Corporation Law: The Revised Corporation Code of the Philippines - Sec 23

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE III -  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS


SEC. 23. Election of Directors or Trustees.  – 

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

At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy, the owners of majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. When so authorized in the bylaws or by a majority of the board of directors, the stockholders or members may also vote through remote communication or in absentia: Provided, That the right to vote through such modes may be exercised in corporations vested with public interest, notwithstanding the absence of a provision in the bylaws of such corporations. 

A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum. The election must be by ballot if requested by any voting stockholder or member. 

In stock corporations, stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own names in the stock books of the corporation at the time fixed in the bylaws or where the bylaws are silent, at the time of the election. The said stockholder may: (a) vote such number of shares for as many persons as there are directors to be elected; (b) cumulate said shares and give one (1) candidate as many votes as the number of directors to be elected multiplied by the number of the shares owned; or (c) distribute them on the same principle among as many candidates as may be seen fit: Provided, That the total number of votes cast shall not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the bylaws, members of nonstock corporations may cast as many votes as there are trustees to be elected but may not cast more than one (1) vote for one (1) candidate. Nominees for directors or trustees receiving the highest number of votes shall be declared elected. 

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

The directors or trustees elected shall perform their duties as prescribed by law, rules of
good corporate governance, and bylaws of the corporation.

NOTES 

  • Nominating Directors/Trustees:
    • All stockholders/members, except when the exclusive right is reserved for holders of founders’ shares, can nominate directors/trustees who possesses all of the qualifications and none of the disqualifications.
  • Presence:
    • The presence, either in person or through a representative authorized to act by written proxy, of the owners of majority of the outstanding capital stock or majority of the members entitled to vote. 
    • Bylaws or majority of the board may authorize voting through remote communication or in absentia: provided, the right to vote through such modes  may be exercised in corporations vested with public interest, notwithstanding the absence of a provision.
  • Participation in absentia:
    • Participants voting remotely or in absentia are considered present for quorum. 
  • Ballot elections:
    • Ballot elections can be requested by any voting stockholder or member.
  • Voting Rights in Stock Corporations:
    • Stockholders in stock corporations can vote the number of shares they own for candidates equal to the number of directors to be elected.
    • Stockholders have options to distribute their votes among candidates or cumulate votes for a single candidate, subject to limits to prevent exceeding owned shares.
  • Voting in Nonstock Corporations:
    • Members of nonstock corporations can cast as many votes as there are trustees to be elected, but not more than one vote for a single candidate.
  • Outcome:
    • Nominees with the highest votes become directors/trustees.
  • Adjournment:
    • If the required majority is not present in elections, the meeting can be adjourned as per Section 25 of the Code.
  • Directors/Trustees' Duties:
    • Elected directors/trustee shall perform their duties as prescribed by:
      • law
      • rules of good corporate governance, and 
      • bylaws of the corporation

1. Manner of Election
  • The manner of electing directors is prescribed in Section 23 of the RCCP. 
  • A corporation cannot adopt a procedure other than what is prescribed in Section 23 for stock corporations.
  • For instance, the requirement that quorum must be present cannot be dispensed with. 
    • A provision that allows mere designation of directors without election is also contrary to Section 23 of the RCCP. 
    • Execution of an agreement between stockholders that the directors will be designated is not acceptable.
  • Automatic membership in the Board is also not allowed. 
    • There must be an election in the manner prescribed under Section 23 of the RCCP.
    • For example, it cannot be provided in the By-laws that past presidents are automatically members of the Board. 
  • Every qualified stockholder or member can be a candidate in the election of the members of the Board. 
    • Section 23 of the RCCP provides that stockholders and members shall have the right to nominate any qualified director or trustee in a corporation. 
    • The exception is a corporation with founders' shares where the founders are given the exclusive right to be elected as directors.
  • Stockholders elect directors at large.
    • There will be a violation of Section 23 of the RCCP if the election of the members of the Board of Directors of a stock corporation is by region. 
    • It cannot be provided in the By-Laws of a stock corporation that each region shall elect their own representative in the Board. 
    • Election by region is feasible only in a non-stock corporation.
  • Staggered election of directors is not allowed in a stock corporation. 
    • A staggered election would be violative of the rule that provides for annual election of all directors.
    • The RCCP even removed the staggered term of trustees in non-stock corporations. 
  • An agreement by which selection of corporate directors is reposed in anybody except the stockholders is in violation of public policy and unenforceable.

1.01 Voting Through Remote Communication or In Absentia
  • The stockholders and members may vote in the election of directors either:
    • personally by attending the meeting; 
    • through a proxy; or 
    • through remote communication or in absentia.
  • Voting through remote communication or in absentia is allowed only:
    • when authorized by the By-Laws, or 
    • when authorized by a majority of the Board of Directors, or 
    • even without a provision in the By-Laws, in corporations vested with public interest.

1.02 Government - Owned or Controlled Corporation (GOCC). 
  • By way of exception, under Republic Act No. 10149, known as the GOCC Governance Act of 2011, there are Appointive Directors/ \Trustees in GOCCs whom the State is entitled to nominate, to the extent of its percentage shareholdings in such GOCC that are created even under the Corporation Code.
  • The President appoints these Appointive Directors in the GOCC.
  • In addition, Ex Officio Directors are likewise provided for in R.A. No. 10149.

2. Plurality of Votes
  • Majority vote is not necessary for the election of each director or trustee. 
  • The candidates who will receive the highest number of votes shall be declared as duly elected.
  • Section 23 of the RCCP does not require a specific number of votes for one to be elected as director.

3. Quorum
  • It is necessary that there is a quorum and in the absence thereof, the election shall be considered invalid. 
  • The quorum for election purposes is the stockholders representing a majority of the outstanding capital stock entitled to vote.
  • Although more cumbersome, the requirement is meant to prevent railroading of election of directors. 
  • Under Section 23 of the RCCP, a stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum. 
  • In determining the quorum, all the stockholders at the time of the election should be considered. 
  • However, it is also proper for the By-Laws to provide a record date.
    • For instance, the By-Laws of the corporation may provide that only stockholders of record two days before the election are entitled to vote. 
4. Presence of Candidate.
  • It is not necessary, however, that the candidate stockholder be present during the meeting before he can be elected as director. 
  • A director can be elected in absentia.
  • However, the By-Laws may require the physical presence of a director who will be elected.
5. Cumulative Voting
  • Cumulative voting is allowed in this jurisdiction in the election of directors of stock corporations. 
  • Cumulative voting is allowed in non-stock corporations only if the same is provided for in the Articles of Incorporation. 
  • The basic effect of cumulative voting is to increase the chances of the minority stockholders to elect a director; cumulative voting ensures minority representation in the Board.
  • The options of the stockholder under Section 23 of the RCCP are as follows:
    1. Vote such number of shares standing/recorded in his/ her/its name in the stock books for as many persons as there are directors to be elected; 
    2. Cumulate said shares and give one (1) candidate as many votes as the number of directors to be elected multiplied by the number of the shares owned; or
    3. Distribute the votes on the same principle among as many candidates as may be seen fit.
  • Cumulative voting is defined as a method of concentrating votes devised to give sufficient opportunity to minority shareholders to secure representation in the board. 
  • It is not required that the total votes a shareholder is entitled to cast under the cumulative voting be evenly or proportionately distributed among his candidates. 
    • He can give all his votes to one candidate or he can distribute his votes and give such number of votes to each of his candidates' at his own discretion without any limitation except that the total votes cast by him shall not exceed the number of shares owned by him multiplied by the number of directors to be elected.
    • For example, if Mr. A has 10 shares and there are five directors to be elected, he can cast 50 votes (10 shares x 5 directors) which he can give to one candidate or distribute to any number of candidates in the proportion that he may deem fit. 
5.01 Advantages of Cumulative Voting
  • The advantages of cumulative voting are: 
  1. It is democratic in that persons with large (but minority) holdings would have a voice in the conduct of the corporation; 
  2. It is desirable to have as many viewpoints as possible represented on the Board of Directors; and 
  3. The presence of minority director may discourage conflicts of interest by management since discovery is considerably more likely.
5.02 Grounds Used to Oppose Cumulative Voting. 
  • Those who oppose cumulative voting usually cite one or more of the following grounds: 
  1. The introduction of a partisan on the Board is inconsistent with the notion that the Board should represent all interests in the corporation; 
  2. A partisan director may cause disharmony which reduces the efficiency of the Board; 
  3. A partisan director may criticize management unreasonably so as to make it less willing to take risky but desirable actions; 
  4. A partisan director may leak confidential information; and 
  5. It may be used to further narrow partisan goals, particularly to give an insurgent group a toehold in the corporation in an effort to obtain control. 
5.03 Distinguished from Straight Voting. 
  • Under straight voting, a stockholder can cast one vote per share for each candidate/ director up to the number of positions to be elected. 
    • For example, if a shareholder has 10 shares and five directors are supposed to be elected, the said shareholder can give 10 votes to each of the five candidates that he wants to elect. 
    • In cumulative voting, he can cumulate all his votes and give to one candidate all his votes or he may divide the votes among two or more candidates.
  • It should be noted that even if cumulative voting is provided for under the RCCP, there is nothing that prevents stockholders from resorting to straight voting. It is up to the stockholder how he will divide his votes.
5.04 Formula
  • With cumulative voting in place, the formula that is prescribed in order to determine the number of shares needed to elect a single director is as follows:
 Number of Shares Needed to Elect One Director 
N = [ S / (D+1) ] + 1 
  • S = total number of shares voting 
  • D = number of the directors to be elected
  • Example:
    • There are 1,000 outstanding shares in the corporation and five directors will be elected and the stockholders representing all the shares are present and are going to vote. 
    • S = 1,000
    • D = 5
    • [1,000 / (5 + 1) ] + 1 = 167.67
    • ≈ 168 voting shares are necessary to elect one director. 

  • The suggested formula to determine the number of shares necessary to elect a desired number of directors is:
Number of Shares Necessary to Elect a Desired Number of Director 
N = [( S x Desired Number of Directors) / (D + 1) ] + 1 
  • S = total number of shares voting 
  • D = number of the directors to be elected
    • Any fractional part of one in the result should be dropped in using this formula. 
  • Example:
    • Thus, if there are 1,000 voting shares, five directors will be elected, and the desired number of directors is 2:
    • S = 1,000
    • D = 5
    • Desired Number of Directors = 2
    • [(1,000 x 2)  / (5 + 1)] + 1 = 334.33
    • ≈  334 number of shares necessary to elect the desired number of directors.

  • A case decided by the Supreme Court provides a concrete example of the application of the formula used in determining how many votes are necessary to elect one director. The given facts are as follows: 
    • The Articles of Incorporation of the subject corporation, EPCIB, provides for 15 directors; and 
    • A stockholder, TMEE, owns 51,827,640 shares equivalent to 7.13% of the outstanding capital stock. 
    • The Supreme Court concluded that 7.13% is sufficient to elect one director. Considering that there are 15 directors, a stockholder in control of at least 6.67% of the outstanding capital stock could cumulate his controlled shares to be able to elect one seat in the Board of Directors. 
  • The number of directors that can be elected by a shareholder holding a specific number of shares may be determined using the formula given below:
Number of Directors that can be elected by ''N"
N = [ (N - 1) (D + 1) ] / S 
    • N = number of shares of the shareholder
    • D = number of the directors to be elected
    • S = total number of shares to be voted by all shareholders
6. Election of Incomplete Directors
  • The stockholders may elect less than the total number of directors specified in the Articles of Incorporation. 
  • Nevertheless, an incomplete Board may still function so long as the remaining directors constitute a quorum.
  • It may happen that the number of directors is incomplete because the stockholders who are willing to serve as directors are less than the total number of directors that should be elected. 
  • In other cases, the stockholders may not want to elect other candidates or may simply want to elect less than the total number of vacant positions leaving the line-up of the directors incomplete. 
    • In those cases, the election would still be valid and the directors, though incomplete, can still perform their functions provided that a quorum remains.
    • "In case the number of candidates does not exceed the number of seats in the board, said candidates, provided they received votes, can be said to have received the highest number of votes, as the law requires only plurality of the votes cast at the election."
7. Failure to Hold an Election
  • If the Board or the officer authorized to call a meeting (like the President) refuses to call an election of directors, the stockholders may ask for the assistance of the SEC to compel the holding of such election. 
  • If a meeting was called but the directors were not elected during the meeting, the meeting can be adjourned but the adjournment must be not sine die or indefinitely.
    • Section 25 of the RCCP expressly provides that the date for the election shall not be later than sixty (60) days from the scheduled date. 
    • This rule prevents the indefinite hold-over of the directors.
8. Election Contests
  • The election of the directors is presumed to be valid. 
  • Complaints involving election contests should be filed with the proper Regional Trial Court. 
  • An election contest refers to any controversy or dispute involving:
    • Title or claim to any elective office in a stock or non-stock corporation,
    • The validation of proxies,
    • the manner and validity of elections, and 
    • The qualifications of candidates, 
      • including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the Articles of Incorporation or By-Laws so provide.
  • In addition to the formal requirements of a complaint under Section 4, Rule 2 of the Interim Rules of Procedure for Intra-Corporate Controversies, the complaint in an election contest must state the following:
    1. The case was filed 15 days from the date of the election if the By-Laws of the corporation do not provide for a  procedure for resolution of the controversy, or within 15 days from the resolution of the controversy by the corporation as provided in its By-Laws; and 
    2. The plaintiff has exhausted all intra-corporate remedies in election cases as provided for in the By-Laws of the corporation. 
  • Questions regarding the validity of the election of the Board of Directors for a given year may be rendered moot and academic by a valid election of a new set of Board of Directors for the next succeeding year.
  • There was an election contest in Eismendi, Jr. v. Fernandez because the allegation in the complaint for invalidation of corporate acts and resolutions partly assails the authority of the Board of Directors to suspend the complainant's membership on the ground that despite the lack of quorum at the meeting, the individual petitioners proceeded to have themselves constituted as the new members of the Board. 
    • The Supreme Court ruled that the complaint clearly raises an issue on the validity of the election of the individual petitioners. The Court also cited its previous resolution in Valle Verde Country Club, Inc. v. Eizmendi Jr., et al., where it ruled that the complaint for misrepresentation of corporate office filed by the non-stock corporation against the respondent.
Problems:
Q: The incorporators of a proposed stock corporation want to include the following provision in the Articles of Incorporation: 
"Shares are classified as Class "A" shares and Class "B'' shares and Class "N' shares shall be entitled to one vote and Class "B" shares shall be entitled to three votes." 
Is the provision legally acceptable? 
A: No, the provision is not acceptable. The provisions of the Revised Corporation Code requiring votes of stockholders are always determined on the basis of the number of shares. Each share is entitled to one vote. (SEC Opinion, May 23, 1994) 

Q: The incorporators of a proposed stock corporation want to include the following provision in the Articles of Incorporation: 
"Class A shares shall be entitled to vote one director and Class B shares, voting as a separate class, shall be entitled to vote three directors." 
Is the provision legally feasible? 
A: No, the provision is not legally feasible. Section 23 of the Revised Corporation Code provides for the procedure for the election of directors. Adoption of a manner of electing the directors other than what is provided for in the Revised Corporation Code is prohibited. (Section 46, RCCP; SEC Opinion May 23, 1994) 

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