Board of Directors

ATTY. ADRIAN B. CAMPILLA

 Doctrine of Centralized Management
Unless otherwise provided in this Code, the board of directors or
trustees shall exercise the corporate powers, conduct all business,
and control all properties of the corporation. (Sec 22 (1) of the RCC)

Under this Doctrine, A corporation’s Board of Directors is understood

to be that body which:

• Exercises all powers provided for under the Corporation Code;

• Conducts all business of the corporation; and

• Controls and holds all property of the corporation.(Hornilla v.

Salunat, 405 SCRA 220)

2020
 Business Judgment Rule

The courts cannot undertake to control the

discretion of the board of directors about
administrative matters as to which they have
legitimate power of action, and contracts
intravires entered into by the board of directors are
binding upon the corporation and courts will not
interfere unless such contracts are so
unconscionable and oppressive as to amount to a
wanton destruction of the rights of the minority

2023
 Exceptions to the Business Judgment Rule

a) When otherwise provided by the Corporation

Code.

b) When the Directors or officers acted with fraud,

gross negligence or in bad faith; and.

c) When directors or officers act against the

corporation in conflict of interest situation

2023
 Composition of the Board of Directors:
Tenure and Hold-over
Directors shall be elected for a term of one (1) year from
among the holders of stocks registered in the corporation’s
books, while trustees shall be elected for a term not
exceeding three (3) years from among the members of the
corporation. (Tenure Provision)

Each director and trustee shall hold office until the successor
is elected and qualified. (Hold-Over Provision)

A director who ceases to own at least one (1) share of stock

or a trustee who ceases to be a member of the corporation
shall cease to be such. (Capacity Provision)
2023
 Question:
What if the By-Laws of the Corporation provide for a
longer tenure for the Board of Directors, which shall
prevail?

RCC or By-Laws?

Answer: By-Laws, As a general rule, the directors or

trustees of a corporation shall serve for a term as
fixed in the by-laws.

2020
 Qualifications to be a Director/Trustee
Stock Corporations:
a. Own at least one (1) share;
b. Share of stock must be registered in his name;
c. Must continually own such share during his term;
otherwise he automatically ceases to be a director

Non-stock Corporation:
a. He must be a member in good standing thereof

Note: The RCC removed the requirement that Majority of the

Directors/Trustees must be residents of the Philippines

2023
 Disqualifications to be a Director or Trustee
(Sec. 26 of the RCC)
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 the Philippine Competition
Commission may impose in its promotion of good corporate governance or as a
sanction in its administrative proceedings
2023
 Election of the Board of Directors
Except when the exclusive right is reserved for holders of
founders’ shares under Section 7 of this Code, each
stockholder or member shall have the right to nominate any
director or trustee who possesses all of the qualifications
and none of the disqualifications set forth in this Code.

At all elections of directors or trustees, there must be

present, either in person or through a representative
authorized to act by written proxy, the owners of majority of
the outstanding capital stock, or if there be no capital stock,
a majority of the members entitled to vote. (Sec 23 (2) of
the RCC)
2020
 What represents the Majority of the
Outstanding Capital Stock?

The term “outstanding capital stock”, as used in this

Code, shall mean the total shares of stock issued
under binding subscription contracts to subscribers or
stockholders, whether fully or partially paid, except
treasury shares. (Sec. 137 RCC)

Simply put, these are the number of shares ISSUED AND

HELD by the respective stockholders, regardless of full or
partial payment.

2020
 Illustration of Majority of the Outstanding Capital
Stock
Dolomite Company has an Authorized Capital Stock of P1,000,000 divided
into 1,000,000 shares as P1.00 par value per share.

Total Issued Stock is 600,000 shares divided as follows:

A -100,000
B -100,000
C- 200,000
D- 99,999
E-1

E is the only who has not yet fully paid his subscription

How do we then determine Majority of OCS?

Formula: 50% of OCS plus one

600,000/2= 300,00 + One (1) Share = 300,001 shares must be present in order to
elect directors
2020
 Shares may now be voted in Absentia or Alternative
Modes

When so authorized in the by-laws or by a majority of

the board of directors, the stockholders or members
may also vote through remote communication or in
absentia PROVIDED That the right to vote through
such modes may be exercised in corporations vested
with public interest, notwithstanding the absence of a
provision in the by-laws of such corporations (Section
23 (2) of the RCC).

2020
 Manner of Voting Shares
Election of Directors are generally held in an Annual Stockholders’ Meeting of the
Corporation as expressly provided in its Corporate By-Laws.

In stock corporations, stockholders entitled to vote shall have the right to vote the
number of shares of stock standing in their own names in the stock books of
the corporation at the time fixed in the bylaws or where the bylaws are
silent, at the time of the election. The said stockholder may vote through the
following modes;

1. Straight Voting
2. Cumulative Voting
3. Combination of both -distribute them on the same principle among as many
candidates as may be seen fit

Provided, That the total number of votes cast shall not exceed the number of
shares owned by the stockholders as shown in the books of the corporation
multiplied by the whole number of directors to be elected: Provided, however,
That no delinquent stock shall be voted. Unless otherwise provided in the articles
of incorporation or in the by-laws,
2023
 Illustration: Straight Voting
Every stockholder “may vote such number of shares for as many
persons as there are directors” to be elected.

Formula: (No. of Shares). x (No. of Directors to be Elected) = Total

Votes

Example: A owns 100 shares of stock in a corporation and Five

(5 )directors are to be elected.

A is entitled to 500 votes (100shares x 5 directors)

In straight voting, A may distribute equally 100 votes to each of the

5 directors without preference.

100 votes for each Director to be elected.

2023
 Illustration: Cumulative Voting
Stockholder is allowed to concentrate his votes and “give one candidate as many
votes as the number of directors to be elected multiplied by the number of his shares
shall equal

Formula: (No. of Shares). x (No. of Directors to be Elected) = Total Votes

Example: A owns 100 shares of stock in a corporation and Five (5)directors are to
be elected.
A is entitled to 500 votes (100shares x 5 directors)

In cumulative voting, A give all of his 500 votes to one candidate to ensure a seat in
the Board.

500 Votes for one Candidate (He may also divide depending on his preference-200
shares to Director 1, 100 shares to director 2, and 200 shares to Director 3, giving no
favorable vote to Directors 4 and 5.)

However, the Corporation Code states that the total number of votes cast by a
stockholder shall not exceed the number of shares owned by him.
2020
 QUORUM FOR THE BOD
Unless the articles of incorporation or the by-laws provides for
a greater majority, a majority of the directors or trustees as
stated in the articles of incorporation shall constitute a quorum
to transact corporate business, and every decision reached by
at least a majority of the directors or trustees constituting a
quorum, except for the election of officers which shall require
the vote of a majority of all the members of the board, shall be
valid as a corporate act.

Usually the Quorum is also 50% of the Board plus 1 Director.

2020
 Illustration: QUORUM FOR THE BOD
XYZ Corporation has a Five Member Board of
Directors.

For its Regular Board Meetings, the Quorum provided

under the By-Laws is Three (3).

So for the Meeting to be valid, Three (3) Directors must

be present.

2020
 Illustration: Validity of a Corporate Act
XYZ Corporation has a Five Member Board of Directors. Three
of the Directors were present during the scheduled Board
Meeting

One of the Agenda items presented was the Authority to Sell one of
their Corporate Properties.

How Many Votes are required in order to validly pass this Corporate
Resolution?

Answer: At least 2 directors present must agree in order for the Sale
to validly pass as a Corporate Act
2020
 Voting of the Board of Trustees
Depends on the Membership and Number of Seats in the Board

Kapuso Foundation has BOT of 5 Trustees and 25 Members:

Majority: 50% Plus One = 12.5 +1 = 13.5/ 14 Members

Each Member has 5 votes each. No cumulative voting and only

straight voting

Each Member must select Five Different Individuals as Trustees.

Top Five will be declared as Trustees.

2020
 Can Non-Voting Shares vote?
[1] Amendment of articles of incorporation;

[2] Adoption and amendment of by‐laws;

[3] Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;

[4] Incurring, creating or increasing bonded indebtedness;

[5] Increase or decrease of capital stock;

[6] Merger or consolidation of the corporation with another corporation or

other corporations;

[7 Investment of corporate funds in another corporation or business in

accordance with this Code;

[8] Dissolution of the corporation.

 No Election entails Mandatory Reporting
with the SEC

The non-holding of elections and the reasons

therefor shall be reported to the Commission within
thirty (30) days from the date of the scheduled
election. The report shall specify a new date for the
election, which shall not be later than sixty (60) days
from the scheduled date.

2020
 Independent Director Requirement
The board of the following corporations vested with public interest shall have
independent directors constituting at least twenty percent (20%) of such board:
a. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known
as “The Securities Regulation Code”, namely those whose securities are
registered with the Commission, corporations listed with an exchange or with
assets of at least Fifty million pesos (P50,000,000.00) and having two hundred
(200) or more holders of shares, each holding at least one hundred (100)
shares of a class of its equity shares;
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, pre-need, trust and insurance companies, and other financial
intermediaries; and

c. Other corporations engaged in business vested with public interest similar to the
above, as may be determined by the Commission, after taking into account
relevant factors which are germane to the objective and purpose of requiring the
election of an independent director, such as the extent of minority ownership, type
of financial products or securities issued or offered to investors, public interest
involved in the nature of business operations, and other analogous factors.

2023
 Removal of Directors
Any director or trustee of a corporation may be removed from office.

a) By a vote of the stockholders representing 2/3 of the outstanding capital

stock, or 2/3 vote of the members.

b) At a regular meeting of the corporation or at a special meeting called for

such purpose,
c) Previous notice to stockholders or members

d) May be without just cause, except when it operates to deprive minority

stockholders or members the right of representation (requires just
cause).

The board of directors has no power to remove one of its members as

director or trustee. Must be done through the proper meeting with
Stockholders’ Approval

2020
 Liability of Directors
A director is a Fiduciary . The Corporation must be his/her 1st priority.

Three Fold Duties of a Director

1. Duty of Obedience -The directors or trustees and officers tobe elected

shall perform the duties enjoined on them by law

2. Duty of Diligence - directors or trustees who (1) willfully and knowingly

vote for, or assent to patently unlawful acts of the corporation, (2) or who
are guilty of gross negligence or bad faith in directing the affairs of the
corporation, shall be liable jointly and severally for all the damages
resulting therefrom suffered by the corporation, its stockholders or
members and other persons.

3. Duty of Loyalty- Corporation’s Business Interest should never be his

personal Interest

2020
 Who is a Self Dealing Director?
A director who acts in their own best interest in a transaction,
rather than in the best interest of their Corporation.

Self-dealing may take many forms but generally involves an

individual benefiting — or attempting to benefit from a
transaction that is being executed on behalf of the
Corporation.

The rule on self-dealing Directors – is expanded to cover

contracts of the corporation with spouses and relatives within
the fourth civil degree of consanguinity or affinity of a director
of officer

2020
 Dealings of Directors
A contract of the corporation with (1) one or more of its directors, trustees,
officers or their spouses and relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of such corporation, unless
all the following conditions are present:

(a) The presence of such director or trustee in the board meeting in which
the contract was approved was not necessary to constitute a quorum for
such meeting;

(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;

(d) In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the
board, with at least a majority of the independent directors voting to
approve the material contract;
2020
 Dealings of Directors

In case of an officer, the contract has been previously

authorized by the board of directors. Where any of the first
three (3) conditions set forth in the preceding paragraph
is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of the members in
a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
involved is made at such meeting and the contract is fair and
reasonable under the circumstances

2020
 Illustration: Self Dealing Directors
Mano Corporation was founded in 2015 with three Corporate
Shareholders
A- 75%. B- 20% C-5%, with the three of them also serving in their Board
of Directors

In June 2019 Mano wanted to resell old computers of the company. B

wanted to buy this computers for his own Computer Shop Business.

B must fully disclose the same to the Board in order to properly purchase
the said equipment and these requisites must concur:

1. B’s presence in the meeting is not necessary:

2. B’s vote in the meeting is also not necessary
3. Contract offer by B is fair and reasonable and
4. 2/3 of the Board must agree. Which means A and C must concur with the
sale,
2020
 Who is an Interlocking Director?
Interlocking director is an individual who serves as member of the
board of directors of two or more competing corporations or
corporations engaged in practically the same kind of business.

Effect of Corporate contracts with interlocking directors

• Interlocking directors of corporations does not make a contract

between or among the corporations void and of no effect provided
there in no fraud and reasonable under the circumstances.
• Provided, That if the interest of the interlocking director in one (1)
corporation is substantial and the interest in the other corporation
or corporations is merely nominal, the contract shall be subject to
the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.

2020
 Further Requirements for Interlocking
Directors
A director who has a substantial interest in one or both
Corporations

Substantial interest means Stockholdings exceeding twenty

(20%) percent of the outstanding capital stock. It shall be
considered substantial for purposes of interlocking directors.

Provided, That if the interest of the interlocking director in one

(1) corporation is substantial and the interest in the other
corporation or corporations is merely nominal, the contract shall
be subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.
(This means the same rule of approval in Self Dealing Directors
will also apply.)

2020
 Illustration: Interlocking Director

San Miguel Corporation NLEX Corporation

Ramon Ang -45% MVP -49%
Ang 1 -10% Dennis Uy%- 21%
Ang 2 – 10% Charlie Tan-10%
Ang 3 – 10% Grace Udenna- 10%
MVP – 25% Ang1 10%

SMC Entered into a Joint Venture Agreement with NLEX for the construction of
the Bulacan Airport.

How many Interlocking Directors?

Answer: MVP and Ang1. MVP has substantial interests in both corporations.
Should the JVA be considered valid and approved?
Yes. There is nothing wrong with interlocking directors so long as the
transaction is fair and reasonable.

2020
 Illustration: Interlocking Director

San Miguel Corporation NLEX Corporation

Ramon Ang -55% MVP -49%
Ang 1 -8% Dennis Uy%- 21%
Ang 2 – 8% Charlie Tan-10%
Ang 3 – 8% Grace Udenna- 10%
MVP – 21% Ramon Ang- 10%

SMC Entered into a Joint Venture Agreement with NLEX for the construction of
the Bulacan Airport.

How many Interlocking Directors?

Answer: 2. MVP and RSA. MVP has substantial interests in both corporations.
While RSA has a substantial and nominal interests.
Should the JVA be considered valid and approved?
Yes so long as the requisites on Self-Dealing directors will also be followed

2020
 Doctrine of Corporate Opportunity

Where a director, 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, he must account to the latter for all
such profits by refunding the same, unless his 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 his
own funds in the venture.

2020
Illustration Doctrine of Corporate
Opportunity
• Assume you are a Director for DOLE Corporation which sells
fruits like oranges. Assume you discover that a vendor of
oranges is in economic trouble and willing to sell the product
for a fifty percent reduced price. The company has sufficient
funds to purchase the oranges and customers waiting to buy
them.
• You cannot purchase the oranges for your own account. You
cannot refer the vendor to another entity and hope to receive a
commission or some other benefit. You cannot purchase the
oranges and resell them to your own entity for a markup.
• The reduced price oranges are a corporate opportunity and if
the fiduciary takes it he or she may be personally liable to the
corporation for the lost benefit.

2020
Sale of All or Substantially All Assets

X CORPORATION IS ENGAGED IN SELLING PENCILS

ON WHOLESALE BASIS.
IT IS MERELY RENTING A BODEGA AND 90% OF ITS
ASSETS CONSISTS OF ITS STOCKS OF PENCIL.
“ABC”, A SCHOOL SUPPLY DEALER, PURCHASED ALL
THE STOCKS OF X CORP.

IS THE TRANSACTION A SALE OF SUBSTANTIALLY

ALL OF THE ASSETS OF THE CORPORATION
REQUIRING CONCURRENCE OF STOCKHOLDERS
REPRESENTING 2/3 OF THE OUTSTANDING CAPITAL
STOCK?
2020
Answer

No, because this sale is in the regular

course of business. Moreover, this is in
line with the purpose of the corporation.

2020
 Sale of All or Substantially All Assets
AA CORPORATION IS ENGAGED IN THE
BUSINESS OF PRINTING BOOKS.
AROUND 70% OF ITS ASSETS CONSISTS OF
CASH IN THE BANK, 25% PRINTING MACHINE
AND THE REMAINING OFFICE EQUIPMENT AND
SUPPLIES.
AA CORPORATION PLANS TO SELL THE
MACHINE.
CAN IT BE CONSIDERED SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE
CORPORATION?
2020
Answer

Yes, because the normal operations of the

company would be impaired by such sale.
Sale of substantially all assets of the
corporation has been defined as that which
will render it "incapable of continuing the
business or accomplishing the purpose for
which it is incorporated. The test is not
quantity but quality.

2020
 Sale of All or Substantially All Assets -
Requisites
[a] Resolution by the majority vote of a governing board;

[b] Authorization from the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of members;

[c] Such ratification of stockholders or members must be made at a meeting duly

called for that purpose;

[d] Prior written notice of the proposed action and of the time and place of meeting
addressed to all stockholders of record, either by mail or personal service;

[e] The sale of assets must not be illegal such as an illegal combination or monopoly;

[f] Any dissenting stockholder shall have the option to exercise his appraisal right

2023
Dividends

DIVIDENDS – unrestricted retained earnings set apart

from the general mass of funds of the corporation and
distributed among the Shareholders in proportion to
their shares or interest in the corporation, in the form of
cash, property or stocks.

2020
 Types of Dividends
1. Stock Dividends- these dividends are payable in unissued additional
shares of the corporation instead of cash or property out of
the unrestricted retained earnings. These are issued by a resolution of
the board and approval of stockholders.

2. Cash Dividends, these are dividend payable in cash. These can be

declared by mere board resolution from unrestricted retained earnings.

3. Property Dividends these are dividends distributed to the

stockholders in the form of property, real or personal, such as
warehouse receipts, or shares of stock
of another corporation. However, no actual distribution of property
dividend shall be made without approval by the Commission

2020
 Power to Declare Dividends is lodged in the
Board of Directors
The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be
payable in cash, property, or in stock to all stockholders on the
basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from
the delinquent stockholders until their unpaid subscription is fully
paid:

Provided, further, That no stock dividend shall be issued without

the approval of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock at a regular or special meeting
duly called for the purpose.
2020
 Requirements for the Declaration of
Dividends
1. Approval of stockholders representing not less than 2/3 of
the Outstanding Capital Stock
2. In a regular or special meeting duly called for its purpose
3. Existence of unrestricted retained earnings

A stock Corporation is prohibited from retaining surplus profits

in excess of 100%

Corporation will be subject to Improperly Accumulated

Earnings Tax (IAET) by the BIR.

2020
 Exception to the Retention of Profits
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
except:
(1) when justified by definite corporate expansion projects or programs
approved by the board of directors; or
(2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has
not yet been secured; or
(3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.
(n) projects or programs approved by the board of directors; or (b)
when the corporation is prohibited under any loan agreement with
financial institutions or creditors,

2020
Quick Summary on the Requirement of 2/3 of
OCS
 Declaration of bond or stock dividends;

 Investment in other corporations or for purposes other

than those provided in the Articles of Incorporation;

 Sale, lease, exchange, mortgage, pledge or other

disposition of all or substantially of the corporate assets,
but stockholders’ action is not required if corporation’s
business is not substantially limited or if the proceeds
are used to continue the remaining business ;

2020
 Quick Summary on the Requirement of
Majority of the BOD and 2/3 of OCS
 Execution of management contracts in cases
of interlocking stockholders or directors

 Increase or decrease of capital stock and creation or

increase of bonded indebtedness

 Extending or shortening corporate term

 To Deny pre-emptive right

2020
 Quick Summary on the Requirement of
Majority of the BOD and 2/3 of OCS
 Execution of management contracts in cases of interlocking
stockholders or directors

 Increase or decrease of capital stock and creation or increase of

bonded indebtedness

 Extending or shortening corporate term

 To Deny pre-emptive right

2020
 Take Note
The only instances when the only Majority of the
Board and Majority of the OCS is when are the
following:

1. Management Contracts that there are no control

of more than 15% and there are no interlocking
directors:

2. To Adopt, amend and Repeal By-laws.

2020
 Final Note

The power to delegate to the Board

the amendment of By-Laws does
not need Board Approval but ONLY
2/3 of the OCS.

2020
Questions and Comments

2020