Corporation Law: The Revised Corporation Code of the Philippines - Sec 27

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE III -  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

Section 27. Removal of Director or Trustees. 

Any director or trustee of a corporation may be removed from office by vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or in a nonstock corporation, by a vote of at least two-thirds (2/3) of the member entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members for the purpose of removing any director or trustee must be called by the secretary on order of the president, or upon written demand of stockholders representing or holding at least a majority of the outstanding capital stock, or a majority of the members entitled to vote. If there is no secretary, or the secretary, despite demand, fails or refuses to call the special meeting or to give notice thereof, the stockholder or member of the corporation signing the demand may call the special meeting or to give notice thereof, the stockholder or member of the corporation signing the demand may call for the meeting by directly addressing the stockholders or members. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right representation to which they may be entitled under Section 23 of this Code.

The Commission shall, motu propio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election. The removal of a disqualified director shall be without prejudice to other sanctions that the Commission may impose on the board of directors or trustees who, with knowledge of the disqualification, failed to remove such director or trustee.

Notes:

• Director or Trustee Removal:
• Vote Required:
• stock corporation — two-thirds (2/3) of outstanding capital stockholders 
• nonstock corporation — two-thirds (2/3) of eligible voting members.
• Removal shall take place either at a regular or special meeting after prior notice to the stockholders or members about the intention to propose removal.
• The secretary must call a special meeting for removal:
• on order of the president or
• upon written demand of the majority of stockholders or eligible voting members.
• If the secretary fails to call the meeting, the demanding stockholder or member may do so by notifying other stakeholders.
• Notice of the meeting and the proposed removal must be given through:
• publication
• written notice as prescribed in the Code.
• Removal may be:
• with cause
• without cause, but may not deprive minority stockholders or members of their representation rights as per Section 23 of the Code.
• Commission's Authority in Disqualification Cases:
• The Commission has the authority, upon complaint or its own initiative, to order the removal of a disqualified director or trustee.
• This applies to those elected despite disqualification or whose disqualification is discovered after election.
• The removal of a disqualified director does not prevent the Commission from imposing other sanctions on the board if they knowingly failed to remove the disqualified director.

1. Right to Remove.

• At common law, stockholders have the traditional inherent power to remove a director for cause, which is known as "amotion." 
• Under the RCCP, the authority to remove the directors is a prerogative reposed in the stockholders or members of the corporation under Section 27.
• Hence, the directors cannot indirectly usurp or disregard the said power of the stockholders.

2. Requisites of Removal. 

• The requirements for a valid removal are as follows:

1. It must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose;
2. The call of the special meeting shall be made by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock or of majority of the members entitled to vote; 
3. There must be previous notice to the stockholders or members of the intention to remove a director or trustee at the regular or special meeting; 
4. The removal must be by a vote of the stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members entitled to vote; 
5. A director/trustee who was elected by the minority must be removed only for cause.

2.01 Election of Replacement. 

• Under Section 28 of the RCCP, the stockholders/members may elect the removed director's/ trustee's replacement during the same stockholders'/members' meeting that the director/trustee was removed. The meeting that will fill the vacancy in the Board created by removal will be called immediately on the same day that the removal was made or soon thereafter.

2.02 Call.

• A special meeting to remove a director shall be void if it was called by an unauthorized committee and not by the secretary as provided for in Section 27 of the RCCP or the authorized officer identified in the By-Laws. 
• The defect cannot be ratified.

3. Removal Without Cause.

• A director who was elected by the majority may actually be removed with or without cause. 
• The requirement that there must be cause for removal is limited to a director who was elected by the minority.
• The Supreme Court declared valid the removal of two directors where 400 shares voted for their removal and 2/3 of the outstanding capital was only 333.33 shares. The votes of 400 shares were more than enough to oust the two directors, with or without cause.

4. Disqualified Director. 

• Removal should be distinguished from ouster because of disqualification.
• There is no need to follow the procedure of removal required under Section 27 if the director is disqualified.
• By operation of law, such director is disqualified to act as director thereby creating vacancies in the Board
• Mere declaration of disqualification as the cause of vacancy is sufficient.
• Remedy. 
• Section 27 of the RCCP provides that the SEC shall, motu proprio or upon verified complaint, and due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election.

5. Effect on the Shares. 

• Generally, the removal of the director does not result in the transfer of his shares; the removed director remains a shareholder.
• A share is a personal property under Article 417 of the New Civil Code and the transfer of property should be only through the modes recognized under the New Civil Code. 
• However, the By-Laws may provide for a procedure for expulsion of a stockholder and the sale of his shares. 

6. Removal of Corporate Officers.

• Since the authority to elect corporate officers rests with the Board, there is a correlative authority to remove the corporate officers.
•  The removal of corporate officers is a corporate act.

PROBLEMS: 

If the minority stockholders in a stock corporation cumulate their votes so that they could be assured of being represented in the Board of Directors, what assurance do they have that the director or directors representing them would not be removed, considering that under the Revised Corporation Code of the Philippines (RCCP), a director may be removed from office with or without cause by the vote of stockholders holding or representing at least 2/3 of the outstanding capital stock?

Assurance is provided for under Section 27 of the RCCP because although removal of a director with or without cause is allowed, it contains a proviso to the effect that such removal, if without cause, cannot be used to deprive the minority stockholders of their right to representation through the use of cumulative voting. Therefore, the minority stockholders who cumulate their votes to elect a representative to the Board of Directors can be assured of his/her continuance in office during his term, unless there exists just cause for his removal. (1983 Bar) 

Assuming that the minority block of the XYZ Corporation is able to elect only one director and therefore, the majority stockholders can always muster a 2/3 vote, would you allow the majority stockholders to remove the one director representing the minority? 

No, I will not allow the majority stockholders to remove the director. Section 27 of the RCCP is explicit that the directors elected by the minority shall be removed only if there is justifiable cause. Thus, without just cause, the majority cannot deprive the minority of representation in the board of directors. (1991 Bar)

In 1999, Corporation "A" passed a board resolution removing "X" from his position as manager of said corporation. The by-laws of "A" corporation provide that the officers are the president, vice-president, treasurer and secretary. Upon complaint filed with the SEC, it held that a manager could be removed by mere resolution of the board of directors. On motion for reconsideration, "X" alleged that he could only be removed by the affirmative vote of the stockholders representing 2/3 of the outstanding capital stock. Is the contention of "X'' legally tenable? Why?

No. The contention of X is not tenable. The approval of stockholders is not necessary for the removal of officers. Stockholders' approval is necessary only for the removal of the members of the Board. The vote of the Board of Directors is sufficient for the removal of an officer. (2001 Bar)