 27, series of 2003, addressed to Mr. Arthur Mar O. Alivio. 2 SEC Opinion, 21 January 1992, XXVI SEC QUARTERLY BULLETIN 6 (No. 2, June 1992). 3 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

meetings. Dead members shall not be counted. Tan v. Sycip, 499 SCRA 216 (2006).

• In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by Section 137 of the Corporation Code. Tan v. Sycip, 499 SCRA 216 (2006).

• When the principle for determining quorum for stock corporations is applied by analogy to non-‐stock corporations, only those who are actual members with voting rights should be counted. Tan v. Sycip, 499 SCRA 216 (2006).

C. Abstention: In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972). D. Minutes of Meetings

• The signing of the minutes by all the members of the board is not required—there is no provision in the Corporation Code that requires that the minutes of the meeting should be signed by all the members of the board. The signature of the corporate secretary gives the minutes of the meting probative value and credibility. People v. Dumlao, 580 SCRA 409 (2009).

• The entries contained in the minutes are prima facie evidence of what actually took place during the meeting, pursuant to Section 44, Rule 130 of the Revised Rule on Evidence. People v. Dumlao, 580 SCRA 409 (2009).



• Resolution versus Minutes of Meetings: A resolution is distinct and different from the minutes of the meeting—a board resolution is a formal action by a corporate board of directors or other corporate body authorizing a particular act, transaction, or appointment, while, on the other hand, minutes are a brief statement not only of what transpired at a meeting, usually of stockholders/members or directors/trustees, but also at a meeting of an executive committee. People v. Dumlao, 580 SCRA 409 (2009).

X. COMPENSATION OF DIRECTORS (Section 30) Section 30. Compensation of directors. In the absence of any provision in the by-‐laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable pre diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.

• Functions of Directors and Trustees v. Functions of Officers: Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that

the return upon their shares adequately furnishes the motives for service, without compensation. But they can receive remunerations for executive officer position. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).1

Western Institute of Technology, Inc. v. Salas Facts: The Salas family are the majority and controlling members of the Board of Trustees of the Western Institute of Technology, a stock corporation engaged in the operation, among others, of an educational institution. The Villasis (minority stock holders of the corporation) contest the resolution passed by the Board of Directors which increased the officers of the officers of the corporation. Such resolution was supposedly passed in accordance with the amended by-‐laws of the WIT on compensation of all officers of the corporation. Issue: Whether or not such grant of compensation is in violation of the proscription against such under Section 30 of the Corporation Code. Held: NO. The proscription, however, against granting compensation to director/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which state: "[T]he directors shall not receive any compensation, as such directors." The implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. Herein, resolution 48, s. 1986 granted monthly compensation to Salas, et. al. not in their capacity as

1 Singson v. Commission on Audit, 627 SCRA 36 (2010).



members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-‐Chairman, Treasurer and Secretary of Western Institute of Technology. Clearly, therefore, the prohibition with respect to granting compensation to corporate directors/trustees as such under Section 30 is not violated in this particular case. Doctrine: Directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a presumption that directors/trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. Under Section 30 of the Corporation Code, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-‐laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders' meeting agree to give it to them.

• General Rule: The Courts of law will not meddle into business determination, one of which is salary scale of people.

• Exception: When the amount becomes huge and unreasonable, the courts may come in and suspend the enforcement of the by-‐law provision.

o Generally, dividends and compensation policies represent areas of conflicts of interests and these are an exception to the business judgment rule.

XI. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS

• Relationship between Directors and Stockholders

o A director when he sits on the Board is required to act in independence from those who elected him.

§ In this sense, the director is not a mere representative or agent of the stockholder

• The director is an agent of the corporation NOT of the stockholder.

o There is a trust relationship (fiduciary) • Relationship between Directors/Officers and the Corporation

o Directors act in representation of the Corporation. o As such, the directors must act for the interest of the

corporation. A. Directors as Fiduciaries

• Pre-‐Corporation Code: Palting v. San Jose Petroleum, Inc., 18 SCRA 924.

Palting v. San Jose Petroleum, Inc.

Facts: San Jose Petroleum, Inc. (SJ PETROLEUM), a corporation organized and existing in the Republic of Panama, applied and was granted by the Securities and Exchange Commission license to sell 2M (later increased to 5M) shares of capital stock. SJ Petroleum claims that the proceeds of the sale will be used to finance the operations of San Jose Oil Corporation which has 14 petroleum exploration concessions in various provinces. Palting and other prospective investors filed with the SEC an opposition to said registration on the ground that the tie-‐up between SJ Petroleum, a Panamanian corporation and SJ Oil, a domestic



corporation violates the Constitution, the Corporation Law and the Petroleum Act of 1949. In its answer, SJ Petroleum stated that it was a “business enterprise” enjoying parity rights, with respect to mineral resources in the Philippines, which may be exercised pursuant to the Laurel-‐Langley Agreement, through a medium, the SJ Oil. Issue: Whether or not the “tie-‐up” between the respondent San Jose Petroleum, a foreign corporation, and San Jose Oil Company, Inc., a domestic mining corporation, is violative of the Constitution, the Laurel-‐ Langley Agreement, the Petroleum Act of 1949, and the Corporation Law. Held: YES. SJ Petroleum is not accorded with Parity Rights, which would have allowed the Company to interest in mining.

1. It is not owned or controlled directly by US citizens because it is owned and controlled by Panamanian corporation;

2. It is not indirectly owned and controlled by US citizens because the controlling corporation is in turn owned by two Venezuelan corporations;

3. Although the two Venezuelan corporations claim to be owned by stockholders residing in the US, there is no showing that said stockholders were US citizens;

4. The word indirectly should not be unduly stretched in application.

Doctrine: Our Constitution provides that, the exploitation of natural resources shall be limited to citizens of the Philippines or to corporations or associations at least 60% of the capital of which is owned by such citizens. However, this right was earlier extended to US

citizens by virtue of the Parity Agreement. Said US citizens can either directly or indirectly own or control the business enterprise.

• Nature of Duties of Directors and Officers: Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).

Prime White Cement Corp. v. Intermediate Appellate Court

Facts: Prime White Cement Corp (PWCC) thru its President and Chairman of the Board entered into a dealership agreement with Alejandro Te, making him the exclusive dealer and/or distributor of PWCC’s cement products in the entire Mindanao area for 5 years. The agreement is that the price of cement per bag (P9.70) is fixed for the entire 5-‐year period, and that Te must sell 20,000 bags per month. Later, PWCC through its corporate secretary informed Te that the board of directors decided to impose limitations on their agreement, including limiting the period of the dealership (3 months), decreasing allocation (8,000 bags) and increasing the price per bag (P13.30). Te demanded the enforcement of the original dealership agreement but PWCC refused to comply. The latter even entered into an exclusive dealership agreement with Napoleon Co for the marketing of the cement in Mindanao, hence this suit. Issue: Whether or not the "dealership agreement" referred by the President and Chairman of the Board of PWCC is a valid and enforceable contract. Held: NO. The general rules provided by the Corporate Law (in force at



the time of the case) as well as the present Corporation Code – whereby the corporate powers are exercised by the Board of Directors and may be delegated to its president or officers – cannot apply with the case on hand, since the said rules pertain to dealings with 3rd persons (i.e. person outside the corporation). In this case, Te was not only an ordinary stockholder of PWCC, but was a member of the Board of Directors and Auditor of the corporation. He is what is often referred to as a “self-‐dealing” director. Granting arguendo that the “dealership agreement” involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. The contract was neither fair nor reasonable. Based on the original agreement that provided a flat rate of P9.70 per bag for 5-‐years, respondent Te must have knowledge that within that period, there would be a considerable rise in the price of white cement. As director, respondent Te’s bounden duty was to act in such manner as not to unduly prejudice PWCC. However, it is quite clear that he was guilty of disloyalty to the corporation, that he was attempting in effect, to enrich himself at the expense of the corporation. Furthermore, there is no showing that the stockholders ratified the “dealership agreement” or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty. Doctrine: A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to

his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation.

• A director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made.

• Section 32 of the Corporation Code provides the general rule as well as the exception on dealings of directors, trustees or officers with the corporation. Although the old Corp Law does not contain a similar provision, the said provision incorporates well-‐settled principles in corporate law.

• In Philippine jurisdiction, the members of the Board of Directors

have a three-‐fold duty: duty of obedience, duty of diligence, and the duty of loyalty. Accordingly, the members of the board of directors (1) shall direct the affairs of the corporation only in accordance with the purpose for which it was organized; (2) shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2001, p. 318.

Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.

Facts: The Construction Development Corporation of the Philippines (CDCP) had a 30-‐year franchise to construct, operate and maintain toll



facilities in the North and South Luzon Tollways. Basay Mining Corporation (an affiliate of CDCP) obtained loans from Marubeni Corporation of Japan amounting to P10 billion, which CDCP guaranteed solidarily. Thereafter, CDCP changed its corporate name to PNCC to reflect the government’s (90.3%) shareholding in the corporation. The money owed Marubeni remained unpaid and unacknowledged for 20 years. But in October 2000, PNCC recognized this financial obligation to Marubeni. Barely 3 months after, Marubeni assigned its entire credit to Radstock Corporation for less than P100 million, who in turn sought to collect from PNCC. Eventually, Radstock and PNCC entered into the compromise agreement whereby PNCC shall assign to a third party assignee (designated by Radstock) all its rights and interests in specified real properties (amounting to P6Billion -‐ reduced obligation) provided the assignee shall be duly qualified to own real properties in the Philippines. PNCC shall also assign to Radstock 20% of the outstanding capital stock of PNCC, and 6% share in the gross toll revenue of the Manila North Tollways Corporation from 2008-‐2035. Issue: Whether or not the PNCC Board Acted in Bad Faith and with Gross Negligence in Directing the Affairs of PNCC Held: YES. The PNCC Board blatantly violated its duty of diligence as it miserably failed to act in good faith in handling the affairs of PNCC. First. For almost two decades, the PNCC Board had consistently refused to admit liability for the Marubeni loans because of the absence of a PNCC Board resolution authorizing the issuance of the letters of guarantee.

Second. The PNCC Board admitted liability for the Marubeni loans despite PNCC’s total liabilities far exceeding its assets. There is no dispute that the Marubeni loans, once recognized, would wipe out the assets of PNCC, “virtually emptying the coffers of the PNCC.” While PNCC insists that it remains financially viable, the figures in the COA Audit Reports tell otherwise. Third. In a debilitating self-‐inflicted injury, the PNCC Board revived what appeared to have been a dead claim by abandoning one of PNCC’s strong defenses, which is the prescription of the action to collect the Marubeni loans. In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981. While Radstock claims that numerous demand letters were sent to PNCC, based on the records, the extrajudicial demands to pay the loans appear to have been made only in 1984 and 1986. Meanwhile, the written acknowledgment of the debt, in the form of Board Resolution No. BD-‐092-‐2000, was issued only on 20 October 2000. The PNCC Board admitted liability for the Marubeni loans despite the fact that the same might no longer be judicially collectible. Fourth. The basis for the admission of liability for the Marubeni loans, which was an opinion of the Feria Law Office, was not even shown to the PNCC Board. Atty. Raymundo Francisco, the Asset Privatization Trust trustee overseeing the proposed privatization of PNCC at the time, was responsible for recommending to the PNCC Board the admission of PNCC’s liability for the Marubeni loans. Atty. Francisco based his recommendation solely on a mere alleged opinion of the Feria Law Office -‐ which he did not show to the board. The PNCC Board admitted liability for the P10.743 billion Marubeni loans without seeing, reading



or discussing the “Feria opinion” which was the sole basis for its admission of liability. Such act surely goes against ordinary human nature, and amounts to gross negligence and utter bad faith, even bordering on fraud, on the part of the PNCC Board in directing the affairs of the corporation. Owing loyalty to PNCC and its stockholders, the PNCC Board should have exercised utmost care and diligence in admitting a gargantuan debt that would certainly force PNCC into insolvency, a debt that previous PNCC Boards in the last two decades consistently refused to admit. The PNCC Board knew that PNCC, as a government owned and controlled corporation (GOCC), must rely “exclusively” on the opinion of the Office of the Government Corporate Counsel (OGCC), which they did not abide by. The act of the PNCC Board in issuing Board Resolution No. BD-‐092-‐2000 expressly admitting liability for the Marubeni loans demonstrates the PNCC Board’s gross and willful disregard of the requisite care and diligence in managing the affairs of PNCC, amounting to bad faith and resulting in grave and irreparable injury to PNCC and its stockholders. This reckless and treacherous move on the part of the PNCC Board clearly constitutes a serious breach of its fiduciary duty to PNCC and its stockholders, rendering the members of the PNCC Board liable under Section 31 of the Corporation Code. Doctrine: See above. B. Duty of Obedience

• A corporation, through its Board of Directors, should act in the manner and within the formalities, if any, prescribed by its

charter or by the general law. Lopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995)

C. Duty of Diligence (Section 31) Section 31. 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. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

• Duty of Diligence à The directors must act with due diligence in all the times that it would bind the corporation.

• Exception to the Business Judgment Rule: o “Knowingly and willfully vote” à This is the default idea

about a director’s vote, but it may be overturned. o “Patently unlawful” à Where the directors made a

decision without knowledge that the act was unlawful, they are protected from being personally liable.



However, where a person with reasonable sense is supposed to know that the act is unlawful, the directors won’t be protected.

• The directors of the corporation shall be personally liable to reimburse the corporation for the amounts of dividends wrongfully declared and paid to stockholders, when they failed to consider that the recorded retained earnings in the books of the corporation was illusory considering the various accounts receivables that had to be written off as uncollectible. Steinberg v. Velasco, 52 Phil. 953 (1929).

Steinberg v. Velasco

Facts: Steinberg (plaintiff) was the receiver of Sibugey Trading Company, while Velasco et. al (defendants) were the members of the Board of Directors. In 1922, the Board of Directors of Sibugey authorized the purchase of, and purchased, 330 shares of the capital stock of the corporation at the price of P3,300, and that at the time the purchase, the corporation was indebted in the sum of P13,807.50, and that, it had accounts receivable in the sum of P19,126.02. In the same year, a resolution to distribute dividends amounting to P3,000 was approved by the board. In 1923, the petition was filed for its dissolution upon the ground that it was insolvent, its accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47. Stienberg now alleges, this was all, wrongfully done and in bad faith, and to the injury and fraud of its creditors. He now prays that Velasco et. al. pay the sums of money wrongfully given to them with interest and cost. Issue: Whether or not the board of directors did not act in good faith

and grossly ignorant, and therefore should pay for the losses Held: YES. It appears that the dividends were made in installments so as not to affect the financial condition of the corporation. In other words, that the corporation did not then have an actual bona fide surplus from which the dividends could be paid. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation, it is apparent the directors did not act in good faith or that they were grossly ignorant of their duties. As such, they are liable to pay. Doctrine: Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.

• General Duty to Exercise Reasonable Care. The directors of a corporation are bound to care for its property and manage its affairs in good faith, and for a violation of these duties resulting they will be liable for damages cause, and that if they act beyond their power, and the corporation losses, or dispose of its property without authority, they will be required to make good the loss out of their private estates.

• Want of Knowledge, Skill, or Competency. If directors commit an error of judgment through mere recklessness or want of ordinary prudence or skill, they may be held liable for the



consequences. A director is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to exercise ordinary skill and judgment, he cannot set up that he did not possess them.

• The President being closer to the operations of the bank on a

day-‐to-‐day basis is more liable for breach of diligence when compared to directors who must act on the basis of reports and representations to them during board meetings. Bates v. Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919).

Bates v. Dresser

Facts: Dresser was the president and executive officer, a large stockholder, of the National City Bank of Cambridge. Earl was the cashier and Coleman was the bank’s bookkeeper. An auditor reported that the daily balance book was very much behind, that it was impossible to prove the deposits and that a competent bookkeeper should be employed. Coleman kept the deposit ledger and this was the work that fell into his hands. Coleman then acted as paying and receiving teller, in addition to his other duty. Later, Coleman began a series of thefts which he effectively hid from the Board of Directors who attributed the decline of monthly deposits to competition with rival banks. The bank’s semi-‐annual examinations by national bank examiners found nothing that would raise suspicion. The directors also relied on the cashier since he was an honest man. However, if only Earl had opened the envelopes that came from the clearinghouse, he would’ve discovered the fraud.

Issue: Whether or not the directors neglected their duty by accepting the cashier’s statement of liabilities and failing to inspect the depositors’ ledger Held: NO. The Court held that the directors should not be held answerable for taking the cashier’s statement of liabilities to be as correct as the statement of assets always was. The director’s confidence seemed warranted by the semi-‐annual examinations and they were encouraged in their belief that all was well by the president, whose responsibility and knowledge were greater than theirs. Dresser, on the other hand, was daily at the bank, he had the deposit ledger in his hands, and he had hints and warning regarding the theft from other employees of the bank. In accepting the presidency, Dresser must be taken to have contemplated responsibility for losses to the bank, if chargeable to his fault. Those that happened was chargeable to his fault, after he had warnings that should have led to steps that would have made the fraud impossible. Doctrine: The directors were not bound by virtue of the office gratuitously assumed by them to call in the passbooks and compare them with the ledger, and until the event showed the possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud.

• Although directors have the protection of the business judgment rule against personal liability for decisions that cause damage to the corporation, such protection is available only when they act or decide based on an informed judgment and not merely accept the representations and reports of the CEO.



Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985).

Smith v. Van Gorkam

Facts: Trans Union was suffering a tax credit problem prompting Van Gorkom to sell his shares but eventually negotiated to involve all the stocks of Trans Union. A corporation called Marmon was attempting a leverage buy-‐out of Trans Union. Van Gorkom proposed a price of $55 a share. Van Gorkom and his CFO didn’t bother to do any research to see how much the company was actually worth. He didn’t even inform Trans Union’s legal department about the transaction. Later, it was found that the value of $55 was only about 60% of what the company was worth. Van Gorkom called an emergency meeting of the board of directors, proposed the merger, and the directors gave preliminary approval. In the meeting, Van Gorkom did not disclose that there was no basis for the $55 price and that there had been objections by Trans Union management regarding the merger. Neither did he provide the directors with copies of the merger agreement. The directors eventually recommended that the shareholders approve the merger even though they did not really learn if the terms of the merger were a good deal for the company. The Appellate Court found that the directors were grossly negligent because they approved the merger without substantial inquiry or any expert advice. Therefore they breached their duty to care. Issue: Whether or not the actions of Van Gorkom and the board is protected by the Business Judgement Rule Doctrine. Held: NO. The Court found that the directors breached their fiduciary

duty by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the merger. Van Gorkom breached his duty to care by offering $55 a share because, “the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company.” The business judgment rule was not a defense because the directors and Van Gorkom didn’t use any “business judgment” when they came to their decision. Doctrine: In order to hide behind the business judgment rule, you have to show that you made an informed decision based on some principle of business.

• The rule itself ‘is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’ ...Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one.” “Under the business judgment rule there is no protection for directors who have made an unintelligent or unadvised judgment.” Basically, the actual decision is not so important, what the courts will look to is whether there was an adequate decision-‐making process.

• For wrongdoing to make a director personally liable for debts of

the corporation, the wrongdoing approved or assented to by the director must be a patently unlawful act. Mere failure to comply with the notice requirement of labor laws on company closure or dismissal of employees does not amount to a patently unlawful act. Patently unlawful acts are those declared



unlawful by law which imposes penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007); Dy-‐Dumalasa v. Fernandez, 593 SCRA 656 (2009).

• Holding a corporate officer personally liable for directing the corporate affairs with gross negligence or in bad faith does not amount to an application of the doctrine of piercing the veil of corporate fiction, for such personal liability is imposed directly under Section 31 to directors and officers of corporation who are guilty of violating their duty of diligence. Sanchez v. Republic, 603 SCRA 229 (2009).

D. Duty of Loyalty (Sections 31 to 34) Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two 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: Provided, however, That the contract is fair and reasonable under the circumstances. Section 33. 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 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 corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.



Section 34. Disloyalty of a director. Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his 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, notwithstanding the fact that the director risked his own funds in the venture.

• Duty of Loyalty à the directors must act primarily for the interest of the corporation. The directors may pursue personal endeavors provided these do not conflict with the interest of the corporation.

1. Doctrine of Corporate Opportunity. 2. Using Inside Information • It is well established that corporate officers are not permitted to

use their position of trust and confidence to further their private interests. The doctrine of “corporate opportunity” is precisely recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interest. The doctrine rest fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his personal profit when the interest of the corporation justly calls for protection. Gokongwei v. SEC, 89 SCRA 336 (1979).

Gokongwei v. SEC

Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a president and stockholder of Robina Corp. and Consolidated Foods Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice Cream, Poultry and Hog Feeds and many more), filed a petition for declaration of nullity of amended by-‐laws, cancellation of certificate of filing of the amended-‐by laws, injunction and damages against the majority of the members of the Board of Directors of the SMC based on the following grounds:

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

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

Issue: Whether or not the corporation has the power to disqualify a competitor from being elected to the board of directors as a reasonable exercise of corporate authority Held: YES. It is well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-‐ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or



director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-‐laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. Doctrine: See above.

• When a director-‐majority stockholder, who is the administrator of corporate affairs directly negotiating the sale of corporate landholdings to the Government at great prices, purchases the stocks of a shareholder without informing the latter of the on-‐going negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of concealing his knowledge of important corporate affairs. Strong v. Repide, 41 Phil. 947 (1909).

• Doctrine of corporate opportunity applies to confidential employees of the corporation. cf. Sing Juco v. Llorente, 43 Phil. 589 (1922).

E. Duty to Creditors and Outsiders

• Under the trust fund doctrine, it would be a violation of the right of creditors to allow the return to the stockholders of any portion of their capital or declare dividends outside of the unrestricted retained earnings. Also upon insolvency of the

corporation, the Board of Directors are duty bound to hold the assets of the corporation primarily for the payment of the creditors. Mead v. McCullough, 21 Phil. 95 (1911).

Mead v. McCullough

Facts: The complaint contains three causes of action one of which is for the value of the personal effects alleged to have been left by Mead and sold by the �defendants. The parties organized the Philippine Engineering & Construction Co. (PECC) by giving $2000 Mexican currency cash each, except for Mead who contributed property. Mead was also the general manager until he resigned to accept employment with the Canton & Shanghai Railway Co. Several contracts entered by Mead as general manager failed, specifically a wrecking contract with the navy. Because of these failures, the board voted to sell all the rights and interests of PECC to the wrecking contract in favor of McCullough (along with some of Mead’s personal effects). McCullough then incorporated a new company, Manila Salvage Association, and transferred all his rights and interests to the contract to MSA. Mead alleges that these were done in bad faith. Issue: �Whether or not the sale or transfer to McCullough of the assets of said corporation was done within the laws and powers �of the corporation. Held: YES. �A private corporation, which owes no special duty to the public and which has not been given the right of eminent domain, has absolute right and power as against the whole world except the state, to



sell and dispose of all of its property. A transaction done in good faith which achieves substantial justice cannot be disturbed based on mere suspicions. Doctrine: Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without such a limit the will of the majority would be absolute and irresistible and might easily degenerate into an arbitrary tyranny. Notwithstanding these limitations upon the power of the majority of the stockholders, their (the majority’s) resolutions, when passed in good faith and for a just cause, deserve careful consideration and are generally binding upon the minority. F. Corporate Dealings with Directors and Officers (Section 32)

• The provisions of Section 32 of the Corporation Code on self-‐dealings by directors/trustees and officers merely incorporate well-‐established principles in Corporate Law. A director who enters into a distributorship agreement with the corporation would make the contract voidable at the option of the corporation especially when the terms are disadvantageous to the corporation. The director cannot claim the same doctrine as an outsider dealing in good faith with the corporation. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).

G. Contracts Between Corporations with Interlocking Directors (Section 33)

• The rule under Section 33 of Corporation Code allowing annulment of contracts between corporations with interlocking

directors resulting in the prejudice to one of the corporation, has no application to cases where fraud is alleged to have been committed to third parties. DBP v. Court of Appeals, 363 SCRA 307 (2001).

H. SEC Revised Code of Corporate Governance (SEC Memorandum. Circular No. 6, s. 2009)

• Securities Regulation Code was issued pursuance to a mandate of the SEC.

o “Blue Sky Law” à To secure you from being misled by companies who actually offer you nothing since nothing is backing them up.

• SEC Revised Code of Corporate Governance à applies to specific corporations whose securities are registered in the stock exchange; they are large companies with a lot of public shareholders.

o The SEC hopes to protect the public from possible fraud that large companies may commit in the process of gathering investments.

o These large companies must have at least two independent directors able to police the activities of the corporation (not merely a puppet of the shareholders) and must be very transparent.

XII. CORPORATE OFFICERS

• The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-‐laws, or relevant provisions of law — when authorized, their acts bind the corporation, otherwise, their acts



cannot bind it. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006).

A. Powers of Corporate Officers:

• Just as a natural person may authorize another to do certain acts for and on his behalf, the Board of Directors may validly delegate some of its functions and powers to officers, committees or agents — the authority of such individuals to bind the corporation is generally derived from law, corporate by-‐laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009). While it is a general rule that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation, the Board may validly delegate some of its functions and powers to its officers, committee and agents. Associated Bank v. Pronstroller, 558 SCRA 113 (2008).1

Associated Bank v. Pronstroller

Facts: The Spouses Vaca executed a Real Estate Mortgage in favor of Associated Bank over their parcel of residential land in Green Meadows Subdivision. Eventually, the property was foreclosed and sold at public auction with Associated Bank as the highest bidder. However, the Vacas commenced an action for the nullification of the real estate mortgage

1 Yu Chuck v. “Kong Li Po,” 46 Phil. 608, 614 (1924); Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009).

and the foreclosure sale. Pending its resolution in the Supreme Court, Associated Bank negotiated with the Spouses Pronstroller through Atty. Jose Soluta, the bank’s Vice President and member of its Board of Directors. Letter agreements were executed whereby the Spouses Pronstrollers would give a downpayment (first letter agreement), and then given an extension to pay the balance which would be given upon delivery of the property subsequent to the resolution of the Vaca case with such property being free from occupants (embodied in the second letter agreement). Later, the bank reorganized its management and Atty. Dayday replaced Atty. Soluta. Atty. Dayday informed Spouses Pronstroller that their deposit would be forfeited because the second letter agreement was a mistake because Atty. Soluta had no authority to give an extension. Issue: Whether or not Associated Bank is bound by the Letter-‐Agreement signed by Atty. Soluta under the doctrine of apparent authority. Held: YES. Undoubtedly, the Associated Bank had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same via the second letter-‐agreement. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. Doctrine: The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. The power and responsibility to decide whether the



corporation should enter into a contract that will bind the corporation is lodged in the board of directors. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board may validly delegate some of its functions and powers to officers, committees and agents.

• While the Court agrees that those who belong to the upper corporate echelons would have more privileges, it cannot be presume the existence of such privileges or benefits—he who claims the same is burdened to prove not only the existence of such benefits but also that he is entitled to the same. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).

• Even though a judgment, decree or order is addressed to the corporation only, the officers as well as the corporation itself, may be punished for contempt for disobedience to its terms, at least if they knowingly disobey the court’s mandate, since a lawful judicial command to a corporation is in effect a command to the officers. Heirs of Trinidad de Leon Vda. De Roxas v. Court of Appeals, 422 SCRA 101 (2004).

1. Rule on Corporate Officer’s Power to Bind Corporation • An officer’s power as an agent of the corporation must be

sought from the statute, charter, the by-‐laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-‐Roxas v. Court of Appeals, 211 SCRA 470 (1992).

• As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation, but when these officers exceeded their authority, their actions cannot

bind the corporation, unless it has ratified such acts or is estopped from disclaiming them. Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006).

• Doctrine of Apparent Authority: Corporate policies need not be in writing. Contracts entered into by a corporate officer or obligations or prestations assumed by such officer for and in behalf of such corporation are binding on the said corporation only if such officer acted within the scope of his authority or if such officer exceeded the limits of his authority, the corporation has ratified such contracts or obligations. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).

2. President. People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998).

• Requisites: Member of the Board of Directors and must possess at least one share

People’s Aircargo v. Court of Appeals

Facts: People’s Aircargo is a domestic corporation, which was organized in the middle of 1986 to operate a customs bonded warehouse. To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation president, solicited a proposal from Stefano Sano (who was preferred because of his membership in the task force supervising the transition of the bureau from the Marcos to the Aquino Government) for a feasibility study. This constituted the “First Contract” for which Sano was paid for. On December 1086, a “Second Contract”, this time for consultancy services, was made upon Punsalan’s request. The consultancy services included an Operations Manual and Seminar/Workshop for the employees of People’s Aircargo.



Sano was not paid for the 2nd contract so he filed a collection case. By this time, Punsalan had sold his shares and resigned as president. People’s Aircargo denied that Sano conducted Consultancy services. It alleged that the contract entered into between Sano and Punsalan was without authority. Issue: Whether or not Punsalan, as president, has apparent authority to enter into the second contract that could bind the corporation Held: YES. Since the corporation had previously allowed Punsalan to enter into the first contract with Sano without a board resolution expressly authorizing him, thus, it had clothed its president with apparent authority to execute the Second Contract. Furthermore, private respondent prepared an operations manual and conducted a seminar for the employees of petitioner in accordance with their contract. Petitioner accepted the operations manual, submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of this, petitioner was given by the Bureau of Customs a license to operate a bonded warehouse. Even if the Second Contract was outside the usual powers of the president, petitioner’s ratification of said contract and acceptance of benefits have made it binding, nonetheless. Doctrine: Contracts entered into by a corporate president without express prior board approval bind the corporation, when such officer’s apparent authority is established and when these contracts are ratified by the corporation.

• If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those

acts, and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

• It is the Board of Directors, not the President, that exercises

corporate powers. It must be emphasized that the basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).

• A corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. Sugay should not be allowed to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA 700 (1961).

• The President is considered as the corporation’s agent, and as such, his knowledge of the repeal of a resolution in another juridical person in which his corporation has an interest, is ascribed to his principal under the theory of imputed knowledge. Rovels Enterprises, Inc. v. Ocampo, 392 SCRA 176 (2002).

• The President of the corporation which becomes liable for the accident caused by its truck driver cannot be held solidarily liable for the judgment obligation arising from quasi-‐delict, since the fact alone of being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).

3. Corporate Secretary • Requisite: Resident and citizen of the Philippines



o The corporate secretary can be a member of the Board of Directors since there is no prohibition for such.

• In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate records — he keeps the stock and transfer book and makes proper and necessary entries therein. It is his duty and obligation to register valid transfers of stock in the books of the corporation; and in the event he refuses to comply with such duty, the transferor-‐stockholder may rightfully bring suit to compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).

• Although the corporate secretary’s duty to record transfers of stock is ministerial, he cannot be compelled to do so when the transferee’s title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. Mandamus will not issue to establish a right, but only to enforce one that is already established. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).

• A sale that fails to comply with Section 40 of Corporation Code, cannot be invalidated when the buyer relies upon a Secretary’s Certificate confirming authority. A secretary’s certificate which is regular on its face can be relied upon by a third party who does not have to investigate the truths of the facts contained in such certification; otherwise business transactions of corporations would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997).

4. Corporate Treasurer • Requirement: May or may not be a director • A corporate treasurer’s function have generally been described

as “to receive and keeps funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers.” Unless duly authorized, a treasurer, whose power are limited, cannot bind the corporation in a sale of its assets, which obviously is foreign to a corporate treasurer’s function. San Juan Structural v. Court of Appeals, 296 SCRA 631, 645 (1998).

• A corporate treasurer whose negligence in signing a confirmation letter for rediscounting of crossed checks, knowing fully well that the checks were strictly endorsed for deposit only to the payee’s account and not to be further negotiated, may be personally liable for the damaged caused the corporation. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).

5. Manager • Although a branch manager of a bank, within his field and as to

third persons, is the general agent and is in general charge of the corporation, with apparent authority commensurate with the ordinary business entrusted him and the usual course and conduct thereof, yet the power to modify contracts of the bank remains generally with the board of directors. Being a branch manager alone is insufficient to support the conclusion that he has been clothed with “apparent authority” to verbally alter terms of the bank’s written contract, such as the mortgage contract. Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).



B. POWER OF THE BOARD TO APPOINT AND TERMINATE CORPORATE OFFICERS

• The law does not expressly indicate a limit over the term of the corporate officers. But it seems they should serve for a term of one year so that the next set of directors will not be precluded from appointing a new set of corporate officers.

1. Who Is a “Corporate Officer”? (Section 25) • “Corporate officers” in the context of P.D. No. 902-‐A are those

officers of the corporation who are given that character by the Corporation Code or by the corporation’s by-‐laws. Gurrea v. Lezama, 103 Phil. 553 (1958).1

Gurrea v. Lezama

Facts: Gurrea sought to have Resolution No. 65 of the Board of Directors of the La Paz Ice Plant and Cold Storage Co., Inc., removing him from his position of manager of said corporation declared null and void and to recover damages incident thereto. The action is predicated on the ground that said resolution was adopted in contravention of the provisions of the by-‐laws of the corporation, of the Corporation Law and of the understanding, intention and agreement reached among its stockholders. Issue: Whether or not Gurrea was properly removed from his position as manager of La Paz Ice Plant by a mere resolution.

1 Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009); WQPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010).

Held: YES. Guerra’s position was only created by the officers. The by laws did not provide for the creation of his position. Therefore, he may not be considered as an “officer” and the manner of removal provided for in the by laws shall not be made applicable to him. He may thus be removed by a mere resolution by the officers of the corporation. The by-‐laws of the instant corporation in turn provide that in the board of directors there shall be a president, a vice-‐president, a secretary and a treasurer. These are the only ones mentioned therein as officers of the corporation. The manager is not included. The by-‐laws provide that the officers of the corporation may be removed or suspended by the affirmative vote of 2/3 of the corporation. The conclusion is inescapable that Guerra can be suspended or removed by said board of directors under such terms as it may see fit and not as provided for in the by-‐laws, without the 2/3 vote of the stockholders, as required when an officer is to be removed. Doctrine: One distinction between officers and agents of a corporation lies in the manner of their creation. An officer is created by the charter of the corporation, and the officer is elected by the directors or the stockholders. An agency is usually created by the officers, or one or more of them, and the agent is appointed by the same authority. It is clear that the two terms officers and agents are by no means interchangeable.

• The position of Executive Secretary, which is provided for in the Society’s by-‐laws, is an “officer” position. Since the appointment of the incumbent did not contain a fixed term, the implication



was that the appointee held the appointment at the pleasure of the Board of Directors, such that when the Board opted to replace the incumbent, technically there was no removal but only an expiration of the term and there was no need of prior notice, due hearing or sufficient grounds before the incumbent could be separated from office. Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).1

Mita Pardo de Tavera v. Tuberculosis Society

Facts: Dr. Buktaw, then executive secretary of the Board of Directors of the Philippine Tuberculosis Society (Society) retired. Dr. Mita Pardo de Tavera was appointed as his replacement. President Canizares sent an appointment letter. The letter of appointment, however, didn’t include a fixed term. Subsequently, de Tavera was removed from her post without telling her the cause. One of the defendants, Alberto Romulo was appointed to her position with a vote of 7(affirm)-‐2(abstain)-‐1(objection). The defendants claimed denying that plaintiff was illegally removed from her position as Executive Secretary and averring that under the Society’s by-‐laws, said position is held at the pleasure of the Board of Directors and when the pleasure is exercised, it only means that the incumbent has to vacate the same because her term has expired. Issue: Whether or not de Tavera was illegally dismissed

1 PSBA v. Leaño, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications Phils., Inc. v. King, 478 SCRA 102 (2005); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012).

Held: NO. Although the minutes of the organizational meeting show that the Chairman mentioned the need of appointing a “permanent” Executive Secretary, such statement alone cannot characterize the appointment of petitioner without a contract of employment definitely fixing her term because of the specific provision of Section 7.02 of the Code of By-‐Laws that: “The Executive Secretary shall hold office at the pleasure of the Board of Directors, unless their term of employment shall have been fixed in their contract of employment.” Besides the word “permanent” could have been used to distinguish the appointment from acting capacity”. Doctrine: See above.

• Ordinary company employees are generally employed not by action of the directors and stockholders but by that of the Management of the corporation who also determines the compensation to be paid such employees. Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those who are given that character either by the Corporation Code or by the corporation’s by-‐laws. Gomez v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009).2

o A mere manager not so named in the by-‐laws does is not an officer of the corporation. Pamplona Plantation Company v. Acosta, 510 SCRA 249 (2006).

o When the by-‐laws provide for the position of “Superintendent/ Administrator,” it is clearly a

2 Okol v. Slimmers World Int’l, 608 SCRA 97 (2009).



corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997).

• Although the by-‐laws provide expressly that the Board of Directors “shall have full power to create new offices and to appoint the officers thereto,” any office created, and any officer appointed pursuant to such clause does not become a “corporate officer”, but is an employee and the determination of the rights and liabilities relating to his removal are within the jurisdiction of the NLRC; they do not constitute intra-‐corporate controversies. “A different interpretation can easily leave the way open for the Board of Directors to circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the By-‐Laws of an enabling clause on the creation of just any corporate officer position.” (at p. 27). The rulings in Tabang v. NLRC, 266 SCRA 462 (1997), and Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002), “should no longer be controlling.” Matling Industrial and Commercial Corp. v. Coros, 633 SCRA 12 (2010).1

Matling Industrial and Commercial Corp. v. Coros

Facts: Ricardo R. Coros is the Vice President for Finance and Administration of Matling Industrial and Commercial Corporation. However, Matling dismissed him. As a result, Coros filed a complaint for illegal suspension and illegal dismissal against Matling and some of its

1 Reiterated in Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012).

corporate officers before the NLRC. Matling, et al. moved to dismiss the petition. They claimed that SEC, and not NLRC, had jurisdiction over the case, the matter being an intra-‐corporate in nature. This is because Coros was also a member of the corporation’s Board of Directors prior to his termination. Issue: Whether or not Coros, as Vice President for Finance and Administration, was a corporate office of Matling Industrial and Commercial Corporation. Held: NO. The position of “Vice President for Finance and Administration” was not explicitly written in the by-‐laws. Coros’ was appointed Vice President by Matling’s general manager and not by the Board of Directors. It was also the general manager who determined the amount of compensation he received. Therefore, Coros is merely an employee and not a corporate officer. This being the case, NLRC and not SEC has jurisdiction over his complaint for illegal dismissal. In addition, there is no relation between his acquisition of his status as stockholder or Director and his position as Vice President of Finance and Administration. His position as stockholder or Director remained unaffected by his dismissal as Vice President. This is not an intra-‐corporate controversy, because an intra-‐corporate controversy is one, which arises between a stockholder and a corporation. Doctrine: A position must be expressly mentioned in the By-‐laws in order to be considered as a corporate office. The creation of an office under a by-‐law enabling provision is not enough to make a position a corporate office. A different interpretation can easily allow the Board to circumvent the constitutional guarantee of security of tenure by



including an enabling clause on the creation of any corporate office in the by-‐laws. The Board may create appointive positions other than those expressly mentioned in the by-‐laws. However, persons occupying such positions are not considered as corporate officers within the meaning of Section 25.

2. Nature of Exercise of Power to Terminate Officers • An officer’s removal is a corporate act, and if such removal

occasions an intra-‐corporate controversy, its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors might have in taking such action. Perforce, the matter would come within the area of corporate affairs and management, and such a corporate controversy would call for SEC adjudicative expertise [now RTC Special Commercial Courts], not that of NLRC. De Rossi v. NLRC, 314 SCRA 245 (1999); Okol v. Slimmers World International, 608 SCRA 97 (2009).

De Rossi v. NLRC

Facts: Armando de Rossi is an Italian Citizen and was the Executive Vice-‐President and General Manager of Matling Industrial and Commercial Corp. (MICC). He started to work in 1985 and was terminated in 1988 for failing to secure his employment permit and grossly mismanaged the business affairs of the company—he allegedly diverted corporate funds to his personal use. Aggrieved, he then filed a case against MICC in the NLRC for illegal dismissal. Issue: Whether or not the NLRC has jurisdiction over illegal dismissal

cases and intra-‐corporate affairs regarding elections and appointments. Held: NO. It is the SEC who has jurisdiction in the abovementioned cases. The Articles of Incorporation of MICC expressly states that de Rossi’s position as Executive Vice-‐President was considered to be an “officer” position. Doctrine: The SEC has the jurisdiction over removal of corporate officers as well as intra-‐corporate affairs regarding election and appointment of corporate officers.

• One who is included in the by-‐laws of a corporation in its roster of corporate officers is an officer of said corporation and not a mere employee — being a corporate officer, his removal is deemed to be an intra-‐corporate dispute cognizable by the SEC and not by the Labor Arbiter. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).

XIII. LIABILITIES OF CORPORATE OFFICERS (Section 31)

• Mere ownership by an officer (President) of majority of the equity of the corporation do not warrant a piercing of the veil of corporate fiction to make such officer personally liable for the debts of the corporation. Palay, Inc. v. Clave, 124 SCRA 638 (1093).1

Palay, Inc. v. Clave

1 Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc. Inc., 72 SCRA 347 (1976); Mindanao Motors Lines, Inc. v. CIR, 6 SCRA 710 (1962).



Facts: Palay, Inc., through its President, Albert Onstott executed a Contract to Sell a parcel of land to Dumpit. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of 1 month, without need of notice and with forfeiture of all installments paid. Dumpit paid the downpayment and several installments. Almost 6 years later, Dumpit wrote Palay, Inc. offering to update all his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. Palay, Inc. informed him that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold. Dumpit filed a letter complaint with the National Housing Authority (NHA) for reconveyance. Issue: Whether or not petitioners may be held liable for the refund of the installment payments made by Dumpit. Held: YES. Rights to the lot should be restored to Dumpit or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of 12% computed from the date of the institution of the action. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. There were no badges of fraud on

petitioners’ part. They had literally relied, albeit mistakenly, on paragraph 6 of its contract with Dumpit when it rescinded the contract to sell extrajudicially and had sold it to a third person. Onstott was made liable because he was then the President of the corporation. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot be made personally liable just because he “appears to be the controlling stockholder”. Doctrine: The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. A. GENERAL RULE: Corporate Officers Not Liable for Corporate Debts

• Unless they have exceeded their authority, corporate officers are, as a general rule, not personally liable for their official acts, because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008).1

• Corporate officers who entered into and signed contracts on behalf of the corporation in their official capacities cannot be made personally liable thereunder in the absence of stipulation

1 Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992); Lowe, Inc. v. Court of Appeals, 596 SCRA 140 (2009); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); St. Tomas v. Salac, 685 SCRA 245 (2012).



to that effect, due to the personality of the corporation being separate and distinct from the persons composing it. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990).1

• Officers of a corporation may become liable for its loans when they have breached their duty of diligence under Section 31 of the Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007);2 or when they have contractually made themselves personally liable for a corporate loan. Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).

• A corporation has a personality separate and distinct from the persons composing or representing it; hence, personal liability attaches only in exceptional cases, such as when the director, trustee, or officer is guilty of bad faith or gross negligence in directing the affairs of the corporation. Continental Cement Corp. v. Asea Brown Boveri, Inc., 659 SCRA 137 (2011).3

• Where the Chairman & President has made himself accountable in the promissory note “in his personal capacity and as authorized by the Board Resolution,” and in the absence of any representation on the part of corporation that the obligation is all its own because of its separate corporate identity, we see no occasion to consider piercing the corporate veil as material to the case.” Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).

1 Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949). 2 Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005) 3 Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Ban, Inc. v. Pena, 659 SCRA 418 (2011).

• To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director must be established clearly and convincingly. Bad faith is never presumed. Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad faith means [a] breach of a known duty through some ill motive or interest. Bad faith partakes of the nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007).4

• The finding of solidary liability among the corporation, its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and director that show them to have been individually guilty of unmistakable malice, bad faith, or ill-‐motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. NPC. v. Court of Appeals, 273 SCRA 419 (1997).5

• An officer-‐stockholder who signs in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity: “Thus, being a party to a simulated contract of management, petitioner Uy cannot be permitted to escape liability under the said contract by using the corporate entity theory. This is one instance when the veil of corporate entity

4 EPG Constructions Co. v. CA, 210 SCRA 230 (1992). 5 Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of Appeals, 215 SCRA 120 (1992).



has to be pierced to avoid injustice and inequity.” Paradise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).

B. Rundown on Officer’s Liabilities: Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14 (1994).1

Tramat Mercantile, Inc. v. Court of Appeals Facts: Melchor de la Cuesta (doing business under the name of Farmer’s Machineries) sold a tractor to Tramat Mercantile. David Ong, president and manager of Tramat, issued a check for payment. In turn, Tramat sold the tractor along with a lawn mower to MWSS. The latter refused to pay when it learned that the tractor was not brand new and there were hidden defects. Ong then issued a stop payment for the check issued to de la Cuesta (it seems that Ong intended to pay de la Cuesta with the proceeds of the sale to MWSS). Because of this, de la Cuesta filed an action for recovery of the P33,500 payment as well as P10,000 as attorney's fees. Ong answered that de la Cuesta had no cause of action, and that the transaction was between de la Cuesta and Tramat Mercantile, not Ong. Issue: Whether or not Ong can be held liable in his personal capacity. Held: NO. David Ong was acting as an officer of Tramat, not in his

1 MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. Court of Appeals, 311 SCRA 700 (1999); Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001); Malayang Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); H.L. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007).

personal capacity. Tramat has its own distinct and separate personality. In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of the mentioned cases (see doctrine). Doctrine: Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:

1. He assents a. To a patently unlawful act of the corporation b. For bad faith, or gross negligence in directing its affairs c. For conflict of interest, resulting in damages to the

corporation, its stockholders or other persons 2. He consents to the issuance of watered stocks or who, having

knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation;

4. He is made, by a specific provision of law, to personally answer for his corporate action.

• While the limited liability doctrine is intended to protect the

stockholder by immunizing him from personal liability for the corporate debts, a corporate officer may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank Corp., 408 SCRA 544 (2003).

• The corporate representatives signing as a solidary guarantee as corporate representative did not undertake to guarantee



personally the payment of the corporation’s debt embodied in the trust receipts. Debts incurred by directors, officers and employees acting as such corporate agents are not theirs but the direct liability of the corporation they represent. As an exception, directors or officers are personally liable for the corporation’s debt if they so contractually agree or stipulate. Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005).

• “Bad faith” does not arise just because a corporation fails to pay its obligation, because the inability to pay one’s obligation is not synonymous with fraudulent intent not to honor the obligations. In order to piece the veil of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the corporation, such negligence must be “gross”. Magaling v. Ong, 562 SCRA 152 (2008).

• Directors or trustees who willfully or knowingly vote for or assent to patently unlawful acts of the corporation or acquire any 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. EDSA Shangri-‐La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).

C. SPECIAL PROVISIONS IN LABOR LAWS:

• Since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the “person acting in the interest of (the) employer” as defined in Article 283 of the Labor Code. A.C. Ransom Labor Union-‐CCLU v. NLRC, 142 SCRA 269 (1986).

A.C. Ransom Labor Union-‐CCLU v. NLRC

Facts: On June 6, 1961, employees of AC Ransom, most being members of the AC Ransom Labor Union, went on strike. The said strike was lifted on June 21 with most of the strikers being allowed to resume their work. However, twenty two strikers were refused reinstatement. In 1969, the Hernandez family (owners of AC RANSOM) organized another corporation under the name of Rosario Industrial Corporation. The said company dealt in the same type of business as AC Ransom. In 1972, a decision to reinstate the 22 strikers was rendered by the Court of Industrial Relations. In 1973, RAMSOM filed an application for clearance to close and cease operations which was granted, and as such the reinstatement of the 22 strikers has been precluded. Because of this, the Union subsequently asked the officers of Ransom to be personally liable for payment of the back wages. Issue: Whether or not the officers of the corporation should be held personally liable to pay for the back wages. Held: YES. In the instant case, RANSOM, in foreseeing the possibility or probability of payment of back wages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their case. Note: The record does not clearly identify “the officer or officers” of RANSOM directly responsible for failure to pay the back wages of the 22



strikers. In the absence of definite proof in that regard, it should be presumed that the responsible officer is the President of the corporation who can be deemed the chief operation officer thereof. Doctrine: Under Article 212 (c) of the Labor Code, “Employee” includes any person acting in the interest of an employer, directly or indirectly. Since Ransom is an artificial person, it must have an officer who can be presumed to be the employer, being the “person acting in the interest of the employer (Ransom).”

1. Overturning the A.C. Ransom Ruling: • Article 212(e) of the Labor Code, by itself, does not make a

corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. David v. National Federation of Labor Unions, 586 SCRA 100 (2009).

• Corporate officers cannot be held personally liable for damages on account of the employees dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents. Malayang Samahan ng mga Mangagagawa sa M. Greenfields v. Ramos, 357 SCRA 77 (2001).1

• Corporate officers are not personally liable for money claims of discharged employees unless they acted with evident malice

1 AMA Computer College-‐East Rizal v. Ignacio, 590 SCRA 633, 659-‐660 (2009).

and bad faith in terminating their employment. AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).2

• Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be held personally liable for the corporate obligations arising from such act. Maglutac v. NLRC, 189 SCRA 767 (1990);3 and for the separate juridical personality of a corporation to be disregarded as to make the highest corporate officer personally liable on labor claims, the wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990).

• A corporation, being a juridical entity, may act only through its directors, officers and employees and obligations incurred by them, acting as corporate agents, are not theirs but the direct accountabilities of the corporation they represent. In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of employees done with malice or bad faith. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).4

2 Reiterated in Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008); M+W Zander Philippines, Inc. v. Enriquez, 588 SCRA 590 (2009); AMA Computer College-‐East Rizal v. Ignacio, 590 SCRA 633, 659-‐660 (2009); Lowe, Inc. v. Court of Appeals, 596 SCRA 140, 155 (2009); Peñaflor v. Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010). 3 Reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997) 4 Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011); Grandteq Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011); Alert Security and Investigation Agency, Inc. v. Pasawilan, 657 SCRA 655 (2011); Lynvil Fishing Enterprises, Inc. v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading Co., Inc. v. Blas, 667 SCRA 727 (2012).



• In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-‐ranking officers and directors of the corporation, signed the Board Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997).

2. Limiting the A.C. Ransom Ruling to Insolvent Corporation • A.C. Ransom is not in point because there the corporation

actually ceased operations after the decision of the Court was promulgated against it, making it necessary to enforce it against its former president. When the corporation is still existing and able to satisfy the judgment in favor of the private respondent, the corporate officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989).

• A.C. Ransom will apply only where the persons who are made personally liable for the employees’ claims are stockholders-‐officers of employer-‐corporation. In the case at bar, a mere general manager while admittedly the highest ranking local representative of the corporation, is nevertheless not a stockholder and much less a member of the Board of Directors nor an officer thereof. De Guzman v. NLRC, 211 SCRA 723 (1992).

3. Upholding the A.C. Ransom Ruling:

• Under the Labor Code, in the case of corporations, it is the president who responds personally for violation of the labor pay laws. Villanueva v. Adre, 172 SCRA 876 (1989).

• A.C. Ransom doctrine has been reiterated subsequently in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).1

• Since a corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the “person acting in the interest of the employer” — the corporation, in the technical sense only, is the employer. The manager of the corporation falls within the meaning of an “employer” as contemplated by the Labor code, who may be held jointly and severally liable for the obligation of the corporation to its dismissed employees. NYK International Knitwear Corp. Phil. v. NLRC, 397 SCRA 607 (2003).

4. Definitive Overturning of A.C. Ransom Ruling: • It is settled that in the absence of malice, bad faith, or specific

provisions of law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222 (2007).2

1 Reiterated in Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996). 2 Citing Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001); Bogo-‐Medellin Sugarcane Planters Asso., Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC, 449 SCRA 360 (2005); Coca-‐Cola Bottlers Phils., Inc. v. Daniel, 460 SCRA 494 (2005); Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011). Grandteq Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011).



• Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio, does not obtain in the present case. [What applies therefore is the ruling [i]n Santos v. NLRC, [254 SCRA 673 (1996)]. McLeod v. NLRC, 512 SCRA 222 (2007).1

• It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McLeod v. NLRC, 512 SCRA 22 (2007), that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation—the governing law on personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Code. Pantranco Employees Association (PEA-‐PTGWO) v. NLRC, 581 SCRA 598 (2009).2

D. Personal Liability of Trustees and Officers of Non-‐Stock Corporation

• The non-‐stock corporation acted in clear bad faith when it sent the final notice to a member under the pretense they believed him to be still alive, when in fact it had very well known that he had already died. Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).

• Non-‐stock corporations and their officers are not exempt from the obligation imposed by Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code, which provisions

1 Reiterated in H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation Company v. Acosta, 510 SCRA 249 (2006); Elcee Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73 (2007). 2 Reiterated in David v. National Federation of Labor Unions, 586 SCRA 100 (2009).

enunciate a general obligation under law for every person to act fairly and in good faith towards one another. Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).

Documents

10. Directors, Trustees and Officers