Chapter VIII – Duties of Directors and Controlling violation of his duty, any interest adverse to the corporation in respect of

Stockholders any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall
— The law makes directors fiduciaries of the corporation be liable as a trustee for the corporation and must account for the profits
— Directors are expected to serve the corporation with reasonable which otherwise would have accrued to the corporation. (n)
diligence and skill and with utmost loyalty
— Obligation of directors to act within their corporate powers
— Cannot act alone where SHs have the power of final approval Business Judgment Rule
— Personal liability would still arise if due diligence has not been observed
or there is disloyalty — Corporate principle recognizing corporate power and competence to
— Three-fold duties of directors, trustees, and officers: be lodged primarily with the board of directors
o Duty of obedience — A resolution or transaction pursued within the corporate powers and
o Duty of diligence business operations of the corporation, and passed in GF by the
o Duty of loyalty board is valid and binding, and generally courts have no authority to
review the same or substitute their own judgment
— Governed by 31, 32, 33, 34
— Duties and obligations of directors, trustees, and officers have their — Business judgment rule has two (2) applications:
bases in common law, derived from the nature and relationship created (1) resolutions and transactions entered into by the board within the
in the corporate setting and the fiduciary nature of the positions held by powers of the corporation cannot be reversed by the courts
such persons (2) GR: directors and officers acting within such business judgment
— Attempt of the Corpo Code to codify the nature od duties and obligations cannot be personally liable for the consequences of such acts
to cover most of such situations, but cannot be considered as to exclude — Exceptions:

—
other forms of violations of such duties
GR: members of the board and corporate officers who purport to act for
i. When the director willfully and knowingly vote for
patently unlawful acts of the corporation
and in behalf of the corporation, keep within the lawful scope of their
authority in so acting, and act in GF, do not become liable for the ii. When he is guilty of gross negligence or BF
consequences of their acts
o These acts would be attributable to the corporation alone and no iii.
When he acquires any personal or pecuniary
personal liability is incurred by such officers and board members interest in conflict with his duty as such directors
(Benguet Electric v NLRC) — business judgment rule is not only a substantial rule of law, but also a
o Although a director may have been voted into office by a block of rule on evidence
SHs, it is the director’s duty to vote according to his own — once entered into by the board in the exercise of its judgment, it will
independent judgment and his own conscience as to what is in the be presumed to be valid
best interets of the corporation. (SMC v Kahn)
Duty of Diligence

Section 31. Liability of directors, trustees or officers. - Directors or — 31: Directors or trustees who willfully and knowingly vote for or
trustees who wilfully and knowingly vote for or assent to patently assent to patently unlawful acts of the corporation or who are guilty
unlawful acts of the corporation or who are guilty of gross negligence or of gross negligence or BF in the directing the affairs of the
bad faith in directing the affairs of the corporation or acquire any corporation shall be solidarily liable for all damages
personal or pecuniary interest in conflict with their duty as such directors o available to SHs, the corporation, and to creditors
or trustees shall be liable jointly and severally for all damages resulting o mere assent would make director liable
therefrom suffered by the corporation, its stockholders or members and o it is not enough that he abstains from voting; he should cast a
other persons. negative vote
o but mere ownership of majority of shares or mere holding of
When a director, trustee or officer attempts to acquire or acquires, in

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 officership position does not make one personally liable (Board of wide latitude in the management of the affairs of the corporation
Liquidators v Kalaw) provided that the judgment is unbiased, honest and reasonably
— Directors are expected to manage the corporation with reasonable exercised. Negligence must be determined as of the time of transaction.
diligence, care and prudence Mistakes or errors in the exercise of honest business judgment do not
o Can be held liable for willful dishonesty and negligence subject the officers and directors to liability for negligence in the
o Should keep themselves sufficiently informed about the general discharge of their appointed duties. Directors are entrusted with the
condition of their business and to some extent the manner in which management of the affairs of the corporation. If in the course of
its is conducted; if due to their fault or negligence, the corporate management they arrive at a decision for which there is a reasonable
assets are wasted or lost, each of them may be held responsible for basis, and they acted in GF as the result of their independent judgment,
any loss proximately caused by the wrongful acts or omissions. and uninfluenced by any other consideration than what they honestly felt
o But they cannot be held liable for mistakes or errors in the exercise was in the best interests of the corporation. In the present case, the SC
of their business judgment, provided the act in GF and with due care found that the officers and directors of the corporations acted honestly in
and prudence (Barnes v Andrews infra) GF and sought to exercise their best judgment for the best interests of
o Degree of care and diligence: their corporation. No fraud was present, but only a faint suggestion of BF.
The directors had the right to negotiate privately with Kuhn and Loeb. In
 that which is usually required of men prompted by self-
contracting with the latter, the directors were not contracting with
interest in the exercise of their own affairs
another firm in which they were interested, nor did the directorship or
 that which is demanded by the particular circumstances officership positions interlock. There is no contention that fraud existed
• nature of business and fraudulent acts will not be presumed.
• director of a bank is held to a higher degree of
diligence than an ordinary commercial transaction Montelibano et al v. Bacolod-Murcia Milling Co Inc. Montelibano et
(Litwin v Allen) al are sugar planters adhered to the Milling Company’s sugar central mill
— remedy of SHs: where directors have become grossly negligent or under identical contracts. The contracts would be in force for 30 years
fraudulently mismanaged the corporation, they can be removed by the and provide that the resulting product should be divided in the ratio of
SHs in accordance with Sec 28, + damages 45% for the mill and 55% for the planters. It was proposed to execute the
milling contracts, increasing the planter’s shares to 60% of the
Otis & Co. v Pennsylvania Railroad Co. F: Otis & Co is a SH in and among manufactured sugar and molasses and extending the period from 30 to
the wholly-owned subsidiaries of the Pennsylvania Railroad Co (PRR), which 45 years. The Board of the Milling company then adopted a resolution
included Pennsylvania Ohio 7 Detroit Railroads (POD). One of its subsidiaries granting further concessions to the planters over and above the amended
had an outstanding bond issuance of $28.4M. The parent then negotiated contract. 17 years later, Montelibano sues the Milling company,
with a third party, Kuhn, Loeb and Co, to refinance the bonds. The directors contending that the 3 sugar centrals with a total annual production
of POD approved a resolution authorizing the sale of the new Series D bonds exceeding 1/3 of the production of all sugar millis in Negros, had already
at a best obtainable price. Bonds were then sold to Kuhn and Loeb. Another granted 62.5% participation to their planters, and in accordance with
buyer was willing to purchase the bonds at a better price but the directors Para 9 of the resolution, it had become obligated to grant similar
declined. The Interstate Commerce Commission found that the corporation concessions to them.
was not able to get the best price for the sale and that other options were
not explored, that negotiations were only with one investment house and H: When a resolution is passed in GF by the board, it is valid and binding,
were at “arms-length dealing”, and that it was possible to have greater and whether or not it will cause losses or decrease the profits of the
savings. central, the court has no authority to review them. Questions of policy or
I: W/N the directors are liable for failing to exercise ordinary care and management are left solely to the honest decision of officers and
judgment in the issuance and sale of $28M in bonds, which resulted in directors of a corporation, and the court is without authority to substitute
alleged losses suffered by the corporation. its judgment for that of the board; the board is the business manager of
H: Business judgment rule: courts will not interfere in matters of business the corporation and so long as it acts in GF its orders are not reviewable
judgment, in which it is presumed that judgment—reasonable diligence—has by the courts
in fact been exercised. A director cannot close his eyes to what is going on
about him in the conduct of business judgment. Courts have given directors Litwin v Allen et al. H: The officers are liable for the transaction

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because the entire arrangement was so improvident, risky, and unusual and debts and liabilities, the board will not use the corporate assets to
contrary to fundamental concepts of prudent banking practice. A bank purchase its own stock, and that it will not declare dividends to SHs when
director when appointed takes oath that he will diligently and honestly the corporation is insolvent
administer the affairs of the bank or trust company. Honesty alone would not
suffice; there must be more than honesty—there must be diligence, and that Barnes v Andrews. F: Corporation manufactures starters for Ford motor
means care and prudence as well. What sound reason is there for a bank, vehicles and airplanes. Director Andrews, the largest SH, who was
desiring to make an investment, to buy securities under an arrangement induced by the President to become director, held only 2 board meetings.
whereby any appreciation will insure to the benefit of the seller and any loss During his term, the company business was mismanaged. Barnes was
will be borne by the bank. There is here more than a question of business then appointed receiver after the corporation had gone under, and was
judgment. The directors plainly failed to bestow the care which the situation found that the company had no funds. He alleged that Andrews failed to
demanded. give adequate attention to the affairs of the company, which had been
conducted incompetently and without regard to the wastage in salaries.
A director, however, is not liable for loss or damage other than what was Work had languished from incompetence and extravagance and quarrels
proximately caused by his own acts or omissions in breach of his duty. The between the factory manager and the other personnel affected
directors in this case are liable only for the loss attributable to the improper production.
transaction itself, and not after the option on the improper transaction had
expired. H: First liability must rest upon the director’s general inattention to his
duties. He cannot be charged with neglect in attending director meetings,
Walker v Man et al. F/H: Corporation was engaged in real estate and since there had been only 2. But his liability must depend upon his failure
advanced a loan to a third person taking as security his PN. The loan was not in general to keep advised of the conduct of the corporate affairs. While
authorized by the board and was not for the benefit of the corporation nor directors are collectively managers of the company, they are not
was it in aid of its business. No effort was done to collect on the loan, which expected to interfere individually in the actual conduct of its affairs. To do
became due and demandable. The corporation went bankrupt, and the so would disturb the authority of the officers and destroy their individual
receiver sues the directors to collect on the amount due the insolvent responsibility, without which no proper discipline is possible. Having
corporation and for damages. Court held that the director was negligent. accepted a post of confidence, Andrews was charged with an active duty
to learn whether the company was moving to production, and why it was
Steinberg v Velasco. F: The board of the corporation authorized the not, and to consider what could be done to avoid the conflicts among
purchase of 330 shares of capital stock of the corporation and the personnel or correct their incompetence, which was slowly bleeding the
declaration of dividends at a time when the corporation was indebted and in business to death. He must go further to show that he should have been
such a bad financial condition. The directors relied on the face value on the more active, as the cause of action against him by the receiver rests
books of its A/R, which had little or no value. Furthermore it appears that two upon a tort of omission as though it had rested on a positive act on his
of the directors were permitted to resign so that they could sell their stock to part.
the corporation. The corporation became insolvent, and the receiver
Steinberg sues the directors. When a business fails from general mismanagement or business
incapacity, could the blame be placed upon a single director and could he
H: The corporation did not have a bona fide surplus with which dividends have saved the company if he had tried? A director could have least
could be declared and paid out. The directors did not act in GF and were fulfilled his duties to the company and to the SHs to have made the
grossly ignorant of their duties. Directors were held personally liable for company prosper, or at least to show that he had done his duty enough
causing the corporation to purchase their own shares and declaring to have broken the fall of the company. This Andrews failed to do. x
dividends, which because of such failure to take into consideration of
worthless receivables, worked to the detriment of the creditors. The True, Andrews was not well-suited by experience for the job he had
directors did not act with diligence in taking the word of their chairman and undertaken. Directors are not specialists, but they must have good sense,
not making an informed decision based on the facts then available to them and must have acquainted themselves with the corporate affairs, but
and on not relying on other documents available to them. they need not have any technical talent. They are the general advisers of
the business, and if they faithfully give such ability as they have, it would
Creditors have the right to assume that so long as there are outstanding not be lawful to hold them liable. Must a director guarantee that his

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judgment is good? Can SHs call him to account for deficiencies which their interest in conflict with their duty as directors shall be liable solidarily
votes assured him did not disqualify him for office? for all damages resulting therefrom
o When a director attempts to acquire or acquires any interest
Bates v Dresser. F: Bank employee was able to embezzle cash from the adverse to the corporation, equity imposes a liability upon him to
branch operations for a considerable period of time, unbeknown to the bank deal in his own behalf, he shall be liable as a trustee for the
officers, who relied to heavily and trusted the employee. He was able to corporation and must account for the profits which otherwise
swindle money by concealing his withdrawals through entries in the records would have accrued to the corporation
of the bank, and matched it with the correct statements which were relied — director is a fiduciary of the corporation
upon by the cashier. — in case of conflict of interest, he cannot sacrifice the interests of the
corporation without incurring liability for his disloyal act
H: Under the circumstances of this case, the directors did not neglect their — Code sets up standards but ultimately must be decided on the merits
duty in accepting the statement of the cashier and failing to inspect the of each case
depositor’s ledger. They should not be held answerable for taking the
cashier’s statement to be as correct as the statement of assets always was. 1. the self-dealing director
The statement of assets were always correct. A committee was appointed to
examine the operations of the bank. The bank itself was in sound financial — a director who enters into a contract with the corporation of which he
condition. Their confidence seemed warranted by the semi-annual is a SH or member
examinations by the government examiner and they were encouraged in — since he participates in the decision as to whether or not the contract
their belief that all was well by the president. They were not bound by virtue is to be accepted, he will be exposed to the temptation of putting his
of the office gratuitously assumed by them to call in the passbooks and interest above those of the corporation and could exert influence to
compare them with the ledger, and until the event showed the possibility obtain board approval of his contract with the corporation
they hardly could have seen that their failure to look at the ledger opened a — but not all dealings of the director with his own corporation when it’ll
way to fraud. be beneficial or have the best interest in its welfare
— the rule thus absolutely disqualifying a fiduciary from dealing with his
The position of the president, however, is different. Practically he was the cestui que trust has not been strictly applied to directors
master of the situation. He was at the bank daily for hours, had the ledger in
his hands at time. He had hints and warnings of the unexplained shortages sec 35: A contract of the corporation with one or more of its directors or
and rapid decline in deposits. He knew the errant employee had been living trustees or officers is voidable at the option of such corporation, unless
at a fast pace and had been dabbling in stocks. He had been put on his all the following conditions are present that:
guard, and had they been heeded by the President, it would have led to an (a) the presence of such director or trustee in the board meeting in
examination of the ledger’s and would have prevented future thefts. In which the contract was approved was not necessary to constitute
accepting the presidency Dresser must be taken to have contemplated a quorum
responsibility for losses to the bank. (b) the vote of such director or trustee was not necessary for the
approval of the contract
(c) the contract is fair and reasonable under the circumstances
Duty of Obedience (d) the contract with the officer has been previously authorized by
the board
— Board is bound to observe the duty of obedience—they will direct the
affairs of the corporation only in accordance with the purposes for which — where any of the first two (2) conditions is absent, in the case of a
its was organized contract with a director or trustee, such contract may be ratified by a
— 26: Directors and officers to be elected shall perform the duties enjoined vote of 2/3 OCS
on them by law and by the BLs of the corporation. — but full disclosure of the adverse interest must be made
— not all conditions must be present
Duty of Loyalty; Fiduciary Duties; Conflict of Interests — also applies to corporate officers
— contract of a self-dealing director is VOIDABLE at the option of the
— Under 31: Directors or trustees who acquire any personal or pecuniary corporation, w/n there has been damages

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— self-dealing contract is presumed unfair until the self-dealing director Where a director in a corporation accepts a position in which his duties
proves otherwise are incompatible with those as such director it is presumed that he has
— to validate the contract of a self-dealing director: abandoned his office as director of the corporation.
o ratification by the SHs thru a vote of at least 2/3 OCS (including the
shares of the self-dealing director)
 although he may not have voted, if the other members of 2. Fixing compensation of directors and officers
the board are under his dominating influence, he will still be
considered a self-dealing director covered by the provision — Typical situation of self-dealing
(Globe Woolen Co v Utica Gas & Electric) — Takes various forms: per diems, salaries and profit-sharing
 even when the director resigns in order to consummate the arrangements like bonuses, stock options plans, pension plans, etc
contract, but after he has laid the foundation for the — GR: directors are NOT entitled to compensation for performing
successful completion of the same, he can still be held liable services ordinarily attached to their office; they are presumed to
to account for the profits he may have reaped (Steinberg v serve without pay
Velasco) — Exception: unless the AOI or BLs expressly provide or a contract is
o full disclosure of the adverse interest made in advance (Lingayen gulf v Baltazar infra)
o contract must be fair and reasonable — Only the SHs and NOT the directors themselves may fix the amount
of compensation
Palting v San Jose Petroleum Inc. F: Case involves provisions in the by- o A SHs resolution to grant such compensation can only refer to
laws of a corporation seeking to have its securities registered and future and NOT to PAST services (Barretto v La Previsora infra)
distributed in the Philippines. — Principles also applicable to non-stock corporations…
H: Considering the questioned provision that no contract or transaction — … but NOT applicable to an officer who is not a director
between the company and any other association or corporation shall be — … also not applicable to directors who render service outside his
affected except in case of fraud, by the fact that any of the directors or usual duties
officers of the company may be interested in or are directors or officers of
such other associations or corporation, the impact of these provisions upon Sec 30
the traditional fiduciary relationship between the directors and SHs of a Sec 87
corporation is too obvious to escape notice. The directors and officers of the
corporation can do anything, short of actual fraud, with the affairs of the — Directors can receive compensation other than per diems only if the
corporation, even to benefit themselves, with immunity. This and other by-laws fix the same or in the absence thereof, approval of majority
provisions which authorized the election of non-SHs as directors, completely of SHs
disassociate the SHs from the government and management of the business — Sec 30 allows directors to fix the amount of their own per diems;
in which they have invested. technically is self-dealing but allowed by express provision of law
o But the per diems must be REASONABLE
Mead v EC McCullough. H: While a corporation remains solvent, there is o Total amount of compensation—including per diems—must not
no reason why a director or officer, by authority of a majority of the SHs or exceed 10% of the corporation’s net income before taxes
board may not deal with the corporation, loan it money or buy property from — As to corporate officers and employees not directors: may consist not
it. So long as a purely private corporation remains solvent, its director are only of salaries but also bonuses, stock options, and other profit-
agents or trustees for the SHs. They owe no duties or obligations to others. sharing schemes
But the moment such a corporation becomes insolvent, its directors are — As to the president: Code is silent, but SC held that he is expected to
trustees of all the creditors, whether they are members of the corporation or serve without salary, and that the per diems paid were sufficient
not, and must manage its property and assets with strict regard to their compensation for services (Lingayen Gulf v Baltazar)
interest. A director or officer may in GF and for an adequate consideration — SEC: stock option plans of widely-held corporations
purchase from a majority of the directors or SHs the property even of an o must be subject to full disclosure before they can publicly sell
insolvent corporation, and a sale thus made to him is valid and binding upon their securities
the minority. o must be approved by SHs representing 2/3 of SUBSCRIBED capital
stock
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 o amount set aside must not be more than 20% of the subscribed The validity of a stock option plan depends directly upon the existence of
capital stock consideration to the corporation. Sufficient consideration to the
corporation may be inter alia, the retention of the services of an
Gov’t of PI vs. El Hogar Filipino. (supra) employee, or the gaining of services of a new employee, provided there
is a reasonable relationship between the value of the services rendered
Barretto v La Previsora Filipina. F: Suit by the resigned directors of a and the value of options granted. In this case, the stock option plan is
building and loan association to recover 1% of the profits to each deficient because it is not reasonably calculated to insure that the
complainant in accordance with an amendment to the by-laws, which corporation will receive the contemplated benefits. No rule of thumb can
stipulate that they are entitled to a lifetime annuity from the profits of the be devised to test the sufficiency of the condition which are urged as
corporation. insurance that the corporation will receive the contemplated benefit. The
most that can be said is that in each case there must be some element
H: The amended by-laws does create any obligation to pay to the persons which, within reason, can be expected to lead to the desired end. The
name therein such a life gratuity or pension out of the profits. A by-law of plan and options issued do not of themselves insure that benefit of
this nature must be clearly regarded as beyond the lawful powers of a retaining the services of the employee to whom the option is granted will
mutual building and loan association and is thus ultra vires. As it were, the inure to the corporation. They are too insecure in nature to be regarded
by-law cannot be held to establish a contractual relation between the as a condition of the stock option plan designed to insure that the
parties. corporation will receive the contemplated benefit.

The authority conferred upon corporations in the code refers to providing 3. Using inside information
compensation for future services of directors, officers, and employees after
the adoption of the by-law and cannot in any sense be held to authorize the — Directors and corporate officers are insiders having access to
giving of continuous compensation to particular directors after their confidential information relating to the business of the corporation
employment has terminated for past services rendered gratuitously by the — Fiduciary position prohibits them from using any information to
them to the corporation. To permit the transaction would be to create an benefit themselves or any competitor corporation
obligation unknown to the law, and to countenance a misapplication of funds — Liability of guilty and disloyal director can be based on Sec 31
of the building and loan association to the prejudice of SHs. — RSA (now SRC) contains express provisions regarding use of inside
information
Contracts between a corporation and third persons must be made by or
under authority of its board and not by the SHs. The action of the SHs is only Sec 36 RSA
advisory and is not binding on the corporation. Sec 30 RSA
Sec 53 RSA
Kerbs v California Eastern Airways. F: The stock option plan of the
company provides that 250,000 shares of the corporation’s unissued stock Strong v Repide. F: Erica Strong is the owner of 800 shares of the Phil
be subject to options to purchase at $1/share, exercisable at any time within Sugar Estates Devt Company, which owned ½ of the value of friar lands
a period of 5 years. The profit sharing plan provides that when quarterly in the Philippines. Repide is director and majority SH. The government
earning exceeded $30,000 before taxes, 10% shall be distributed among the made an offer to purchase the lands owned by the corporation and from
name officers and executive personnel. If a loss is incurred, cumulative the other owners. The offer was rejected by Repide, without consulting
deficiency plus operating losses shall be carried forward to succeeding the other SHs, and held out for a better deal. He was aware that the
quarterly periods. Both plans were adopted at a board meeting, but only the value of the lands and the shares would be of no value if the sale were
stock options plan was ratified by the SH. not consummated, since the company had not paid dividends, was living
on credit, and could not even paid taxes. The land was the only valuable
H: The SH ratification cures any voidable defect in the action of the board on asset of the corporation. Repide than took steps to purchase 800 shares
the stock options plan. Ratification by SHs of voidable acts of directors is of stock owner by Strong. He employed Kaufmann, who then employed
effective for all purposes unless the action of the directors constituted a gift Sloan the broker, to purchase the stock for him. Negotiations ensued.
of corporate assets to themselves or was ultra vires, illegal, or fraudulent. Strong through Jones agreed to sell Strong’s shares to Repide. He thus
obtained the 800 shares for 1/10th the amount they were worth by the

6
eventual sale of the lands two months after he bought the shares. The individually as well as collectively, and refuses to permit him to profit
probable value of the shares was unknown to anyone except Repide, while at the latter’s expense by the use of information obtained as a result
the agent of Strong had no idea that it was Repide who wanted to purchase of his official position and duties. Such a duty exists because the SHs
the shares. have placed the directors in a strategic position where they can make
it appear the shares are much less valuable than they really are.
I: W/n it was the duty of Repide, in GF, to disclose to the agent of Strong the — The Special Facts rule—an exception to the Majority rule; where
facts which would affect the value of the stock he purchased from the latter. special circumstances are present which make it inequitable for the
director to withhold information from the SH, the duty to disclose
H: In this case, Repide was the chief negotiator for the sale of the lands, arises, and concealment is fraud.
acting for all the other SHs. Only he knew the state-of-play in the proposed
sale. He owned ¾ of the shares of the corporation. Under these Assuming the Special Facts rule to be applicable, there is no doubt that
circumstances, and before the negotiations for the sale were completed, he the Wrights owed Taylor a duty and violated that duty to her damage. The
employs agents to purchase shares of his company from another SH and stock was not sold or traded in any exchange. They concealed their
conceals his own identity and knowledge of the state of the negotiations on position as directors, and had full knowledge of the real value of the
the sale of the lands and their probable effect on the value of the shares to stock, but kept that knowledge to themselves. They had full control over
be purchased. A director may be accountable directly to the SH where the the corporation. Under such circumstances the findings that the Wrights
special facts surrounding the transaction give rise to the obligation to are guilty of fraud within the meaning of the Special Facts rule are
disclose his identity or the inside information he possesses. This is known as supported by the evidence.
the special facts doctrine.
4. Seizing corporate opportunity
Taylor v Wright et al. F: Mrs Wright and Allen Wright, majority SH and both
director respectively, employed an agent to purchase from Emma Taylor — Significant aspect of fiduciary obligation is the duty to refrain from
3750 shares in the corporation to which they are directors in. Said shares usurping a business opportunity rightly belonging to the corporation
were pledged as security for a loan by Taylor which the Wrights knew. The
Wrights also knew that the company was operating at a loss, and they knew Sec 34: Where a director acquires for himself a business opportunity
the true value of the shares (which was not traded in the exchange). They which should belong to the corporation, thereby obtaining profits which
also concealed their identity and purpose in purchasing the stock from should belong to the corporate corporation, he must account to the latter
Taylor. for all such profits by refunding the same, unless his act has been ratified
by vote of the SHs owning 2/3 OCS
I: W/n the directors and officers of a corporation owe any duty to all SHs in — Applicable only to directors and NOT to officers
relation to transactions whereby officers and directors buy for themselves — Allows ratification of a transaction by vote of 2/3 OCS
shares of stock from the SHs
Sec 31: Directors or trustees who acquire any personal or pecuniary
H: Three (3) rules are recognized as applying to the case. interest in conflict with their duty as directors shall be liable solidarily for
all damages resulting therefrom
— The Majority rule—directors and officers owe no fiduciary duty at all to — Applicable to directors, trustees, and officers
SHs, but may deal with them at arm’s length. A director is a fiduciary — Does NOT allow ratification of a self-dealing transaction
with respect to the corporation as an entity, and not to the SHs as
individuals. In dealings with or for the corporation, the director is — If the transaction is one which the corporation has the right to
exercising a corporate function, and is subject to the usual fiduciary duty appropriate, then the director has a positive duty not to seize it for
to disclose all material facts; but that in personal dealings with SHs he is himself
not exercising a corporate function, and is free to deal with them at — Should he do so, he must account for all profits he obtains, even if he
arm’s length. It is based on the theory that the corporation—the used personal funds
collective SHs—is a separate and distinct legal entity, an artificial — Ratification by SHs representing 2/3 OCS cures the transaction
personality, to whom the director owes his duty. — Sec 34 covers only directors and not officers…
— The Minority Rule—recognizes the director’s obligation to the SHs — … but an officer may still be held liable under Sec 31, para 2

7
 oofficer is a full time corporate agent and is paid a salary for his not proper for the fiduciary to take those opportunities unto itself, while
services, and thus there would be stronger reasons to make an at the same time it stayed the processes of its subsidiary directed
officer liable towards the same business ends. It is not only a case of a fiduciary
o director not an officer spends only a part of is business time and seizing business opportunities of the cestui. The trustee at the same time
efforts for the corporation, for which he is not entitled to kept its dominant hand over the cestui, suppressing any attempt by the
compensation unless expressly granted cestui to go out and compete with the trustee.
— when is a corporate opportunity belonging to the corporation?
Where a fiduciary is engaged in a business in competition with his
Singer et al v Carlisle. F: Singer et al are SHs of the United Corporation corporation, he cannot actively use his position and power over his
which owns all capital stock of its subsidiary, NY United Corp, both of which corporation so as to prevent the corporation from seeking certain
are engaged in the business of underwriting securities. Carlisle et al are businesses in competition with himself. It is charged that the directors
directors of the two corporations. Other defendants are investment houses here not only failed and refused any attempt to obtain certain business
JP Morgan, Drexel & Co, and Morgan Stanley. United Corp acquired for their own corporation, but that they affirmatively prevent the
substantial voting stock of various holding and operating companies/utilities, corporation from competing with them for that business. This they may
which were all publicly listed and obtained their funds through the public not do. Directorship in two competing corporation does not in and of itself
sale of their securities. JP Morgan et al were able to obtain large profits from constitute a wrong. It is only when a business opportunity arises which
the underwriting of such securities to the exclusion of United and NY United. places the director in a position of serving two masters, and when
Plaintiff Singer charge that the defendant bankers and investment houses dominated by one, he neglects his duty to the other, that a wrong has
and the directors of the two corporations fraudulently caused the latter been done.
corporations to use their influence and control over the subsidiaries in order
to induce them to award the underwriting business to the defendant Irving Trust Co v Deutsch et al. F: Irving is the trustee of the insolvent
bankers. Having eliminated United Corp and NY United as their competitors company Sonora Acoustic. Acoustic desired the patents of the De Forest
for the underwriting business of the subsidiaries, the defendants allegedly company and wanted gain at least minority stake to have a voice in the
proceeded to utilize their control and influence to obtain the business for management of its patents and products, which goes to Acoustic’s
themselves. Singer et al also claimed that the directors of the corporation, corporate purpose. Reynolds & Co, receiver of the insolvent De Forest,
as fiduciaries, eliminated their cestui as a competitor in the underwriting offered to give Acoustic 1/3 participation in the purchase of 600,000
profits. shares of De Forest stock. It also stipulated that Acoustic’s nominees
should hold 4 of 9 seats in the board and that it should have the right to
H: United and NY United were also engaged in underwriting as do the enter into a contract to handle the managing and selling of De Forest
defendant banks. It was the duty of their directors and officers to make products. This offer was presented to the board of Acoustic and a
every effort consonant with good, honest judgment to obtain for those resolution was passed authorizing its president, Deutsch, to obtain
corporations as much of the underwriting business as possible, and to make sufficient funds to enable Acoustic to carry out its obligations in case it
this business as profitable as possible. This does not mean, however, that accepts the offer. No funds were obtained but Biddle and Deutsch et al,
the directors and controlling SHs of United and NY United were required to agreed to put up the money and accept the certificates of De Forest stock
do anything detrimental to the affairs of other corporations of which they issued when date of payment came under the offer. Reynolds agreed and
were officers and directors, and to the affairs of United and NY United. One issued the certificates. The deal was consummated on the purchase of De
in control of a majority of the stock and of the board of a corporation Forest stock. It was then traded in the exchange and Biddle, Deutsch et al
occupies a fiduciary relation towards the minority, and is charged with the were able to reap huge profits in selling their shares. Acoustic declares
duty of exercising a high degree of GF, care, and diligence for the protection bankruptcy and sues the Biddle group, three of whom were directors of
of the same. Every act in its own interest to the detriment of the minority De Forest, appropriated to themselves Acoustic’s right under its contract,
interests becomes a breach of duty and of trust, and entitled them to when as fiduciaries they were obligated to preserve those rights for
plenary relied. So strict is the rule of undivided loyalty to the beneficiary that Acoustic and were forbidden to take position where personal interest
the mere fact that a trustee has an interest inconsistent with the interest of would conflict with the interest of their principal.
his cestui, casts upon him that burden of justification. Where this duty exists,
the duty of the trustee is to manage the property and affairs of the H: The theory of the suit is that a fiduciary may make no profit for himself
corporation with an eye single to the advantage of the corporation itself. It is out of a violation of duty of the cestui, even though he risked his own

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funds in the venture, and that any one who assists in the fiduciary’s — That the cestui had some legitimate right or expectancy in these
dereliction is likewise liable to account for the profit so made. It is clear that shares
there is no contract between Acoustic and Reynolds because the offer did
not run to Acoustic but to the Biddle group as individuals. The management The question to ask is, have the directors profited at the expense of their
contract, once entered into, would enable access to the patents, stock corporation; have they gained because of disloyalty to its interest and
ownership in De Forest as a going concern after receivership was lifted, and welfare? In this case, the “opportunity” was a routine piece of business
were all concededly legitimate corporate purposes. Thus the proposed wholly lacking in the unique and special quality which distinguished other
purchase is not ultra vires. corporate opportunity cases. The interest of the directors in the stock was
purely speculative, and they even incurred a definite risk which at the
The facts of the present case militate strongly against the directors since in time was totally eliminated from the cestui’s position in the same stock.
this case, they absolutely bound Acoustic by contract to make payments to In other words, the profit of the cestui was assured; that of the directors
Reynolds and exposing it to risk of a suit for damages for nonperformance, were still at hazard.
without committing themselves to it to relieve it of this obligation if
necessary when time for payment arrives. Directors of a solvent corporation 5. Interlocking directors
are forbidden to take over for their own profit a corporate contract on the
plea of the corporation’s financial inability to perform. If the directors are — One who occupies a positioning two (2) corporations dealing with
uncertain whether the corporation can make the necessary outlays, they each other
need not embark upon the venture. If they do, they cannot substitute — Sometimes presented definite advantages to the corporation
themselves for the corporation any place along the line and divert possible
benefits into their own pockets. Sec 33: GR: A contract between two or more corporations having
interlocking directors shall not be invalidated on that ground alone
Litwin v Allen et al. F: JP Morgan, in disposing of 1,250,000 shares of CS of — Exceptions:
Alleghany corporation, offered 500,000 to Guaranty Corporation to be sold o Cases of fraud
on a commission at $24/share. Before the public offering, Morgan also o if the contract is not fair and reasonable under the circumstances
offered the other 750,000 to friends at $20. Among those receiving the o if merely nominal interest, interlocking director shall still be
shares were some directors of Guaranty Corp, who received 40,000 shares. subject to the same ratificatory vote required in cases of dealings
The market opened at a premium and the directors were able to dispose of of directors, trustees, and officers
their stock at a substantial profit. — interests exceeding 20% of OCS is considered substantial

H: A director of a corporation is in a position of fiduciary. He will not be — The burden is on the corporation which seeks to uphold the contract
permitted to improperly profit at the expense of the corporation. Undivided to prove the fairness or unfairness of the transaction
loyalty will ever be insisted upon. Personal gain will be denied to a director — Interlocking director may actually be a self-dealing director where his
when it comes because he has taken a position adverse to or in conflict with interest in one corporation is merely nominal, but his interest in the
the best interests of the corporation. The fiduciary relationship imposes a other corporation is greater than 20% of its OCS:
duty to act in accordance with the highest standard. There is thus no basis
for holding that in acquiring stock through JP Morgan at $20, any of the Globe Woolen Co v Utica Gas & Electric. F: Globe Woolen needed
defendants were guilty of a breach of fiduciary duty. The CS purchased did electric power to run its mills. Its president and majority SH, Maynard,
not represent in any case a business opportunity for the Guaranty was able to get a contract with the electric company Utica Gas which was
Corporation. Having fulfilled their duty to the corporation in accordance to ratified by the executive committee of Globe’s board. Maynard was a
their best judgment, the directors were not precluded from a transaction for nominal SH in the electric company also, and did not vote in the meeting.
their own account and risk. Globe desires to enforce the contract.

In order to constitute a corporate opportunity that was deprived by the H: Contracts are voidable at the instance of Utica Gas. Globe argues that
directors, it was necessary to prove the ff: by refusing to vote, Maynard shifted responsibility to his associates, and
— The shares purchase were in contemplation of equity offered to the may reap a profit from their errors. One does not divest oneself so readily
cestui of one’s duties as trustee. The refusal to vote, has indeed this

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importance: it gives to the transaction the form and presumption of — GR: controlling SH may dispose of his stock at any time and at any
propriety, and requires one who would invalidate it to prove beneath the price
surface. The trustee or director holds a duty of constant and unqualified o But they cannot abuse by transferring office to persons who re
fidelity. He cannot rid himself of the duty to warn and to denounce, if there is known as intending to raid the corporate treasury or improperly
improvidence or oppression, either apparent on the surface, or lurking benefit or enrich themselves (Insuranshares Corp case)
beneath it.

There was an influence in this case which was exerted by Mr Maynard the Insuranshares Corporation v Northern Fiscal Corp. F: The
president of Globe Woolen. From beginning to end he dealt with a Management group (composed of Philadelphia banks) transferred control
subordinate, who was alert to serve at his pleasure. The unfairness in the over the Insuranshares Corporation, an investment trust specializing in
contract is startling and the consequences could be disastrous. No matter shares of small life insurance companies, to the Boston Group, none of
how large the business, or how great the increase in prices of labor or fuel, whom ever had any interest of any in it. With the control went plenary
or there be extensions to the plant, the electric company had pledged that power under the by-laws to sell or transfer all the securities in the
for 10 years there will be saving of $600/month, $300 for each mill, company’s portfolio. Such acquisition of control was the first step of a
$7200/year. As a result of that pledge it has supplied the plaintiff with grand scheme, planned by the Boston Group with the connivance of
electric current for practically nothing, and even owes it some money brokers, to strip the corporation of its valuable assets, leaving a mere
thereafter. Mr Maynard knew the unfairness of the contract, and he cannot shell to the remaining SHs.
have failed to know that he held a one-sided contract which left the
defendant at his mercy. Thus his refusal to vote does not nullify, as of course H: This case involves more than just a question of liability in the sale of
an influence and predominance exerted without a vote. A constant duty corporate stock: it is the sale of control by a minority—but controlling—
rests on a trustee to seek no harsh advantage to the detriment of his trust, interest.
but rather to protect and renounce he gains what is unfair. Those who control a corporation either by the majority or minority stock
ownership owe some duty to the corporation in respect of the transfer of
Close corporation the control to outsiders. Owners of control in a corporation are under a
duty not to transfer ownership to outsiders if the circumstances
— SHs of a close corporation can choose to manage the corporation surrounding the proposed transfer are such as to awaken suspicion and
themselves, instead of having a board, and thus the law treats them as put a prudent man on his guard. In this case the evidence shows that the
Jack: not limited to the board; it also has to 
directors with all the powers, duties, and liabilities attached thereto Boston group were acquiring control over the corporation by improper
be assumed by the SHs who own the  means and for an improper purpose.
Sec 97 (1-3) majority; all boils down to control!
Jack: a systematic, orchestrated move to transfer 
Sec 100 (5) Duty to creditors mgt/control to an irresponsible group; duty to inform 
SHs applied to situations where there is a clear­cut 
— 100: SHs can be made personally liable for corporate torts — No express duty in Corpo Code; based on contract law
o in other corporations: liable only if there is negligence in his duties — GR: directors cannotmajority
be personally liable to corporate creditors for
o SHs are solidarily liable with the corporation general inefficient management of a solvent corporation
o Remedy of creditors is against the corporation itself
Duty of controlling interest — Exception: when corporation is insolvent, the directors will be
DEEMED trustees of the creditors and should manage its assets with
— A SH who is able to control a corporation by owning a majority of voting strict regard to the creditor’s interest (Mead v McCullough)
shares or otherwise, owes a duty as well of GF to the corporation and to — Upon insolvency of the corporation, the board is duty bound to hold
the minority the assets of the corporation primarily first for the payment of
— Majority SH is subject to the duty of GF when he acts by voting at a SH liabilities
meeting
— persons enjoying management control hold it in behalf of the SHs, and — 31: should they willfully and knowingly assent to patently unlawful
not as their personal property acts of the corporation or are guilty of gross negligence or BF in

10
 directing the affairs of the corporation, they become solidarily liable with
for damages to the corporation + damages to third persons including
creditors
— 65: director who fails to object in writing to the issuance of stock for less
than par or issued value is solidarily liable with the guilty SH to the
corporation as well as to its creditors for the difference

Fiduciary obligation:
Commences at the time director assumes office
Remission can be action, inaction, gross negligence
Liability not the SHs but to the corporation
One word: fiduciary
Trust imposed by SH collectively
Directors collectively mandated to make full use of corporate
property
Fiduciary obligation owed to corporation, not the SH
2 types of responsibilities:
As a Board, collectively
As a director, individually
Degree of responsibility is greater as an individual director
31: repository of duties of directors collectively and individually
distinguish if director is an interlocking director
directors transaction with corporation can prove to be beneficial
prohibition against self-dealing is not absolute
threshold: fraud
burden of proof: corporation
fixing compensation
directors sit on board, can do anything and everything with the
corporate assets
success or downfall is borne by directors
board can only recommend compensation! Subj to SH approval
Determination:
did they discharge their duties mandated by the statute?

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