Corporation Law: The Revised Corporation Code of the Philippines - Sec 33

  THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE III -  BOARD OF DIRECTORS/TRUSTEES AND OFFICE

Section 33.  Disloyalty of a Director.

Where a director, by virtue of such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director must account for and refund to the latter all such profits, unless the act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked one's own funds in the venture.

1. Doctrine of Corporate Opportunity. 

• Section 33 of the RCCP is consistent with the duty of loyalty of a director. 
• The duty of loyalty mandates that directors should not give preference to their own personal amelioration by taking the opportunity belonging to the corporation. 
• It was explained in one case:
• "It is true that when a business opportunity comes to a corporate officer or director in his individual capacity rather than in his official capacity, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it, if, of course, the officer or director has not wrongfully embarked the corporation's resources therein ... Duty and loyalty are inseparably connected. Duty is that which is required by one's station or occupation; is that which one is bound by legal or moral obligation to do or refrain from doing... "
• Section 33 applies if there is presented to a corporate director:
1. a business opportunity which the corporation is financially able to exploit; 
2. from its nature, the business opportunity is in line with the corporation's business; 
3. the corporation has an interest or a reasonable expectancy in the business opportunity; and 
4. by taking the business opportunity as his own, the director will thereby be placed in a position inimical to his duties to the corporation.
• By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation. 
• Hence, the law does not permit him to seize the opportunity v n if he will use his own funds in the venture. 
•  However, no criminal liability attaches to the offending director.
• Doctrine of Corporate Opportunity
• As originally crafted by the courts, recognizes that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. 
• This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection.
• The prohibition no longer applies:
• if the action was made after the resignation of the director
• to cases when two related corporations are involved even if there is interlocking directorship

2. Tests.

• Courts have opened or closed the business opportunity door to corporate managers upon the facts and circumstances of each case by application of one or more of three variant but often overlapping tests or standards.
1. Interest or Expectancy Test 
2. Line of Business Test
3. Fairness Test
4. Mixed Test

2.01 Interest or Expectancy Test 

• It precludes acquisition by corporate officers of the property of a business opportunity in which the corporation has a ''beachhead" in the sense of a legal or equitable interest or expectancy growing out of pre-existing right or relationship.
• The interest or expectancy test is more restrictive and inflexible than the two other tests. 

2.02 Line of Business Test 

• It characterizes an opportunity as corporate whenever a managing officer becomes involved in an activity intimately or closely associated with the existing or prospective activities of the corporation.
• The phrase "in the line of business" has a flexible meaning that is to be applied reasonably and sensibly to the facts and circumstances of the particular case. 
• Where a corporation is engaged in a certain business, and an opportunity is presented to it embracing an activity as to which it has the following, may be properly said that the opportunity is in the line of the corporation's business:
• fundamental knowledge
• practical experience
• ability to pursue
• logically and naturally adaptable to its business having regard for its financial position
• one that is consonant with its reasonable needs and aspirations for expansion,

2.03 Fairness Test.

• It determines the existence of a corporate opportunity by applying ethical standards of what is fair and equitable under the circumstances.
• Under the fairness test, the basis of the Doctrine of Corporate Opportunity rests fundamentally on the unfairness in the particular circumstances of a director, whose relation to the corporation is fiduciary, taking advantage of an opportunity when the interest of the corporation justly calls for protection. 
• This calls for the application of ethical standards of what is fair and equitable.

2.04 Mixed Test.

• Another approach is to apply any two or all the tests. 
• For instance, one court applied a two stage test using both the line of business test and the fairness test. 
• The threshold question to be answered is whether the business opportunity is of sufficient importance and is so closely related to the existing or prospective activity of the corporation as to warrant judicial sanctions against its personal acquisition by a managing officer or director of the corporation.
• The second step is close scrutiny of the equitable considerations existing prior to, at the time of, and following the officer's acquisition.

• It is believed that either the Fairness Test or the Mixed Test can be applied in this jurisdiction. 
• The Line of Business Test cannot be strictly applied because there is no wholesale prohibition against a director to engage in the same line of business as the corporation. 
• In fact, unless there is an express prohibition in the Articles of Incorporation and By-Laws, a director can also be a director in a competing corporation.
• In addition, "non-competition" clauses are expressly stipulated in agreements to prevent officers or directors from competing with their employers.

3. Burden of Proof. 

• The burden of proof on the questions of good faith, fair dealing, and loyalty of the officer to the corporation should rest upon the officer who appropriated the business opportunity for his own advantage. 
• Such a burden necessarily lies with the acquiring officer because:
• a fiduciary with a conflict of interest should be required to justify his actions and
• the practical reality that the facts with regard to such questions are more apt to be within his knowledge
• Example:
• A director usurped a corporate opportunity, when the director purchased the shares from a shareholder because a stockholders' agreement granted the corporation a right of first refusal to purchase any outstanding shares of the corporation that became available and also provided a mechanism for valuing shares in the event of a dispute. 
• The Court imposed, in favor of the corporation, a constructive trust on stock. 
•  The following cases are cited as examples in the annotations to the Delaware General Corporation Law where there is no proof that the director unduly acquired or diverted a corporate opportunity:
1. There is no diversion of corporate opportunity, when a director's wholly owned subsidiary acquired options on the corporation's shares, where:
1. the transaction is merely transfer of shares from one of his wholly owned subsidiaries to another, 
2. the shares were not essential to the corporation's business, and  
3. the corporation had no policy for buying its own shares;
2. There is also no violation when a director acquired the opportunity to develop a new product where the inventor of the new product was unwilling to permit the corporation to use his invention, and the corporation was neither inclined nor financially able to develop new products. The inventor's concept was not an opportunity available to the corporation.
3. Director of corporation did not usurp a corporate ' opportunity to acquire a cellular phone license where the opportunity was presented to the director in his individual capacity, the corporation had been divesting itself of similar cellular holdings, the director had discussed the opportunity with other directors of the corporation who had expressed no interest in the opportunity, and at the time the opportunity was presented to the corporation, the corporation was not financially able to purchase the license.

4. Profits.

• Section 33 of the RCCP provides that a director who, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, must account for and refund to the latter all such profits. 
• The theory is that the profits made and the advantage gained by an agent belongs to the principal.

5. Ratification.

• The corporation may choose to ratify the acts of the director. 
• However, this requires a vote of 2/3 of the outstanding capital stock. 
• Section 33 provides that if a director seizes the opportunity thereby obtaining profits at the expense of the corporation, he must account for all the profits and refund the same to the corporation unless the act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock.

6. Financial Capability. 

• Property or business opportunity ceases to be a corporate opportunity and is transformed into personal opportunity where the corporation is definitely no longer able to avail itself of the opportunity
• The inability to avail itself of a business opportunity may arise from:
• financial insolvency
• legal restrictions
• any other factor that prevents the corporation from acting upon the opportunity for its own advantage
• It is then necessary for the director to take positive steps which show that the opportunity was brought before the corporation for its decision whether to avail of it or not and the corporation rejected it. In other words, notice must be given to the corporation that such opportunity exists and the corporation does not want to avail of the opportunity. 
• The director must inform the corporation that the loss of a certain business is imminent and the corporation must be given a reasonable chance to undertake the business. 
• Normally, mere offer by the director to the corporation to undertake the business and the lack of funds are not sufficient justification for taking advantage of the corporate opportunity. 
• As a director, he is involved in raising the necessary funds that the corporation needs. 
• Hence, if a court allows a "lack-of-funds" defense, it creates an incentive for directors to fail to use their best efforts to help the firm raise the necessary funds.

7. Trustees and Officers Not Covered.

• Section 33 of the RCCP specifies only the directors as the persons who are covered by the Doctrine of Corporate Opportunity. 
• Trustees are not included because non-stock corporations are not supposed to be engaged in business as a main purpose. 
• Nevertheless, it is believed that although the Doctrine of Corporate Opportunity under Section 33 does not expressly cover officers and trustees, they are nevertheless prevented from unduly taking corporate opportunity under Section 33 of the RCCP as well as the New Civil Code provisions on agency prohibiting conflict of interest in some cases. 
• The difference is that the ratification need not be by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. 
• Unless, there is a specific statutory provision requiring stockholders' ratification, the Board ratification is sufficient to cure any defect in the transaction.

PROBLEMS:

Mr. X, a director of Corporation A is also a director of Corporation B. Mr. X acquired for Corporation B (not for himself) a business opportunity identical to the business of Corporation A He could not give the business opportunity to Corporation A allegedly because its policies strongly impede its chances of winning said business. Is there a violation of Section 34 of the Corporation Code (now Section 33 of the RCCP)?

No. If it is true that Corporation A cannot engage competitively in the subject business because of its aJleged policies, then it may not be said that by delivering the business opportunity to Corporation B, the director directly or indirectly competed with the business of or is disloyal to Corporation A. A business opportunity ceases to be a corporate opportunity and transforms into personal opportunity where the corporation is definitely no longer able to avail itself of the opportunity. (SEC Opinion, March 4, 1982) 

Suppose that the by-laws of "X" Corporation, a mining firm, A: 3. provides that "The directors shall be relieved from all liability for any contract entered into by the corporation with any firm in which the directors may be interested." Thus, director "A:' acquired claims which overlapped with "X's" claims and were necessary for the development and operation of "X's" mining properties. 

a) Is the by-law provision valid? Why? 

No. The By-Laws must not be contrary to the provisions of the Revised Corporation Code. The subject provision is clearly in violation of Section 33 of the Revised Corporation Code that disallows directors from taking advantage of corporate business opportunities.

b) What happens if director "A" is able to consummate his mining claims over and above that of the corporation's claims?

Under Section 33 of the Revised Corporation Code, "A" should account for and refund to the corporation all the profits that he realized from the transaction. This is true even if "A" used his own funds in the business venture. He acquired the business opportunity to the prejudice of the corporation. (2001 Bar) 

ABC Piggery, Inc. is engaged in raising and selling hogs in the local market. Mr. De Dios, one of its directors, while traveling abroad, met a leather goods manufacturer who was interested in buying pig skins from the Philippines. Mr. De Dios set up a separate company and started exporting pig skins to his foreign contact but the pig skins exported were not sourced from ABC. His fellow directors in ABC complained that he should have given this business to ABC. How would you decide this matter?

I would decide in favor of Mr. De Dios. There is no conflict between the business of ABC Piggery, Inc. and the separate company of Mr. De Dios. ABC is engaged in raising and selling hogs in the local market while the company of Mr. De Dios is engaged in the export of pig skins. It cannot be said that the opportunity to export pigskins belongs to ABC Piggery, Inc., which is only engaged in hog raising and selling. (1991 Bar)