Corporation Law: The Revised Corporation Code of the Philippines - Sec 26

THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE III -  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

Section 26. Disqualification of Directors, Trustees or Officers.

A person shall be disqualified from being a director, trustee or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was:

(a) Convicted by final judgment:
    (1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
    (2) For violating this Code; and
    (3) For violating Republic Act No. 8799, otherwise known as "The Securities Regulation Code";

(b) Found administratively liable for any offense involving fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the Commission, the primary regulatory agency, or Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings.

Notes:

• Positions:
• Director
• Trustee
• Officer
• Duration:
• within five (5) years prior to the election or appointment
• Grounds:
• Convicted by final judgment:
1. Of an offense punishable by imprisonment for a period exceeding six (6) years;
2. For violating this Code; and
3. For violating Republic Act No. 8799, otherwise known as "The Securities Regulation Code";
• Found administratively liable for any offense involving fraudulent acts; and
• By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above.
• Without prejudice to:
• qualifications or other disqualifications, which the following may impose:
• Commission,
• primary regulatory agency 
• Philippine Competition Commission
• for:
• promotion of good corporate governance 
• sanction in its administrative proceedings

1. Grounds for Disqualification. 

• The RCCP added grounds for disqualification of:
• directors
• trustees
• officer
• Under Section 26 of the RCCP, a person is disqualified to hold the position of director, trustee or officer if, within five years prior to the election or appointment as such, the person was: 
• Convicted by final judgment:
1. Of an offense punishable by imprisonment for a period exceeding six years;
2. For violating this Code; and
3. For violating Republic Act No. 8799, otherwise known as "The Securities Regulation Code";
• Found administratively liable for any offense involving fraudulent acts;
• By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above.

2. Rationale. 

• The disqualifications under Section 26 of the RCCP are meant to assure that only persons of rectitude can act as directors. 
• "The position of director in a corporation is a position of trust. A director in a corporation has the personality of managing the funds belonging to other persons or individuals."

3. Non-Exclusive.

• The list of disqualifications under Section 26 of the RCCP is not exclusive. 
• Additional grounds for disqualification are contemplated in other provisions of the RCCP. 
• For instance. a person who ceases to be a shareholder because he transferred all his shares to another person is disqualified to be a director. 
• Other qualifications and disqualifications may be provided for in:
1. Regulations issued by the SEC; 
2. Special laws applicable to specific corporations, such as the:
• General Banking Law — banks 
• Bangko Sentral ng Pilipinas Regulations
• Insurance Code  — insurance companies
• Insurance Commission Regulations
3. Regulations issued by Philippine Competition Commission in its promotion of good corporate governance;
4. Decisions or orders in administrative proceedings and imposed as sanction; 
5. Provisions of the Articles of Incorporation or By-Laws.

4. Grounds in the Articles and By-Laws. 

• Other grounds may be provided for in the By-Laws or Articles of Incorporation. 
• In Government v. El Hagar Filipino, the Supreme Court sustained the validity of a provision in the corporate By-Laws requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their action. 
• The law then in force, Section 21 of the Corporation Law, authorized corporations to provide in their By-Laws for the qualifications of directors and is highly prudent and in conformity with good practice. 
• Section 46 of the RCCP, previously Section 47 of the Corporation Code, likewise provides that directors' or trustees' qualifications may be included in the By-Laws.

5. Corporate Governance.

• Disqualifications are likewise provided under the 2009 Code of Corporate Governance and the 2016 Code of Corporate Governance. The 2016 Code provides that "the nomination and election process also includes the review and evaluation of the qualifications of all persons nominated to the Board, including whether candidates: 
1. possess the knowledge, skills, experience, and particularly in the case of non-executive directors, independence of mind given their responsibilities to the Board and in light of the entity's business and risk profile;
2. have a record of integrity and good repute;
3. have sufficient time to carry out their responsibilities; and 
4. have the ability to promote a smooth interaction between board members. 
• A good practice is the use of professional search firms or external sources when searching for candidates to the Board.
• The 2016 Code likewise provides that the process also includes monitoring the qualifications of the directors. 
• The qualifications and grounds for disqualification are contained in the company's Manual on Corporate Governance and the recommended grounds for the permanent disqualification of a director are enumerated therein.