4.

Term, Holdover, and Removal

Section 22. The Board of Directors or Trustees of a Corporation; Qualification

and Term. - 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.

Directors shall be elected for a term of one (1) Year from among the holders
of stocks registered in the corporation's book while trustees shall be elected
for a term not exceeding three (3) years from among the members of the
corporation. Each director and trustee shall hold office until the successor is
elected and qualified. 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.

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 (50,000,000.00) 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, preneed, trust and insurance companies and other
financial intermediaries; and

(c) Other corporations engaged in businesses 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.

An independent director is a person who apart from shareholdings and fees

received from any business or other relationship which could, or could
reasonable be received to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director.
 Independent directors must be elected by the shareholders present or entitled
to vote in absentia during the election of directors. Independent directors shall
be subject to rules and regulations governing their qualifications,
disqualifications, voting requirements, duration of term and term limit,
maximum number of board membership and other requirements that the
Commission will prescribed to strengthen their independence and align with
international best practices.

Notes

➢ It is well established in corporation law that the corporation, as a juridical

entity, can act only through the board of directors in the case of stock
corporations, or board of trustees in the case of nonstock corporations. The
board exercises most corporate power, lays down all corporate business
policies and is responsible for the efficient management of the corporation.

➢ The stockholders or members elect a board of directors or trustees to oversee

the management and operation of the corporation. They are not the agents
of the corporation and cannot bind it by their acts. They have only indirect
control of the corporation through their votes.

➢ The powers of the board of directors or trustees are, in a very important sense,
original and undelegated. However, just as a natural person, the board may
validly delegate, either expressly or impliedly, some of its powers to other
officers or agents of the corporation.

➢ The board of directors or trustees must act together as a body in a lawful

meeting, not individually or separately, to bind the corporation by their acts.
In other words, to exercise their powers, they must meet as directors or
trustees and act at a meeting at which there is a quorum.

➢ Directors shall be elected for a term of one (1) year whereas trustees, for a
term not exceeding three (3) years.

Q: Define hold - over.

A: Hold - over is a situation that arises when no successor is elected to due

valid and justifiable reason, in which case the incumbent holds over and
continues to function until another officer is chosen and qualified.
 Section 27. Removal of Director or Trustees. - Any director or trustee of a
corporation may be removed fro office by vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding capital stock, or in a
nonstock corporation, by a vote of at least two-thirds (2/3) of the member
entitled to vote: Provided, That such removal shall take place either at a
regular meeting of the corporation or at a special meeting called for the
purpose, and in either case, after previous notice to stockholders or members
of the corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members for the purpose of removing
any director or trustee must be called by the secretary on order of the
president, or upon written demand of stockholders representing or holding at
least a majority of the outstanding capital stock, or a majority of the members
entitled to vote. If there is no secretary, or the secretary, despite demand,
fails or refuses to call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand may call the
special meeting or to give notice thereof, the stockholder or member of the
corporation signing the demand may call for the meeting by directly addressing
the stockholders or members. Notice of the time and place of such meeting,
as well as of the intention to propose such removal, must be given by
publication or by written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may not be used to
deprive minority stockholders or members of the right representation to which
they may be entitled under Section 23 of this Code.

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

Notes

Q: How is the removal of directors or trustees effected?

A: Any director or trustee of a corporation may be removed from office by:

Stockholders Members

Voting requirement 2/3 of the outstanding 2/3 of the members

capital stock entitled to vote
 Nature of meeting Regular meeting or at Regular meeting or at
a special meeting a special meeting
called for the purpose. called for the purpose

Requirement of prior Prior notice is Prior notice is

notice required. required.

Q: What are the instances when a secretary is required to call a special

meeting of the stockholders or members for the purpose of removing any
director or trustee?

A: A special meeting of the stockholders or members for the purpose of

removing any director or trustee must be called by the secretary on:

(1) Order of the president; or

(2) Upon written demand of stockholders representing or holding at least a

majority of the outstanding capital stock, or a majority of the members
entitled to vote.

➢ A stockholder or member of the corporation signing the demand may call for
the meeting by directly addressing the stockholders or members when there
is no secretary, or the secretary, despite demand, fails or refuses to call the
special meeting or to give notice.

➢ The removal of a director or trustee may be effected with or without cause.

➢ The SEC is given the power, motu proprio or upon verified complaint, and after
due notice and hearing, to order the removal of a director or trustee elected
despite the disqualification, or whose disqualification arose or is discovered
after an election.

➢ The removal of a disqualified director or trustee shall be without prejudice to

other sanctions that the SEC may impose on the board of directors or trustees
who, with knowledge of the disqualification, failed to remove such director or
trustee.

➢ The board of directors has no power to remove one (1) of its members as
director or trustee. Neither can it replace the vacancy caused by removal
effected by the stockholders or members of the corporation.
 ➢ The Revised Corporation Code does not confer expressly upon the courts the
power to remove a director or trustee or any appointed officer of a corporation
on the ground of mismanagement of its affairs, neglect or other cause. The
power of removal is in the corporation itself.

➢ While a director or trustee can be removed from office, he cannot be removed

as stockholder of the corporation, depriving him of his ownership of shares of
stock, without due process of law.

➢ A director or trustee has the right to resign from his incumbent position.
Resignation may be done orally or in writing, but said declaration must clearly
and positively show an intent to resign.

➢ The resignation of a corporate official becomes complete and his office

becomes vacant the moment the resignation is made to the proper officer or
body, and it is unnecessary that the resignation be accepted, or that someone
be elected to take his place, to make the resignation effective.

➢ Where a director or trustee of a corporation accepts a position in which his

duties are incompatible with those as such director or trustee, it is presumed
that he has abandoned his office.

➢ Similarly, where a director absented himself from all meetings for nearly a year
and announced his refusal to act as an officer and stockholder, there is an
abandonment of his position as a director. Abandonment by a director of all
his duties for several years must be regarded as an implied resignation of his
office as director.

5. Compensation

Section 29. Compensation of Directors or Trustees. - In the absence of any

provision in the bylaws fixing their compensation, the directors or trustees
shall not received any compensation in their capacity as such, except for
reasonable per diems: Provided, however, That the stockholders representing
at least a majority of the outstanding capital stock or majority of the members
may grant directors or trustees with compensation and approve the amount
thereof at a regular or special meeting.

In no case shall the total yearly compensation of directors exceed ten percent
(10%) of the net income before income tax of the corporation during the
preceding year.
 Directors or trustees shall not participate in the determination of their own per
diems or compensation.

Corporations vested with public interest shall submit to their shareholders and
the Commission, an annual report of the total compensation of each of their
directors or trustees.

Notes

➢ Under the law, a private corporation is authorized to provide in its bylaws for
the compensation of directors or trustees. Absent any provision in the bylaws
fixing their compensation, the directors or trustees shall receive no
compensation, in their capacity as such, except for reasonable per diems,
unless authorized by a vote of stockholders representing at least majority of
the outstanding capital stock or a majority of the members entitled to vote at
a regular or special meeting.

➢ When compensation is granted either in the bylaws or by the vote of

stockholders, the total yearly compensation of directors shall in no case
exceed 10% of the net income before income tax of the corporation during the
preceding year.

Q: Define per diem.

A: Per diem is a daily allowance given for each day an officer or employee
was away from his home base or permanent station.

6. Vacancy

Section 25. Report of Election of Directors, Trustees and Officers, Non-holding

of Election and Cessation from Office. - Within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the secretary,
or any other officer of the corporation, the secretary, or any other officer of
the corporation, shall submit to the Commission, the names, nationalities,
shareholdings, and residence addresses of the directors, trustees and officers
elected.

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.
 If no new date has been designated, or if the rescheduled election is likewise
not held, the Commission may, upon the application of a stockholder, member,
director or trustee, and after verification of the unjustifiable non-holding of the
election, summarily order that an election be held. The Commission shall have
the power to issue such orders as may be appropriate, including other directing
the issuance of a notice stating the time and place of the election, designated
presiding officer, and the record date or dates for the determination of
stockholders or members entitled to vote.

Notwithstanding any provision of the articles of incorporation or by laws to the

contrary, the shares of stock or membership represented at such meeting and
entitled to vote shall constitute a quorum for purposes of conducting an
election under this section.

Should a director, trustee or officer die, resign or in any manner case to hold
office, the secretary or the director, trustee or officer of the corporation, shall,
within seven (7) days from knowledge thereof, report in writing such fact to
the Commission.

Notes

➢ It is the duty of the secretary or any other officer of the corporation to submit
to the SEC the names, nationalities, shareholdings, and residence addresses
of the elected directors, trustees and officers.

Q: What is the period given by law to the secretary or any other officer of
the corporation to submit the details of the duly elected directors, trustees
and officers?

A: Within thirty (30) days after the election of the directors, trustees and
officers of the corporation.

➢ The non-holding of elections and the reasons shall be reported to the SEC
within thirty (30) days from the date of the scheduled election. The report shall
specify a new date for the election.

➢ If no new date has been designated, or if the rescheduled election is likewise

not held, the SEC may, upon the application of a stockholder, member,
director or trustee, and after verification of the unjustified non - holding
of the election, summarily order that an election be held. The SEC shall have
the power to issue such orders as may be appropriate in order that an election
be held.
➢ It is the duty of the secretary or the director, trustee or officer of the
corporation to report in writing to the SEC, within seven (7) days from
knowledge thereof, about the death, resignation or any reason for cessation of
office of a director, trustee or officer of the corporation.

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

Any vacancy occurring in the board of directors or trustees other than 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
than 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 a vacancy
shall be referred to as replacement and shall serve only for the unexpired term
of the predecessor in office.

However, 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, 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 from 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 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.
Notes

Q: State the instances when a vacancy in the office of director may be

filled by the stockholders or members?

A: A vacancy in the office of director or trustee may be filled by the

stockholder or members in a regular or special meeting called for
that purpose in these cases:

(1) If the vacancy results from the removal by the stockholders or

members, the election may be held on the same day of the meeting
authorizing the removal;

(2) If vacancy is due to the expiration of term, the election shall be held not
later than the day of such expiration.
(3) If the vacancy occurs other than by removal or by expiration of term,
such as death, resignation, abandonment, disqualification, if the
remaining directors or trustees do not constitute a quorum to fill the
vacancy;

(4) If the vacancy may be filled by the remaining directors or trustees but
the board refers the matter to the stockholder or members; or

(5) If the vacancy is created by reason of an increase in the number of

directors or trustees.

Q: State the instances when a vacancy in the office of director may be

filled by the members of the board of directors?

A: If the vacancy occurs other than by removal or by expiration of term,

such as death, resignation, abandonment, disqualification, if the
remaining directors or trustees constitute a quorum to fill the vacancy.

Q: When is the creation of an emergency board allowed?

A: The creation of an emergency board is allowed and the vacancy may be

temporarily filled from among the officers of the corporation by
unanimous vote of the remaining directors or trustees, when these
requisites are present:
 (1)When the vacancy prevents the remaining directors from constituting a
quorum; and

(2)an emergency action is required to prevent grave, substantial, and

irreparable loss or damage to the corporation.

➢ The action by the designated director shall be limited to the emergency action
necessary, and the term shall cease within a reasonable time from the
termination of the emergency or upon election of the replacement director,
whichever comes earlier. The corporation must notify the Securities and
Exchange Commission within three (3) days from the creation of the
emergency board, stating the reason for its creation

7. Voting Requirements

Notes

➢ A majority of the board members constitutes a quorum. To bind the

corporation, it is essential that the board of directors acts by a majority vote
of all its members.

8. Duties and Liabilities

Notes

➢ The directors or trustees of the corporation shall perform the duties enjoined
on them by the law and by the bylaws of the corporation and in accordance
with the purposes for which it was organized. In discharging their
responsibility and exercising their powers, they are held to high standards.
They have a three - fold duty of obedience, diligence, and loyalty in exercising
their powers as the governing body of the corporation, violation of which will
render them personally liable under Section 30 and Section 170 of the Revised
Corporation Code.

➢ The directors of a corporation are its agents. Their duties are often referred
to as fiduciary duties and they are sometimes referred to as fiduciaries because
they also occupy a fiduciary relation to the corporation. In the performance of
their official duties, they are under obligations of trust and confidence to the
corporation and its stockholders and must act in good faith and for the interest
of the corporation or its stockholders with due care and diligence and within
the scope of their authority.
 Q: What are the prohibited acts which makes a director, trustee, or officer
jointly and severally liable (solidary) for all damages under Section 30 of
the Revised Corporation Code?

A: Under Section 30 of the Revised Corporation Code, the following

prohibited acts makes a director, trustee or officer jointly and severally
liable for all damages:

(1) Willfully and knowingly vote for or assent to patently unlawful acts of
the corporation; or

(2) Guilty of gross negligence or bad faith in directing the affairs of the
corporation; or

(3) Acquire any personal or pecuniary interest in conflict with their duty as
a director or trustee;

(4) Attempt to acquire or acquire any interest adverse to the corporation in

respect of any matter which has been reposed in them in confidence,
and upon which equity imposes a disability upon themselves to deal in
their own behalf.

➢ Personal liability of a corporate director, trustee or officer along with the

corporation may also validly attach, as a rule:

(1) When he consents to the issuance of watered stocks or who, having

knowledge thereof, does not forthwith file with the corporate secretary
his written objection; (Section 64, RCC)

(2) When he is made, by a specific provision of law, to personally answer

for his corporate action; (Section 144, RCC); or

(3) When he agrees to hold himself personally and solidarily liable with the
corporation.

➢ Private or secret profits obtained must be accounted for, even though the
transaction on which they are made is advantageous or is not harmful to the
corporation, or even though the director, trustee or officer acted without intent
to injure the corporation.

Section 31. Dealings of Directors, Trustees or Officers with the Corporation. - A

contract of the corporation with one (1) 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 a majority of the independent directors voting to approved the
material contract; and

(e) 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.

Notes

Q: What is a self - dealing director?

A: A self - dealing director is one who enters into a contract, or transacts

business with his own corporation.

➢ When one (1) or more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity enters into
a contract with the corporation, the contract is deemed voidable.

➢ Nevertheless, the contract shall be valid and cannot be set aside merely
because of the relationship of the parties when all of the conditions are
present:
 (1) 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;

(2) The vote of such director or trustee was not necessary for the approval
of the contract;

(3) The contract is fair and reasonable under the circumstances;

(4) In case of corporations vested with public interest, material contracts

are approved by at least a majority of the independent directors voting
to approved the material contract; and
(5) In case of an officer, the contract has been previously authorized by the
board of directors.

➢ In the case of a contract with a director or trustee, where any of the first three
(3) conditions is absent, 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.

Section 32. Contracts Between Corporations with Interlocking Directors. - Except in

cases of fraud, and provided the contract is fair and reasonable under the
circumstances a contract between two (2) or more corporations having interlocking
directors shall not be invalidated on that ground alone: 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.

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

Notes

Q: Who are interlocking directors?

A: Interlocking directors are persons who serve as members of the board

of directors of two or more competing corporations or corporations
engaged in practically the same kind of business.
 ➢ A contract between two or more corporations having interlocking directors shall
be valid, except when there is fraud and the contract is unfair and
unreasonable.

➢ However, if the interest of the interlocking directors in one corporation is

substantial, his stockholdings exceed 20% of the outstanding capital stock and
in other merely nominal, the provision of Section 31 shall apply to the contract
insofar as the latter corporation or corporations are concerned.

Section 33. Disloyalty of a Director. - Where a director, by virtue of such office,

acquires a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, the director must account for
and refund to the latter all such profits, unless the 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 one's own funds in the venture.
Notes

Q: Define the doctrine of corporate opportunity.

A: Under this doctrine, a director who, 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, is guilty
of disloyalty and should therefore, account for and refund to the latter
for all such profits, notwithstanding that he risked his funds in the
venture.

➢ The doctrine of corporate opportunity rests fundamentally on the unfairness,

in particular circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the corporation
justly calls for protection. And if in such circumstances, the interests of the
corporation are betrayed, the corporation may elect to claim all of the benefits
of the transaction for itself and the law will impress a trust in favor of the
corporation upon the interest and profits acquired.

➢ A corporate opportunity of which corporate directors cannot take advantage

for their personal benefit is a business opportunity which has an inherent
aptitude of being integrated into the existing business of the corporation.

➢ Under Section 33, the guilty director will be exempt only from liability to the
corporation to account for the profits he realized if his disloyal act is ratified by
 vote of the stockholders owning or representing at least 2/3 of the outstanding
capital stock.

9. Doctrine of Centralized Management

Q: Define the doctrine of centralized management.

A: The doctrine of centralized management states that the board of

directors holds all the authority in a corporation. They are responsible
for exercising corporate powers, conducting business, and controlling all
properties of the corporation, except in instances where the Revised
Corporation Code requires stockholders’ approval for certain specific
acts. This principle is firmly established in corporate law and
emphasizes that a corporation can only make decisions and take actions
through its board of directors.

10. Business Judgment Rule

Q: What is the business judgment rule?

A: Business judgment rule means that the members of the board of

directors hold such office charged with the duty to act for the corporation
according to their best judgment and in so doing, they cannot be
controlled in the reasonable exercise and performance of such duty.
Questions of policy or of management are left solely to the honest
decisions of officers and directors of a corporation, and the court is
without authority to substitute its judgment for the board of directors.

11. Doctrine of Apparent Authority

Q: Define the doctrine of apparent authority.

A: As applied to corporations, the doctrine of apparent authority provides

that "a corporation is estopped from denying the officer's authority if it
knowingly permits such officer to act within the scope of an apparent
authority, and it holds him out to the public as possessing the power to
do those acts.

12. Doctrine of Ratification or Estoppel

Q: Define the doctrine of ratification.

A: The doctrine of corporate ratification is predicated on the right of a
corporation to contract and any ratification or adoption is equivalent to
a grant of prior authority. The adoption or ratification of a contract by
a corporation is nothing more or less than making of an original contract.