Corporation Law: The Revised Corporation Code of the Philippines - Sec 28

  THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE III -  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

Section 28. Vacancies in the Office of Director or Trustee; Emergency Board.

Any vacancy occurring in the board of directors or trustees other that by removal or expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders or members in a regular or special meeting called for that purpose.

When the vacancy is due to term expiration, the election shall be held no later that the day of such expiration at a meeting called for that purpose. When the vacancy arises as a result of removal by the stockholders or members, the election may be held on the same day of the meeting authorizing the removal and this fact must be so stated in the agenda and notice of said meeting. In all other cases, the election must be held no later than forty-five (45) days from the time the vacancy arose. A director or trustee elected to fill vacancy shall be referred to as replacement director or trustee elected to fill a vacancy shall be referred to as replacement director or trustee and shall serve only for the unexpired term of the predecessor in office.

However, when the vacancy prevents the remaining directors from consituting a quorum and emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation, the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees. The action by the designated director or trustee shall be limited to the emergency action necessary, and the term shall cease within a reasonable time form the termination of the emergency or upon election of the replacement director or trustee, whichever comes earlier. The corporation must notify the Commission within three (3) days from the creation of the emergency board, stating therein the reason for its creation.

Any directorship or trusteeship to be filled by a reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.

In all elections to fill vacancies under this section, the procedure set forth in Section 23 and 25 of this Code shall apply.

1. Filling Up of Vacancies in the Board.

• Vacancies may be filled either by the either constituting a quorum depending on the reason for the vacancy:
• stockholders (or members) or 
• remaining directors (or trustees)
• Vacancy is the operative fact that justifies the election or appointment of the replacement. 
• Thus, an election to choose replacements cannot be allowed to continue if there is a complete Board. 
• The law contemplates and intends that there shall be one set of directors at a time and that new directors shall be elected only as vacancies occur in the directorate by:
• death
• resignation
• removal or
• otherwise.
• The stockholders or members shall replace/elect the director if the vacancy is due to: 
1. removal
2. expiration of term
3. a ground other than removal or expiration of term (e.g., death, resignation, abandonment) where the remaining directors do not constitute a quorum, or
4. increase in the number of directors
• If the vacancy is due to causes other than those specified in the preceding paragraph (cases reserved to stockholders or members), the Board (without the concurrence of stockholders or members) can fill the vacancy, if the remaining directors constitute a quorum. 
• Allowing the remaining directors, or trustees to fill up vacancies avoids the expenses and inconveniences attending the calling of stockholders' or member's meeting, especially where there are many of them. 
• The two requisites before the remaining directors or trustees can fill-up the vacancies are as follows: 
1. the vacancy was occasioned by reasons other than removal by the stockholder or expiration of the term, and 
2. the remaining directors constitute a quorum.
• Both requisites must concur otherwise the stockholders or members in a regular or special meeting called for the purpose must do the filling-up of vacancies.
• The filling up of the vacancy by the remaining directors presupposes that the vacancy occurred within the directors' term.
• The directors are allowed to elect the replacement in certain cases so that the operation of the corporation cannot be hampered or jeopardized. 
• There may be too many vacancies in certain cases and there would be no directors to perform their functions.
• Note that filling up of vacancies by the remaining Board members, if proper, is not mandatory. 
• For instance, the remaining directors may choose not to fill up the vacancy and leave the matter to the stockholders.
• For such purpose, the directors may call a special stockholder's meeting.
• The phrase "may be filled" in Section 28 shows that the filling of vacancies in the Board by the remaining directors or trustees constituting a quorum is merely permissive, not mandatory.
• Corporations, therefore, may choose how vacancies in their respective Boards may be filled up — either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special meeting called for the purpose.
• The Board may still function despite a vacancy provided that there is still a quorum. The power of the Board of Directors is not suspended by vacancies in the Board unless the number is reduced to below a quorum.
• Vacancy may occur if the director abandoned his position.
• A director is deemed to have abandoned his position where a director of a corporation accepts a position in which his duties are incompatible with and which will render him physically incapable of performing his duties as director.

2. Effect of Vacancy. 

• The Board may continue to function even if there is a vacancy so long as there is a quorum. 
• Any act, transaction or resolution of the Board shall be considered valid even if there is a vacancy so long as there is a quorum to do business.

3. By-Laws. 

• The By-Laws may provide for the procedure for the filling up of the vacancy. 
• Thus, the By-Laws may provide that the stockholders must fill the vacancy instead of the remaining directors.
• However, such provisions must be consistent with the other provisions of the RCCP. 
• Inconsistent provisions in the By-Laws cannot prevail over the RCCP.
• For instance, the By-Laws cannot provide that the stockholders with the most shareholdings in the outstanding capital shall take the place of the director.

4. Holdover Directors. 

• If after the expiration of the term of the directors, and while the same directors continue to function in a holdover capacity, one of them resigns, the position of the resigning director cannot be filled by the remaining holdover directors. 
• The vacancy is, in legal effect, not due to resignation but to expiration of the term of the directors. 
• A vacancy is created the moment the term of the directors expires. 
• Hence, only the stockholders can fill the vacancy.
• The rule that the remaining holdover directors cannot replace a director who resigned after the expiration of their term rests on the theory of delegated power of the Board of Directors. 
• The theory similarly explains why; under Section 28 of the RCCP, in cases where the vacancy in the corporation's Board of Directors is caused not by the expiration of a member's term, the successor "so elected to fill in a vacancy shall be elected only for the unexpired term of his predecessor in office." 
• The law has authorized the remaining members of the Board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation's operations; yet, in recognition of the stockholders' right to elect the members of the Board, it limited the period during which the successor shall serve only to the "unexpired term of his predecessor in office."
• Section 28 limits the instances when the remaining directors can fill in vacancies in the Board:
• when the remaining directors still constitute a quorum
• when the vacancy is for reasons other than by removal by the stockholders or by expiration of the term
• Section 28 contemplates a vacancy occurring within the director's term of office. 
• When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. 
• Hence, Section 28 declares that it shall be the corporation's stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member's term.

5. Rules to Prevent Hold-Overs.

• Holdover directors or trustees are supposed to serve for a limited period only because Section 28 requires the holding of an election to fill the vacancy. 
• Thus, Section 28 requires the holding of an election within the following period:

Cause of Vacancy:

1. Term expiration
• No later than the day of such expiration at a meeting called for that purpose. 
2. Removal by the stockholders or members
• May be held on the same day of the meeting authorizing the removal, provided that the agenda and notice of the meeting provide for such election of a replacement director/ trustee. 
3. Increase in the number of directors or trustees
• At a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase in the number of directors or trustees if so stated in the notice of the meeting.
4. All other grounds 
• No later than 45 days from the time the vacancy arose.

6. Term of Replacement Director or Trustee.

• The director who will fill up the vacancy will not serve for another one-year term. 
• The replacement does not change the length of the term. 
• Being a fixed period, the term cannot be split into two or more terms so as to consider the remaining period as another term. 
• The replacement will serve only for the remaining period of the original term of the director that he replaced.

7. Emergency Board.

• There are cases when the vacancy prevents the remaining directors from constituting a quorum and emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation. 
• Section 28 of the RCCP provides that the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees. 
• The Emergency Board is subject to the following conditions:
1. The action by the designated director or trustee shall be limited to the emergency action necessary; 
2. The term shall cease within a reasonable time from the termination of the emergency or upon election of the replacement director or trustee, whichever comes earlier; and
3. The corporation must notify the SEC within three (3) days from the creation of the emergency board, stating therein the reason for its creation. 

PROBLEMS: 

There is a proposal in X corporation to amend its By-Laws so that it will provide that in case of vacancy in the Board of Directors, the losing candidate who garnered the highest number of votes in the immediately preceding election shall be the automatic replacement. Is the proposed provision valid? 

The provision is invalid. Section 28 of the Revised Corporation Code provides that the vacancy may be filled in an election by the stockholders or the directors in certain cases. Automatic replacement is not allowed. Section 28 cannot be disregarded because the By-Laws is subordinate thereto. (SEC Opinion, February 8, 1993)

Primera, Segundo, Tercero, Pedro, and Juan are the original 3. members of the Board of Directors of a stock corporation. The only interest of Primera is that 50% of the corporation's stocks were pledged to him. Pedro and Juan died in a vehicular accident.
Primera, Segundo, and Tercero held an emergency .-Board meeting to fill up the vacancy in the board. Primero and Tercero were able to push the selection of Cuatro and Cinco as new directors over the strong objections of Segundo who, as corporation president, wanted two others as Board members.

At another Board meeting, the four members of Primero's group voted for Seis as the 6th director. When the six-member Board convened, it decided by a five to one vote to replace President Segundo with Tercero as the new President. Was the election of Tercero as new President valid?

No. The election of Tercero as new President is not valid. In the first place, the election of the three new members of the board was not valid because Primera was not validly elected as a director since he was not a stockholder. Upon the death of Pedro and Juan only two remained as duly elected directors, namely, Segundo and Tercero. They could not fill the vacancies because they do not constitute a quorum. Hence, any action of the illegally constituted Board is not valid. (1986 Bar) 

The term of the directors of X Corporation expired on June 1, 2009. However, the annual meeting of stockholders was postponed, hence, the directors continued to perform their functions in a hold-over capacity. Before the new scheduled date of the meeting of the stockholders, one of the hold-over directors, Mr. A, resigned. Can the remaining directors, who still constitute a quorum, appoint a replacement for Mr. A?

No, the hold-over directors cannot appoint a replacement for Mr. A .The vacancy in the Board already occurred on June 1, 2009. In other words, the vacancy was not due to resignation but to expiration of the term. Hence, only stockholders can elect a replacement under Section 28 of the Revised Corporation Code. The stockholders must elect the replacement for all the directors in a meeting called for such purpose. (Valle Verde Country Club, Inc. v. Africa, C.R. No. 151969, September 4, 2009)