Corporation Law: The Revised Corporation Code of the Philippines - Sec 22

  THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE III -  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS


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

Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Each director and trustee shall hold office until the successor is elected and qualified. A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the corporation shall cease to be such.

The board of the following corporations vested with public interest shall have independent
directors constituting at least twenty percent (20%) of such board:
a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The Securities Regulation Code”, namely those whose securities are registered with the Commission, corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares;

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

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

An independent director is a person who, apart from shareholdings and fees received from
the corporation, is independent of management and free from any business or other relationship.

NOTES 

  • General Corporate Powers:
    • Unless otherwise provided, board of directors/trustees:
      • exercise corporate powers
      • conduct all business
      • control all properties 
  • Term and Qualification of Directors/Trustees:
    • Directors: Elected annually from stockholders.
    • Trustees: Elected for up to three years from corporation members.
    • Office held until successor elected and qualified.
    • Director/trustee status ceases if they no longer own stock or cease to be a member.
  • Independent Directors for Specific Corporations:
    • Boards of certain corporations must have at least 20% independent directors.
    • Applies to securities-registered corporations, those listed on an exchange, or with assets ≥ P50,000,000.00 and 200+ shareholders.
    • Applicable to financial institutions (banks, quasi-banks, etc.) and other businesses with public interest.
    • Criteria for determining need for independent directors include factors like minority ownership, types of financial products, public interest, etc.
  • Definition of Independent Director:
    • Independent directors are individuals independent of management and devoid of business relationships with the corporation, except for shareholdings and fees received.

1. Corporate Management.

  • Section 22 expresses the basic rule on corporate management that the Board of Directors or Trustees:
    • exercises the corporate powers, 
    • conducts all business, and 
    • controls all properties of the corporation. 
  • The directors or trustees are the executive representatives of the corporation, charged with the administration of its internal affairs and management and use of its assets.
  • Under Section 22, the Board is the body which: 
    1. exercises all powers provided for under the RCCP and other existing laws;
    2. conducts all business of the corporation; and 
    3. controls and holds all properties of the corporation.
  • Corporate Power
    • It is the Board that exercises almost all the corporate power in a corporation.
      • Thus, generally, an agreement entered into by a corporate officer without Board approval cannot bind the corporation. 
      • Similarly, the filing of cases should be upon prior approval of the Board.
  • Management of Business
    • The management of the business of a corporation is generally vested in its Board of Directors, not its stockholders. 
      • Stockholders are basically investors in a corporation. 
      • They do not have a hand in running the day-to-day business operations of the corporation unless they are at the same time directors or officers of the corporation.
    • With the exception only of some powers expressly granted by law to stockholders (or members, in case of non-stock corporations), the Board of Directors (or Trustees, in case of non-stock corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, i.e., its Articles of Incorporation, By-Laws and relevant provisions of law. 
      • Verily, the authority of the Board of Directors is restricted to the management of the regular business affairs of the corporation, unless more extensive power is expressly conferred.
  • Control
    • A corporation can act only through its directors and officers. 
      • The Board is the central power that authorizes the executive agents to enter into contracts and to embark on a business. 
      • Acts of management = board; 
      • Acts of ownership = stockholders or members. 
        • Here the board cannot act alone, but must seek approval of the stockholders or members.
  • One of the most important rights of a qualified shareholder or member is the right to vote - either personally or by proxy - 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 non-stock 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.
  • Since the Board controls and administers the properties of the corporation, the Board can give authority to corporate officers or stockholders to enter into or take corporate properties. 
    • Thus, in a case, respondents (incorporators of the corporation) implemented a Board Resolution authorizing them to break open the door lock system of the corporation's unit in a building and to install a new door lock system. In addition, boxes containing personal properties were allegedly taken. The Court ruled that no robbery was committed because "one who takes the property openly and avowedly under claim of title offered in good faith is not guilty of robbery even though the claim of ownership is untenable."
2. Reason for Concentration of Power
  • The concentration of powers (of control of corporate business and of appointment of corporate officers and managers) in the Board 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. 
    • The plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business.
    • The concentration of powers in a Board is a question of:
      • speed and cost
      • expertise, and 
      • motivation.
        • Convening numerous shareholders every time a decision should be made may be cumbersome and may entail great costs. 
        • Appointment of a small group of shareholders who are experts in management is more desirable than involving all shareholders.
        • If a shareholder is only one of numerous shareholders, he may not have the incentive to actively participate in the management of the corporation.
    • At any rate, the issue of desirability of concentration of powers in only a group of individuals (directors) is material only when there is separation of management and ownership and if numerous shareholders hold ownership. 
    • Concentration of power is a non-issue in a substantial number of cases, because in those cases the shares are held only by a few and the owners-shareholders are the directors. 
3. Theories on Source of Powers
  1. Agency Theory
    • All powers reside in the stockholders and are just delegated to the directors as agents.
  2. Concession Theory
    • The power of directors is derived from the State. 
    • It is the State that permits the directors to perform only such functions as the State allows.
  3. Platonic Guardian Theory
    • Every corporation must have a board and "the board is an aristocracy or group of Platonic guardians created by legislative ordainment." 
    • The board is not a mere caretaker but it exercises control over corporate affairs. 
    • The board is considered an inviolable institution.
  4. Sui Generis Theory
    • The directors are not agents of the stockholders who elect them; they are fiduciaries whose duties run primarily to the corporation. 
    • They are not trustees in the strict sense. 
    • Their powers are derived from the state through the statute under which the corporation is organized yet they do not qualify solely as Platonic guardians. 
    • They are indeed sui generis. 
  • Valle Verde Country Club, Inc. v. Africa
    • The Supreme Court subscribed to the Agency Theory of Board authority explaining that the power of the Board is delegated. 
    • "The board of directors is the directing and controlling body of the corporation. It is a creation of the stockholders and derives its power to control and direct the affairs of the corporation from them. The board of directors, in drawing to themselves the powers of the corporation, occupies a position of trusteeship in relation to the stockholders in the sense that the board should exercise not only care and diligence, but utmost good faith in the management of corporate affairs." 
    • The Court further explained that the underlying policy of Philippine corporate law 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 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.
  • Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559 (1918)
    • In corporate bodies, the powers of the Board of Directors are, in a very important sense, original and undelegated. The stockholders do not confer and they are not empowered to revoke the powers of directors. The powers of the Board are derivative only in the sense of being received from the State in the act of incorporation. The directors convened as a Board are the primary possessors of all the powers that the charter confers.
  • Nevertheless, regardless of the theories on the status and powers of directors, "the board of directors has become an institution of recognized position charged with the duty and responsibility of managing the business, controlled by law and the corporate charter, serving in a fiduciary capacity, and otherwise responsible to no one in the exercise of prudent judgment in carrying out their functions. Elected by stockholders, they in turn elect the officers who carry out the policies the directors establish. In a great many respects they are sui generis as directors and their powers derive from statutory concessions.
4. Independence
  • The independence of directors is reflected in Section 22 of the RCCP that expressly states that the directors control all businesses of the corporation. 
  • In the management of affairs of the corporation, the directors are dependent solely upon their own knowledge of its business and their own judgment as to what the corporation's interests require.
  • The stockholders do not control the directors and the concurrence of the stockholders is not necessary for their actions unless the RCCP, the Articles of Incorporation, or the By-Laws provides otherwise. 
    • Stockholders cannot reverse the decisions of the Board. 
      • The theory of a corporation is that the stockholders may have all the profits but they shall turn over the management of the enterprise to the directors. 
      • Consistently, the directors, and not the shareholders, must make all contracts with third persons. The corporation in such matters is represented by the former and not by the latter. 
      • It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a corporate contract, its resolutions are at most advisory and not in any wise binding on the Board. 
    • The stockholders, as owners of the corporation, are not entirely helpless.
      • As Justice Holmes explained in one case "if stockholders want to make their power felt, they must unite. There is no reason why a majority should not agree to keep together."
      • The power to unite is limited to removal and election of directors and is not extended to contracts whereby limitations are placed on the power of directors to manage the business of the corporation by the selection of agents.
      • If the stockholders do not agree with the policies of the board, their remedy is to wait for the election of the directors or to remove the directors if they have the required vote.
5. Business Judgment Rule
  • Under this rule the will of the majority of the Board members controls in corporate affairs and contracts intra vires entered into by the board of directors are binding on the corporation and courts will not interfere, unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of rights of the minority. 
    • Courts cannot undertake to control the discretion of the Board of Directors about administrative matters as to which the Board has legitimate powers of action. 
    • Judges are not business experts; they cannot replace their judgment for the judgment of the directors on business matters. 
    • Questions of policy or management are left solely to the honest decision of 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 not reviewable by the courts or the SEC.
  • The directors are also not liable to the stockholder in making decisions using their business judgments.
    • The rule generally provides that corporate officers and directors, absent self-dealing or other personal interest, shall be shielded from liability for any harm to the corporation resulting from their decisions if such decisions lie:
      • within the powers of the corporation 
      • within the authority of management 
      • reasonably made in good faith 
      • with loyalty and due care. 
    • Thus, the directors will not be liable even if the corporation will suffer losses or if its profits will decrease so long as the resolution of the Board was passed in good faith.
  • Even if there was mismanagement resulting in corporate damages and/or business losses, still the directors may not be held liable in the absence of a showing of bad faith in doing the acts complained of. 
    • 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. 
    • 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 interest or ill will partaking of the nature of fraud. 
    • The directors will not be liable if there is no proof of "dishonest purpose" or "some moral obliquity," or "conscious doing of a wrong'' on the part of the directors that "partakes of the nature of fraud."
  • The business judgment rule is a standard of judicial review, entailing only slight review of business decisions.
    •  Alternatively, it could be called a standard of non-review, entailing no review of the merits of a business decision that a corporate official made.
    • This is a display of judicial pragmatism on the proposition that interference or meddling with free and lawful enterprise honestly conducted is repugnant to our concept of government.
  • Mere errors of judgment are not sufficient grounds for equity interference, for the powers of those entrusted with corporate management is discretionary.
    • The directors are entitled to exercise honest business judgment on the information before them and to act within their corporate powers. 
    • That they may be mistaken, that other courses of action might have differing consequences or that their action might benefit some shareholders more than others present no basis for the superimposition of judicial judgment, so long as it appears that the directors have been acting in good faith.
    • The reasons for rarely imposing liability for bad judgment according to one authority are as follows:
      1. Shareholders to a very real degree voluntarily undertake the risk of bad business judgment;
      2. Courts recognize that after-the-fact litigation is a most imperfect device to evaluate corporate business decision. 
        •  The circumstances surrounding a corporate decision are not easily reconstructed in a courtroom years later, since business imperative often call for quick decisions, inevitably based on less than perfect information; the entrepreneur's function is to encounter risks and to confront uncertainty, and a reasoned decision at the time made may seem a wild hunch viewed years later against a background of perfect knowledge; 
      3. Potential profit often corresponds to the potential risk; it is very much in the interest of shareholders that the law does not create incentives for overly cautious corporate business.
5.01 Requirements
  •  The business judgment rule shields the directors only if the following are present:
    1. The presence of a business decision including decisions on policy, management and administration;
    2. The decision must be intra vires and must comply with the procedural and substantive requirements of law;
      • intra vires — within the legal power or authority 
    3. Good faith;
    4. Due care in making the decision; and
    5. The director must not:
      • have personal interest or 
      • be self-dealing or 
      • otherwise be in breach of the duty of loyalty governed by provisions of the RCCP, specifically Sections 30, 31, 32, and 33 thereof.
5.02 Rationale for Business Judgment Rule
  • At least three strong policy considerations support this rule:
    1. If management were liable for mere good faith errors in judgment, few capable individuals would be willing to incur the financial and emotional risks of serving in such roles.
    2. Courts are generally ill-equipped to evaluate business judgments.
    3. Management has the expertise to discharge the responsibility of making such determinations.
  • The business judgment rule further serves the following purposes:
    1. It acts as a presumption in favor of corporate management's actions;
    2. It provides a safe harbor that makes both directors and their actions unassailable if certain prerequisites have been met;
    3. It is a means of conserving judicial resources thereby permitting courts to avoid being mired down in rehashing judgments that are inherently subjective; 
    4. The rule is the law's implementation of broad economic policy built upon economic freedom and encouragement of informed risk taking; 
    5. It is a means by which Boards of Directors adopt take-over defenses and by which the courts review the adoption of those defenses; and 
    6. It is a means by which corporations and their lawyers evaluate and, based upon that evaluation, recommend the dismissal of derivative suits.
6. Resolution. 
  • The Board must act, not individually or separately, but as a body in a lawful meeting.
  • The actions of the Board are expressed in resolutions passed in its meetings. 
  • The Board of Directors or Trustees acts as a body and the directors are not agents individually. 
    • The collective action of the directors is required in order that action may be deliberately taken after opportunity for discussion and an interchange of views.
    • Section 23 of the RCCP provides that the "directors or trustees elected shall perform their duties as prescribed by law, rules of good corporate governance, and bylaws of the corporation."
  • The action of one director or trustee does not bind the corporation. 
    • Absent any valid delegation or authorization from the Board, the declarations of an individual director relating to the affairs of the corporation are not binding on the corporation. 
    • A Board resolution authorizing an officer to act is necessary.
6.01 Approval of Resolution
  • Unless the Articles of Incorporation or the By-Laws provides 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. 
  • The basis for determining presence of the required majority of directors or trustees in order to confirm that there is a quorum for a meeting is the
    • ✅ number of board members as fixed in the Articles of Incorporation and 
    • ❌ not the actual present/available number of members of the Board.
6.02 Proof of Resolution
  • Secretary's Certificate 
    • A certificate issued by the Corporate Secretary of the corporation.
    • It is sufficient proof of the existence of a resolution adopted by the Board.
    • The truthfulness of the certification is presumed. 
      • To overcome the presumption, there must be sufficient, clear and convincing evidence as to exclude all reasonable controversy as to the falsity of the certificate.
    • Non-appearance before the notary
      • The Secretary's Certificate is not rendered invalid even if it is alleged that the Corporate Secretary did not appear before the notary public who notarized the same.
      • The non-appearance before the notary merely exposes the notary public to administrative liability.
  • Minutes of Meeting
    • Similarly, the Minutes of Meeting of the Board of Directors can also establish the existence of a Resolution of the Board.
    • ❌Signature of the Members of the Board
      • The members of the Board need not sign the Minutes of the Meeting; the certification of the Corporate Secretary is enough.
    • ✅Signature of the Corporate Secretary
      • It is the signature of the corporate secretary, as the one who is tasked to prepare and record the minutes, that gives the minutes of meeting probative value and credibility.
7. Ratification
  • The general rule is that 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. 
    • Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's bylaws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. 
  •  However, the actions taken in such a meeting by the directors or trustees may be ratified expressly or impliedly.
  • Power to ratify the previous resolutions and actions of the Board of Directors lies in the stockholders.
    • Lopez Realty, Inc. v. Spouses Tanjanco, G.R. No. 154291, November 12, 2014;
      • It in involved an alleged defective resolution because the meeting was held without prior notice to one of the directors. However, there was a subsequent ratification in a joint meeting of the directors and stockholders including the director who was not previously notified.
      • Here, the stockholders and the directors are the same persons. It is submitted though that if there is a separation of management (the Board) and stockholders, the stockholders cannot ratify defective Board actions on matters over which the stockholders have no power. In those cases, the stockholders are not, in a sense, principals of the directors especially on matters covered by the business judgment rule.
8. Proxy Not Allowed
  1. ❌ Directors or trustees cannot attend or vote by proxy at Board meetings. 
  2. ❌  A director cannot even delegate his powers as director to another person.
  3. ❌ An alternate director who will act as a director in the absence of the duly elected director is also unacceptable. (Section 52, RCCP)
9. Term
  • Section 22 of the RCCP states the following rules:
  1. Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation's books;
  2. Trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation; and 
  3. Each director and trustee shall hold office until the successor is elected and qualified.
  • The provision that states that directors "shall hold office for one year until their successors are elected and qualified" was construed by the Supreme Court to mean that the term of the members of the Board of Directors shall be only for one year; their term expires one year after election to the office.
    • Only in this way can the continued accountability to 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 the properties that they do not own.
  • The provision is explicit that the term is for one year in a stock corporation. The By-Laws cannot provide for a longer term.
    • The rationale for a one-year term "is to protect the corporation, as well as its creditors and the public dealing with it so that if an improvident or wrongful act is committed by the board of directors, the subsequent board can redress or prevent the perpetration of the wrong, and thereby protect its stockholders, creditors and the public having dealings with it.
  • "Term"
    • The word "term" has acquired a definite meaning in jurisprudence.
    • In several cases, the Supreme Court defined "term" as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another.
  • Tenure
    • Term is distinguished from tenure in that an officer's "tenure" represents the term during which the incumbent actually holds office.
    • The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent.
  • Lifetime or unlimited term of the directors is not allowed because the same deprives other stockholders or members the opportunity to participate in the management of the corporation. 
    • Under the same rule, it cannot likewise be provided that the presence of the original board members shall constitute the quorum because the same presupposes that the original board members will be holding office as members of the hoard for an unlimited term.
  • Section 13(g) of the RCCP provides that "the names, nationalities, and residence addresses of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified" should be stated in the Articles of Incorporation. Hence, it was opined that the one-year term (or the term that is not more than three years in the case of trustees) does not apply to the incorporating directors (or trustees) because they shall act only as such until the first regular directors are duly elected and qualified. 
  • Election of Regular Directors
    • The regular directors shall be elected during the first organizational meeting of the corporation, which shall be called immediately after registration with the Securities and Exchange Commission. 
    • The election of regular directors may even be counted as an act that satisfies the requirement under Section 21 of the RCCP that the corporation must organize within a period of five years from incorporation.
9.01 Term of Trustees
  • In the case of a non-stock corporation, the term of the trustees is not more than three (3) years.
  • This means that the Articles of Incorporation can provide for a term of less than three years.
  • Old Corporation Code Rule:
    • For the term of members of the Board of Trustees of non-stock corporations, the RCCP has removed the staggered term of office of trustees previously provided in Section 92 of the Corporation Code. 
    • The previous law provided that unless otherwise provided in the Articles of Incorporation or the By-Laws, the term of 1/3 of the number of trustees first elected shall expire every year, such that annual elections shall be held thereafter for 1/3 of the members of the Board of Trustees and the trustees so elected shall then have a term of three years.
9.02 Effect of Pending Cases
  • If the election of the new directors is questioned for being irregular in a case duly filed for such purpose, "the whole process will be overtaken by the yearly stockholders' meeting and election of directors and officers of the corporation as mandated by law. No director or officer of the corporation can claim his office in perpetuity. He has to submit himself to a yearly election if he wants to continue in the service of the corporation."
  • An injunction issued against the directors whose election is being questioned is not a bar to the holding of an annual election in accordance with the provisions of the By-Laws.
  • The same rule applies even if the directors were subsequently declared to have been invalidly removed. 
    • A subsequent valid annual election prevents them from continuing or from being reinstated as directors. The directors have "no right to continue as director of the corporation unless re-elected by the stockholders in a meeting called for that purpose every year."
    • If a subsequent annual stockholders meeting was SEC supervised, the same "gave rise to the presumption that the corporate officers who won the election were duly elected to their positions and therefore can be rightfully considered as de jure officers.

10.  Qualifications
  • The RCCP prescribes the following qualifications for directors or trustees: 
  1. He must own at least one share of the capital stock of the corporation in his own name or if the corporation is a non-stock corporation, he must be a member thereof;
  2. He must not be disqualified under the RCCP or any applicable special law or rules;
  3. He must be of legal age; and 
  4. He must possess other qualifications as may be prescribed in special laws or regulations or in the by-laws of the corporation.
Natural Persons. 
  • A director or trustee must be a natural person. 
  • The RCCP expressly allows corporations, partnerships and associations to be incorporators. There is no similar express provision with respect to the directors. Hence, it is evident that the requirement that the directors and trustees are, natural persons remains.
  • Corporations, Partnerships and Associations:
    • ✅ Incorporators
    • ❌ Director or Trustee
Residence.
  • There is no residence requirement under the RCCP. 
  • Old Corporation Code Rule:
    • Previously, the Corporation Code required that a majority of the directors/trustees must be residents of the Philippines. This requirement was deleted by the RCCP. 
Age.
  • There is no express statement in Section 22 requiring directors to be of legal age. Nevertheless, minority restricts an individual's capacity to act.
  • Hence, the SEC opined that the election of minors to the Board or as corporate officer is not sound corporate practice. 
  • Since their capacity to act is restricted, they will not be able to participate in all corporate acts.
  • In addition, it is likewise submitted that the requirement for incorporators to be of legal age under Section 14 of the RCCP should also be applied to subsequent directors.

10.01 Shares or Membership. 
  • Section 22 of the Revised Corporation Code provides that to be elected as a director one must come from "among the holders of stocks registered in the corporation's books." In the case of a non-stock corporation, the trustee to be elected must come "from among the members of the corporation."
  • Stock Corporation: holder of stocks registered in the corporation's books
  • Non-stock Corporation: member of the corporation
Rationale.
  • The requirement that the director must be a stockholder of record is intended for the protection of the corporation so that it may have means of knowing at any time who are the stockholders who may participate in the management of the corporation. 
Disqualification.
  • A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the corporation shall cease to be such. 
  • Therefore, the corporation need not comply with the provisions of Section 27 of the RCCP before a director is deemed removed from office. 
  • A director ceases to be a director and a trustee ceases to be a trustee the moment the director ceases to be a stockholder and the moment the trustee ceases to be a member.
Nature of Title.
  • It is sufficient that legal title as it appears in the books of the corporation is in the director since the legal title is what counts. 
    • ✅ The legal title to the stock as appearing in the books of the corporation is material
    • ❌ not beneficial ownership of the stock
  • Thus, a person to whom one share of stock has been transferred for the express purpose of qualifying him as director is qualified. 
    1. While a corporation cannot be elected as a director, its duly authorized officer, agent or trustee who has been designated as "nominee" may be eligible to be elected as director. 
      • A shareholder corporation may have representation in the board by giving one of its officers or any representative one qualifying share, which said person holds as nominee. However, the nominee is no longer qualified to be a director the moment his assignment as nominee is revoked by his principal.
    2. The trustee in a voting trust agreement is also qualified to run as a director. The trustee has legal title over the shares.
    3. Unless he is a stockholder (or member) in his own right, a proxy cannot be elected as a director (or a trustee). 
      • The right to be a candidate cannot be delegated. The right is peculiar only to members or stockholder of a corporation.
      • Lim v. Moldex Land
        • Republic Act No. 4726 (Condominium Act) sanctions the creation of a condominium corporation which is especially formed for the purpose of holding title to the common areas and membership in a condominium corporation is limited only to the unit owners of the condominium project. Hence, even the developer that is still the registered owner of a number of unsold units should be considered a member. However, while the developer corporation may rightfully designate proxies or representatives, the latter cannot be elected as directors or trustees. First, the Corporation Code clearly provides that a director or trustee must be a member of record of the corporation. Further, the power of the proxy is merely to vote. If said proxy is not a member in his own right, he cannot be elected as a director or trustee.
    4. However, that a person who does not own any stock at the time of his election or appointment is not disqualified as director if he becomes a shareholder before assuming the duties of his office.
    5. One cannot be a director if he is not a stockholder of record. Hence, the assignee of a share cannot be elected as a Director if the assignment in his favor is not yet registered in the books of the corporation. 
    6. The SEC is of the opinion that a holder of a non-voting share cannot be elected as a director. Non-voting shares cannot participate in the management and the holders of such shares cannot be elected to a position that is purposely created to manage the corporation. 
    7. The one share requirement is only the minimum. The Articles of Incorporation may provide that a director must have more than one share so long as the required number of shares is reasonable.  
  • Summary
    • ✅ nominee
    • ✅ trustee in a voting trust agreement
    • ✅ person who does not own any stock at the time of his election or appointment, provided he becomes a shareholder before assuming the duties
    • ❌ proxy
    • ❌ assignee
    • ❌ holder of a non-voting share
10.02 Citizenship.
  • General Rule: There is no citizenship requirement for directors and trustees under the RCCP. Foreigners can be elected as directors or trustees subject to the provisions of special laws. There may even be corporations where all the directors or trustees are foreigners. 
  • Exception: When the number of foreign directors is restricted by nationalization laws. 
    • Example:
      • Anti-Dummy Law ― foreigners can be elected as directors only in proportion to their allowable equity participation in the capital of the said activities. 
Dual Citizens
  • Natural born Filipinos who lost their citizenships by assuming foreign citizenship may re-acquire and retain their Filipino citizenship under Republic Act No. 9225. 
  • They can be directors and officers of corporations engaged in partly nationalized or wholly nationalized industries even if they possess "dual citizenship."
10.03 Qualifications under Special Laws.
  • Other special laws may provide for qualifications and disqualifications of directors or trustees. 
  • Example:
    • Banks
      • Those who are to be elected as directors of banks are also subject to the other requirements of the General Banking Law and circulars issued by the Bangko Sentral ng Pilipinas.
    • Public Officer
      • Another example is Republic Act No. 6713 or the Code of Conduct and Ethical Standards for Public Officials and Employees.
        1. Section 7 of the said law prohibits a public officer from being employed in a private enterprise regulated, supervised or licensed by his office unless expressly allowed by law: 
        2. The Code likewise prohibits conflict of interest situations. 
          • Conflict of interest arises when a public official or employee is a member of a board, an officer or substantial stockholder of a private corporation or owner or has a substantial interest in a business, and the interest of such corporation or business, or his rights or duties therein, may be opposed to or affected by the faithful performance of official duties.
10.03 Qualifications under the By-Laws.
  • Section 46(f) of the RCCP provides that a corporation is empowered to provide in its By-Laws the qualifications and disqualifications of members of the Board. If a disqualified director is elected, the stockholders do not waive their right to question his election as a director; qualification cannot be waived.
  • Remedy: Amend the By-Laws if the shareholders feel that the qualifications prescribed in the By-Laws should no longer operate.
  • The provisions prescribing qualifications and disqualifications are devices to protect the interest of the corporation. 
    1. For instance, a provision in the By-Laws disqualifying stockholders who are already directors in competing corporations or the controlling stockholder thereof is considered a valid provision in the By-Laws. To prevent the existence of disloyal directors, it is proper to prescribe in the By-Laws a provision disqualifying stockholders with interest adverse to the business of the corporation, to be a director. By express provision in the By-Laws, directors in competing corporations are thus deprived of the right to participate in the management of the business.
      • This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other.
    2. It has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director.
    3.  A provision in the By-Laws of a rural bank that bars a stockholder who is at the same time an employee of the said bank to run as director unless he resigns as an employee is valid.
    4. It would not be acceptable, however, if the By-Laws will just provide that the disqualifications are subject to the judgment or determination of the directors. The additional qualifications or disqualifications must be spelled out in the By-Laws. In the absence of a provision in the By-Laws, a corporation cannot require additional qualifications for directors other than those provided in Sections 22 and 91 of the RCCP as well as other pertinent special laws. 
    5. The directors or trustees should come from the stockholders or members. Hence, a proposal that the directors or trustees shall come from the officers is not in accordance with law.
11.  Ex Officio Member.
  • A person who is not a stockholder in a corporation governed by the RCCP cannot be a director but he can be an ex officio member without voting rights in the Board.
  • Republic Act No. 10148 provides for Ex Officio Board Member and Alternates in Government-Owned or Controlled Corporations (GOCC). 
    • Ex Officio Board Member refers to any individual who sits or acts as a member of the Board of Directors/ Trustees by virtue of one's title to another office, and without further warrant or appointment. 
    • The ex officio members of the GOCC may designate their respective alternates who shall be the officials next in-rank to them, and whose acts shall be considered the acts of their principals.
12.  Effect of Disqualification
  • A disqualified stockholder cannot run for election as director. 
  • If the ground for disqualification was present at the time of election, but the disqualified stockholder was nevertheless elected as a director, the subsequent disqualification of the director would not render the Board incapable of transacting business for as long as the remaining directors still constitute a quorum. Such situation merely gives rise to a vacancy in the Board. 
  • The same rule should be applied if the stockholder was not disqualified at the time of election but he became disqualified thereafter.
13. Re-Election. 
  • Unless there is a provision in the Articles of Incorporation or By-Laws that disqualifies an incumbent director or officer from seeking another term of office, the incumbent is not prevented from seeking re-election.
14. Hold-Over. 
  • The policy of the law is to avoid or shorten the tenure of hold-over directors or trustees.
  • It is noted that the presence of hold-over directors or trustees cannot be totally avoided.  If no election is held, the directors and officers shall hold-over until their successors are elected. 
    • This rule on hold-over directors and officers applies to a going concern where there is no break in the exercise of the duties of the officers and directors.
    • However, once an annual stockholders' meeting takes place and new directors are elected, the old directors cannot continue to serve as directors. 
  • The hold-over principle cannot be invoked as a shield to perpetuate oneself in office.
  • After the annual election, the old directors cannot serve in a hold-over capacity even if the latter were previously illegally prevented or enjoined from performing their functions during their term.
Term of Office
  • The term of office is not affected by the hold-over. 
  • The term of one year is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify.
Hold-over Period
  • That time from the lapse of one year from a member's election to the Board and until his successor's election and qualification - is not part of the director's original term of office, nor is it a new term.
  • The hold-over period, however, constitutes part of his tenure. 
    • When an incumbent member of the Board of Directors continues to serve in a hold-over capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term.
Power
  • The power of the directors who are continue serve in a hold-over capacity is not diminished. The board has the same power as the board during the term of the directors. Thus, the power of the hold-over board is not limited to the daily routine operations. The business judgment rule still applies.
15. Corporate Governance.
  • In 2009, the SEC issued Memorandum Circular No. 6, Series of 2009 dated June 22, 2009, entitled Code of Corporate Governance.
  • The Code of Corporate Governance applies to:
    1. registered corporations 
    2. branches and subsidiaries of foreign corporations operating in the Philippines
  • that:
    1. sell equity and/or debt securities to the public that are required to be registered with the SEC; or 
    2. have assets in excess of P50,000,000.00 or such other amount as the Commission shall prescribe, and having 200 or more shareholders each holding at least 100 shares of a class of its equity securities; or
    3. whose equity securities are listed in an Exchange; or
    4. are grantees of secondary licenses from the SEC. 
  • However, the SEC issued Memorandum Circular No. 19, Series of 2016 dated November 22, 2016 that superseded Memorandum Circular No. 6, Series of 2009 with respect to listed companies. 
    • Corporate Governance is defined as the system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal and social obligations towards their stakeholders. (Memorandum Circular No. 19, Series of 2016)
      • The said Circular likewise state that "corporate governance is a system of direction, feedback and control using regulations, performance standards and ethical guidelines to hold the Board and senior management accountable for ensuring ethical behavior - reconciling long-term customer satisfaction with shareholder value - to the benefit of all stakeholders and society." The purpose is to maximize the organization's long-term success, creating sustainable value for its shareholders, stakeholders and the nation."
    • Corporate Governance is defined as the framework of rules, systems and processes in the corporation that governs the performance by the Board of Directors and Management of their respective duties and responsibilities to the stockholders and other stakeholders which include, among others, customers, employees, suppliers, financiers, government and community in which it operates.(Memorandum Circular No. 6, Series of 2009)
  • The enumeration of the corporations that are covered by the Code shows the intent to provide a framework of rules, systems and processes primarily when there is a regime of dispersed ownership. In covered "public companies" - which have more than 200 shareholders or corporations whose equity securities are listed in an exchange - there is a greater possibility that there is a separation between management and ownership. Hence, it is necessary to provide for a framework that will focus on the relationship between the directors and officers on one hand and the stockholders on the other. 
  • Additionally, the inclusion of firms that sell equity/debt securities to the public and corporation that have secondary licenses within the coverage of the Code indicates the intent to cover entities that directly affect the public in their operation.
  • The law of corporate fiduciary duties and remedies for violation of those duties are distinct from the aspirational goals of ideal corporate governance practices. 
    • Aspirational ideals of good corporate governance practices for board of directors that go beyond the minimal legal requirements of the corporation law are highly desirable, often tend to benefit stockholders, sometimes reduce litigation and can usually help directors avoid liability. But they are not required by the corporation law and do not define standards of liability. 
  • The coverage of the Code of Corporate Governance issued by the SEC is limited to those expressly numerated therein. Nevertheless, even corporations that are not included in the enumeration may voluntarily adopt the principles and rules that are included in the Code of Corporate Governance because these principles and rules partake the nature of institutional best practices.
  • "Comply or explain" approach.
    • The 2016 Code of Corporate Governance adopts the "comply or explain" approach.
      • This approach combines voluntary compliance with mandatory disclosure. 
      • Companies do not have to comply with the Code, but they must state in their annual corporate governance reports whether they comply with the Code provisions, identify any areas of non-compliance, and explain the reasons for non-compliance."
  • Principle of Proportionality
    • The 2016 Code "does not, in any way, prescribe a 'one size fits all' framework. 
    • It is designed to allow boards some flexibility in establishing their corporate governance arrangements. 
      • Larger companies and financial institutions would generally be expected to follow most of the Code's provisions. 
      • Smaller companies may decide that the costs of some of the provisions outweigh the benefits, or are less relevant in their case.
  • The 2016 Code is arranged into:
    1. Principles
    2. Recommendations
    3. Explanations
  • Principles
    • The Principles can be considered as high-level statements of corporate governance good practice, and are applicable to all companies
  • Recommendations
    • The recommendations are objective criteria that are intended to identify the specific features of corporate governance good practice that are recommended for companies operating according to the Code. 
    • Alternatives to a Recommendation may be justified in particular circumstances if good governance can be achieved by other means. 
    • When a Recommendation is not complied with, the company must disclose and describe this non-compliance, and explain how the overall Principle is being achieved. The alternative should be consistent with the overall Principle.
  • Descriptions and Explanations
    • Descriptions and explanations should be written in plain language and in a clear, complete, objective and precise manner, so that shareholders and other stakeholders can assess the company's governance framework.
    • The Explanations strive to provide companies with additional information on the recommended best practice.

15.01 Alternative Theories on Corporate Governance.
  • There are two alternative theories regarding corporate governance:
  1. The Shareholder Primacy Theory/Shareholder-Wealth-Maximization Theory
    • conservative school of thought 
  2. Social Responsibility Theory/Stakeholder Protection Theory
    • progressive school of thought 
The Shareholder Primacy Theory
  • It holds that the corporation should be run for the exclusive benefit of shareholders. 
    • One of the best known supporters of the shareholder's primacy theory was Milton Friedman who said in his Capitalism and Freedom that "few trends could so thoroughly undermine the very foundations of our society as the acceptance by corporate officers of a social responsibility other than to make as much money for their shareholders as possible."
    • Friedman believes that those who espouse the social responsibility theory show a fundamental misconception of the character and nature of a free economy. In a free economy, there is allegedly "one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud." 
  • Other theorists use the term Wealth Maximization Theory because the shareholder's interest is served if the managers of a corporation will use as a criterion for evaluating the performance of a corporation the maximization of long-term market value of the firm.
    • This includes not only the value of equity but all the sum of the values of all financial claims on the firm such as debt, warrants, preferred stocks, as well as common shares.
Corporate Social Responsibility Theory
  • It prefers the limitation on excessive pursuit of profit and promotion of employee, customer, and community voice in corporate governance.
    • One of the strains of this progressive school is to focus on the so-called Stakeholders. 
    • It signifies an acceptance that corporate governance at a general level can be described as a problem involving the corporation and multiple constituencies. The corporation is a legal fiction that serves as a nexus of contracts. 
    • Corporate governance also implicates how the various constituencies that define the business enterprise serve, and are served by, the corporation. Implicit and explicit relationships between the corporation and its employees, creditors, suppliers, customers, host communities - and relationship among constituencies themselves - fall within the ambit of.a relevant definition of corporate governance. As such, the phrase calls into scrutiny not only the definition of the corporate form, but also its purposes and its accountability to each of the relevant constituencies.
Rationale
  • It has been said that mandatory corporate governance rules are necessary for two main reasons:
    1. to overcome the collective action problem resulting from the dispersion among stockholders, and
    2. to ensure that the interests of all relevant constituencies are represented.
Controlling Theory
  • There is an ongoing debate between two groups of theorist as to what should be the controlling theory - the Stockholders Primacy Theory or the Stakeholders Theory. 
  • There are those who opine that the Stockholders Primacy Theory had already vanquished the Stakeholders Theory leading to what is called the end of history of corporate governance.
15.02. Corporate Social Responsibility (CSR). 
  • Before the 2014 amendments, the focus of the rules was on the relationship between the directors and the stockholders. 
  • Noteworthy is the difference in the definition of "corporate governance" in the 2002 Code of Corporate Governance and in the 2009 Code of Corporate Governance.  On the other hand, the 2016 Code of Corporate Governance expressly states the system is for the benefit of the stakeholders and society.
    • Corporate governance is defined as a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation as it competes in an increasingly global market place. (The 2002 Code of Corporate Governance)
      • Fortunately, the 2009 Revised Code of Corporate Governance was amended in SEC Memorandum Circular No. 9, Series of 2014 to include other stakeholders in the definition of corporate governance and to expressly provide for duties of the Board to other stakeholders. 
    • Corporate Governance (The 2016 Code of Corporate Governance)
      • The system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal and social obligations towards their stakeholders. 
      • Corporate governance is a system of direction, feedback and control using regulations, performance standards and ethical guidelines to hold the Board and senior management accountable for ensuring ethical behavior – reconciling long term customer satisfaction with shareholder value – to the benefit of all stakeholders and society. Its purpose is to maximize the organization’s long-term success, creating sustainable value for its shareholders, stakeholders and the nation. 
  • The principles that are sought to be upheld under the 2016 Code are found here:
  • It is believed that corporate governance practices in this jurisdiction cannot disregard the different stakeholders in the corporation. 
    • The intent of the legislature was to encourage social and civil responsibility of corporations. Hence, the importance of Corporate Social Responsibility (CSR) is recognized and adopted in this jurisdiction. The provisions of the RCCP adopt good corporate governance principles.
  • Old Corporation Code:
    • The intent to adopt good governance principles was likewise present under the Corporation Code. The sponsor of the Corporation Code in the legislature explained that the provisions of the Code demonstrate an awareness that corporations are not mere business organizations exclusively intended to serve the personal interests of shareholders or managers but are social institutions in which all sectors of society have an interest. While inanimate, they cannot be without moral values or ethical concerns; nor can they be bereft of social and civil responsibilities. Thus, as an assurance of a welcome place in society, while the code does not directly mandate the performance of specific social and civil obligations, it encourages and provides corporations with every means of becoming valuable social institutions."
    • In other words, regard for the different constituencies is not a new concept and is in fact one of the considerations when the Corporation Code was passed by the legislature. Thus, as observed in the Sponsorship Speech, the Corporation Code was supposed to be a balanced response to the interests of the shareholders, directors, officers, employees and the public in general and of those who deal with the corporation in particular, as well as of the corporate entity at such a time when the economic demands of the nation are acute and pressing. 
    • Consequently, Section 36 of the then Corporation Code expressly allowed corporations to make reasonable donations for, among other purposes, civic or charitable purposes. This power will be absent if the Corporation Code strictly complied with the Shareholder Primacy Theory. The same power is expressly provided in Section 35 of the RCCP.
  • Other Laws
    • Different constituencies of the corporation are likewise protected in other laws. Special laws are also part of the regulatory structure for corporations. Thus, environmental laws, labor laws, insolvency and rehabilitation laws and consumer protection laws are part of the regulatory framework that covers corporations and their business organizations.
  • Firms likewise voluntarily adopt Corporate Social Responsibility standards.
    • Example:
      • Compliance with CSR Standards is required before getting the widely coveted ISO and OHAS Certifications. 
        • International Organization for Standardization; The certifications include ISO 14000 for environmental management, ISO 26000 for Social Responsibility and ISO 36000 for risk management.
        • Occupational Health and Safety Certifications include OHAS 18001. 
      • In addition, corporations likewise voluntarily adopt the principles of corporate governance of the Organization for Economic Co-Operation and Development (OECD) even if the Philippines is not a member country. 
        • The OECD principles mandate that the corporate governance framework must recognize the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders. Compliance with OECD principles is brought about by the aspiration of corporations to be globally competitive and acceptable to business entities in the OECD member countries. Additionally, corporations are also pressured by their valued customers to comply with CSR principles. Corporations who supply products to big companies are compelled by the latter companies to comply with good governance principles including protection of labor and the environment. 
15.03. Good Governance Principles under the RCCP.
  • A good number of the amendments to the Corporation Code under the RCCP were proposed to strengthen good corporate governance to protect the rights of stockholders, and deter corporate abuses and fraud as well as graft and corrupt practices. The intent of the amendments is to apply good governance principles not only on listed companies but on all corporations as well.
  • The provisions of the RCCP that adopt good corporate governance include the following: 
    • Directors composition:
      1. Additional disqualifications of directors are imposed (Sec. 26, RCCP);
      2. Independent directors are required for corporations vested with public interest (Sec. 22, RCCP);
      3. Provisions that are designed to prevent perpetual or long term holdover directors (Secs. 23 and 25, RCCP).
    • Increased disclosure and transparency: 
      1. Requirement to submit to the stockholders and the SEC an annual report of salary of the total compensation of directors or trustees (Sec. 29, RCCP); 
      2. Improved provisions and additional remedies for the exercise of the right to inspect and to secure copies of the records of the corporation (Sec. 73, RCCP);
      3. Encourage whistleblowers by punishing retaliation against them (Sec. 169, RCCP); 
      4. Additional reportorial requirements of the corporations especially those vested with public interest (Sec. 177, RCCP).
    • Management:
      1. Preventing a vacuum in management or preventing the absence of decision-making body by providing for an Emergency Board even without quorum (Sec. 28, RCCP); 
      2. Directors or trustees are not allowed to participate in the approval of their own per diems or compensation (Sec. 29, RCCP.) 
    • Ensuring Participation of Directors in Decision-making:
      1. Expressly allowing attendance in meetings through alternative modes of communication (Sec. 52, RCCP).
    • Increased Participation of Stockholders through "seamless exercise of stockholder rights and remedies against oppressive acts of the corporations" (Explanatory Note to S.B. 231):
      1. Attendance of Meetings through Remote Communication and Voting in Absentia (Sec. 49, RCCP); 
      2. Strengthened right to inspect and to reproduce records (Sec. 73, RCCP); 
      3. Remedy in case meetings are postponed or when there is unjust refusal to call meetings (Sec. 49, RCCP);
      4. Administrative and Penal sanctions are imposed for violation of rights.
    • Fostering Corporate and Civic Responsibility:
      1. Curbing corporate abuses and fraud; 
      2. Imposing criminal liability on the corporation itself
      3. Specifying additional crimes. 
    • Fortify or Strengthen the SEC as Regulator of Corporations: 
      1. Additional express powers are provided for in the RCCP (Sec. 179, RCCP); 
      2. Provision strengthening the Visitorial powers of the SEC (Sec. 178, RCCP);
      3. Harmonization of powers of the SEC under the SRC and the RCCP (Secs. 154, 156, 158, and 179, RCCP); 
      4. Power to order the removal of signages of disallowed or deregistered names (Sec. 17, RCCP);
      5. Power to issue cease and desist orders (Sec. 156, RCCP); and 
      6. Power to call meetings (Sec. 49, RCCP)
15.04 Independent Directors. 
  • One of the provis10ns that aims to adopt good corporate governance principles  is the rule under Section 22 of the RCCP that the board of corporations vested with public interest shall have independent directors constituting at least twenty percent (20%) of such board.
  • These corporations that are vested with public interest are specified in Section 22 as follows: 
    1. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as "The Securities Regulation Code" namely those whose securities are registered with the Commission, corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares; 
    2. Banks and quasi-banks, Non-stock savings and loan associations (NSSLAs), pawnshops, corporations engaged in money service business, preneed, trust and insurance companies, and other financial intermediaries, and 
    3. Other corporations engaged in businesses vested with public interest similar to the above, as may be determined by the Commission, after taking into account relevant factors which are germane to the objective and purpose of requiring the election of an independent director, such as the extent of minority ownership, type of financial products or securities issued or offered to investors, public interest involved in the nature of business operations, and other analogous factors. 

Definition of Independent Director.
  • Under Section 22 of the RCCP, "an independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director."
  • The definition under the RCCP is substantially the same as the definition under the rules that implement Section 38 of Republic Act No. 8799 or the Securities Regulation Code (SRC). Section 38 of the SRC is implemented by Rule 38, Sections 38.1 to 38.9 of the 2015 Implementing Rules and Regulations of the SRC. Section 38 of the SRC provides:
SEC. 38. Independent Directors. -Any corporation with a class of equity securities listed for trading on an Exchange or with assets in excess of Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders, at least of two hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities or which has sold a class of equity securities to the public pursuant to an effective registration statement in compliance with Section 12 hereof shall have at least two (2) Independent directors or such Independent directors shall constitute at least twenty percent (20%) of the members of such board, whichever is the lesser. For this purpose, an "independent director" shall mean a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. 


Election and Qualifications
  • "Independent directors must be elected by the shareholders present or entitled to vote in ab entia during the election of directors.
  • Independent directors shall be subject to rules and regulations governing their:
    • qualifications
    • disqualifications
    • voting requirements
    • duration of term and term limit
    • maximum number of board memberships and 
    • other requirements that the Commission will prescribe to strengthen their independence and align with international best practices.
  • The underlying thesis on appointment of outside directors is that said directors bring expertise, independence, broadened experience and perspective to the corporate decision making process. They are unhampered by day-to-day involvement and self-interest.
  • The role of independent directors under the framework of the rules on corporate governance is even more important because of the aim not only to protect the shareholders but also the different constituencies of the corporation. 
  • SEC Memorandum Circular No. 9, Series of 2009 dated June 24, 2009 additionally provides that a regular director who resigns or whose term ends on the day of the election shall only qualify for nomination and election as independent director only after a two-year cooling off period. 
  • Persons appointed as Chairman "Emeritus," "Ex-Officio" Directors/Officers or Members of any Executive Advisory Board or otherwise appointed in a capacity to assist the Board in the performance of its duties and responsibilities shall be subject to a one-year "cooling off period" prior to his qualification as an independent director.
  •  According to the SEC, the policy behind the appointment of an independent director is that a non-executive director must not have a relationship with the corporation that would materially interfere with his exercise of independent judgment in carrying out his responsibilities as director in any covered company. Any relationship the independent director may have with the covered company must not compromise said director's objectivity and loyalty to the shareholders.
  • It is during  the annual stockholders/members' meeting that the independent directors are elected. Hence, "it is not correct to say that it is either the majority block or the minority one which has the burden to elect the independent directors since to do so would be anathema to the policy behind the appointment of independent directors. Rather it is the stockholders themselves who will elect the independent directors."
15.05. Corporations Vested with Public Interest.
  • The RCCP contains a number of rules dealing with "corporations vested with public interest." These special rules imposed on corporations vested with public interest include the following: 
  1. Requirement that there must be an independent director (Sec. 22, RCCP);
  2. Right of stockholders/members to vote in the election of directors/trustees through remote communication or in absentia in corporations vested with public interest, notwithstanding the absence of a provision in the bylaws of such corporations (Sec. 23, RCCP); 
  3. Requirement that a compliance officer is elected by the Board (Sec. 24, RCCP); 
  4. Requirement to submit to the shareholders and to the SEC an annual report of the total compensation of each of the directors or trustees (Sec. 29, RCCP);
  5. Additional requirement is imposed for self-dealing directors - material contracts shall be approved by at least two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors voting to approve the material contract (Sec. 31, RCCP); 
  6. With respect to independent trustees of nonstock corporations vested with public interest, they need not be a member/s of the corporation to be elected as a trustee (Sec. 91, RCCP); 
  7. A corporation vested with public interest cannot be incorporated as a close corporation (Sec. 95, RCCP);
  8. The Congress of the Philippines may set maximum limits for stock ownership of individuals or groups of individuals related to each other by consanguinity, affinity, or by close business interests, in corporations declared to be vested with public interest, or whenever necessary to prevent anti-competitive practices as provided in Republic Act No. 10667, otherwise known as the "Philippine Competition Act", or to implement national economic policies designed to promote general welfare and economic development, as declared in laws, rules, and regulations (Sec. 176, RCCP); and 
  9. In addition to reportorial requirements applicable to all corporations, corporations vested with public interest must also submit to the SEC the following:
    • A director or trustee compensation report; and 
    • A director or trustee appraisal or performance report and the standards or criteria used to assess each director or trustee. (Sec. 177, RCCP). 
  • Section 176 of the RCCP provides for the different factors that will be considered in the determination of which entities will be considered as "corporations vested with public interest." Section 176 provides that in recommending to the Congress which corporations, businesses and industries will be declared as vested with public interest, "the NEDA [National Economic and Development Authority] shall consider the type and nature of the industry, size of the enterprise, economies of scale, geographic location, extent of Filipino ownership, labor intensity of the activity, export potential, as well as other factors which are germane to the realization and promotion of business and industry.

Comments

Post a Comment

Popular posts from this blog

Equality and Human Rights: The United Nations and Human Rights System (September 16, 2023)

Sovereign Equality of States/Principle of sovereign equality UN Charter of 1945 All states are equal before international law no matter the size of their territory, population, economy or military. All states have equal rights and duties under international law, and that no state has the right to interfere in the internal affairs of another state. Positive Consequences: All states have a voice in international affairs .   All states have the opportunity to participate in international organizations and to negotiate and conclude treaties. This helps to ensure that the interests of all states are represented in the development of international law and policy. No state has the right to interfere in the internal affairs of another state.  This helps to protect the sovereignty of all states and to prevent the use of force or coercion to achieve political objectives. States have the right to develop their own political, economic, and social systems without interference from othe...
Read more

Commercial Laws 1: R.A. No. 11057 — Personal Property Security Act

  Commercial Law TITLE XVI Personal Property Security Act Micro, Small and Medium Enterprises are sources of growth and innovation. They contribute to and benefit from future growth. Their increased participation in global trade "can have significant impact in reducing poverty through employment creation, productivity improvements and economies of scale." Congress passed the Personal Property Security Act in order to provide Micro, Small and Medium Enterprises (MSMEs) more access to "credit at the least cost through the establishment of a unified and modern legal framework for securing obligations with personal property ." It was explained:  According to the 2015 Philippine Statistics Authority data, there are 896,839 micro-small and medium enterprises (MSMEs) that established in the Philippines.  These MSMEs generated a total of 4,784,870 jobs in 2015 versus 2,181,819 for the large enterprises.  This indicates that the MSMEs contributed almost 61 % o...
Read more

Land Title and Deeds: Chapter 1 — What Lands are Capable of Being Registered

Chapter I What Lands are Capable of Being Registered All lands in the Philippines are presumed to be lands of the public domain, and therefore, owned by the State. This rule finds support in Section 2, Article XII of the 1987 Constitution:  Section 2 . All lands of the public domain , waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State . With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least 60 per centum of whose capital is owned by such citizens. Such agreements may be fo...
Read more