Corporation Law Reviewer Title III

 

SEC25 – CORPORATE OFFICERS, QUORUM

*the determination of the necessity for additional offices is a management prerogative. It is covered by Business judgment rule.

OFFICE – creation of the charter of a corporation *corporate officers jurisdiction – jurisdiction – SEC

OFFICER – person elected by the directors or stockholders. – occupies no office and is generally employed not by action of the directos and EMPLOYEE  – stockholders but by the managing officer of the corporation and who also determines the compensation to be paid to such employee.

*Dismissal of a corporate officer is always a corporate act, or intra-corporate controversy. The question of remuneration is not a simple labor problems but a matter that comes within the area of corporate affairs and management and is corporate controversy in contemplation of the corporation code.

– officers who are designated as such or given that character in the CORPORATE OFFICERS  – law, the articles of incorporation and the by-laws of the corporation.

QUALIFICATION Sec25 enumerates officers namely: OFFICERS- provided by board or AOI or by-laws a. b. c.

The President Treasurer  Secretary

PRESIDENT QUALIFICATIONS:

Sec63 recognizes: 1. 2.

a.

VP

b.

Assistant secretary

*other authorities which may create corporate officers: as may be necessary in a particular  corporation)

He must be a director (and stockholder) He may not be concurrently the treasurer treasurer or secretary

TENURE GR: retirement age of 60 can continue with his term. A president is not covered by compulsory retirement age for employees.

DUTIES a.Articles of Incorporation 1. b.by-laws 2. 3. 4. *the intent to create an additional corporate office must be clear. *the relationship of a person to a corporation is determined by the incidents of his relationship with the corporation as they actually exist.

5.

*it is possible for one to have dual role of officer and employee. The corporation is not prohibited from hiring a corporate officer to perform services under circumstances which will make him an employee.

Sec54 – preside at all meetings of the directors or trustees as well as of the Sec54 – stockholders or members, unless the by-laws provides otherwise. Sec63 – certificate of stocks shall be signed by the president. Sec63 – General supervision and control over corporate operations In absence of a charter or by-laws provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of the corporation’s business and within the scope of his or her usual duties.   Possesses the power power to enter into a contract for the corporation a. Provided: that the conduct of both the president and the corporation shows that he had been in the habit of acting in similar matters on behalf of the company and that the company had authorized him so to act and had recognized approved and ratified his former similar actions.

VICE PRESIDENT *case of vice-president appointed by the board then another person was appointed as such with the operational title of managing director — director —the second appointee was considered by the court not as corporate officer but a regular employee. *If by-laws do not authorized the board to create appointive positions, they may still do so because of the principle that BOD is the governing body of the corporation.

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In absence of the president or if the office of the president becomes vacant Can be elected or appointed Has the authority to act in his stead, or to perform any duty of the office.

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Duty of succession to the chief executive officership in the absence or disability of the president or the chairman of the board and such other duties as the board may assign.

 

CHAIRMAN -

Its functions vary so widely in different companies. May be concurrently the president and may be designated as the chief executive officer of the corporation. Duties: (2009 Code of Corporate Governance) 1. Ensure that the meetings o off the board are held in accordance with the by-laws or  as deemed necessary 2. 3.

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Supervise the preparation of the agenda of the meeting Maintain qualitative and timely lines of communication and information between the board and management.

SECRETARY Must be resident and citizen of the Philippines Reason: to allow would be tantamount to a circumvention of the imperative under  Sec25 of the Corpo Code. Need not be a lawyer  o But it is necessary to be a lawyer when: The corporation is covered by the Revised Code of Corporate  Governance and the Corporate Secretary also acts as the Compliance officer. Duty-bound to keep records and to make proper entries thereto. Who maintains stock and transfer book Makes the entries and records transfer of shares in the stock and transfer book. Certificate of stocks are signed by him One who sends notices of the meeting Prepares minutes of the meetings o Minutes – Minutes  – need not be a word-to-word record but what transpired during the meeting. As long as there is substance. Contains summary and the highlights. But actual solutions which were passed should be stated in the minutes. Issues ―secretary certificate regarding passage, existence, and binding effect of a board resolution. Duties (2009 Code of Corporate Governance) Safekeeping and preservation of the integrity of the minutes as well as o official records of the corporation. o Be loyal to the mission, vision, and objectives of the corporation o Work fairly and objectively with the board, management and stockholders o Have appropriate administrative and interpersonal skills o Is not cor p p’s ’s legal counsel: be aware of the laws, rules, and regulations necessary. o Working knowledge in the operations of the corporation. Inform the members of the board the agenda of their meeting and provide o accurate information that will enable them to arrive at intelligent decisions on matters that require their approval. o Attend all board meetings, except on justifiable causes. o o

Ensure that all Board procedures are followed by members. If also a compliance officer, perform all the duties and responsibilities of the said officer.

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TREASURER Takes care of the funds of the corporation Custodian of the funds of the corporation with the authority to disburse them in proper  cases Authorized to receive funds, funds, issue receipts, and keep the money of the corporation unless otherwise provided by the by-laws the contrary. Philippine residency not necessary. But SEC requires it as a POLICY.

CONCURRENCE OF POSITIONS: any 2 or more positions may be held concurrently by the same person. o o

President at the same time chairman Director at the same time legal counsel

PROHIBITIONS:    

President and secretary President and treasurer  Internal and external auditor  Chairman and vice chairman 

o

Reason: incompatibility. Even if allowed by Corpo code.

Corporate officer concurrently an employee NLRC has jurisdiction if money claims is as employee not  corporate officer 

– foreigners cannot be officers in wholly nationalized and partly nationalized ANTI-DUMMY LAW  – corporation. o

But different rule on partly nationalized corporation in proportion to the equity participation allowed to foreigners. Reason: a director cannot act on his own while an officer acts individually for the corporation.

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Foreigners cannot intervene in the management, operation, and administration or  control whether as an officer, employee or labourer therein except technical personnel. o Applies only to: corporations with businesses that are reserved by the Constitution or law to Filipino citizens or 60% of the capital owned by Filipinos.

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Covers entire range if employment regardless of whether they involve control or noncontrol activities. You cannot employ an alien in any position.

 

Reason: to plug any loophole or close any avenue that an unscrupulous alien may resort to flout the law or defeat its purpose, for no one can deny that while one may be employed in a non-control position who apparently is harmless he may later turn out to be a mere tool to further the evil designs of the employer. May assume the post of chairman of the board provided that the latter’s power is limited to that of a presiding officer during board meetings.

The acts of corporate officers within the scope of their authority are binding on the corporation, but when these officers exceed their authority; their actions cannot bind the corporation, unless the board ratifies such acts or is estopped from disclaiming them.

o

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 AUTHORITY OF OFFICERS OFFICERS TO BIND CORPORATION CORPORATION -

Derived from o Law Corporate by-laws o o Authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business.

***reality:

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DOCTRINE OF APPARENT AUTHORITY -

If a corporation knowingly permits its officers or any other agents, to od acts within the scope of an apparent authority, and holds the officer or agent out to the public as possessing power to do those acts, the corporation will, as against anyone who has in good faith dealt with the corporation through such agent, be estopped from denying his authority.

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Applied in agency law and existence may be ascertained through:

BOD do not often meet, the management of corporations is left to senior officers, particularly the president. Primary responsibility for the business is actually conducted by the

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senior officers and the board only regulates and monitors the activities of the officers. general principles of agency govern the relation between corporation and its officers o When authorized, their acts can bind the corporation, when unauthorized, their acts cannot bind it.  A co rporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon him o Powers that, in the usual course of business, are incidental to those expressly provided o Powers implied frim the powers intentionally conferred o Powers added by custom and usage o Apparent powers – powers – caused a person dealing with the officer to believe that it has conferred.

Implied ratification  – silence or acquiescence, acts showing approval or adoption of  the act, or acceptance and retention of benefits flowing therefrom.

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The general manner in which the corporation hold out an officer or agent as having the power to act, with which it clothes him The acquiescence in his acts of a particular nature, with actual or  constructive knowledge thereof, with or beyond the scope of hi ordinary powers.

What establishes apparent authority? -

The vesting of a corporate officer with the power to bind the corporation Acts of the principal The principal’s liability is limited only to third persons who hav e been led reasonably to believe by the conduct of the principal that such actual authority exists, although none was given.

*there must be proof of reliance upon the representations. *corporate officers may act in accordance with company policies. *the action in behalf of the corporation must likewise be established. Company policies  – written policies approved by the board. It need not be in writing and may be established by sufficient evidence.

DE FACTO OFFICERS doctrine RATIFICATION  – principal voluntarily adopts, confirms, and gives sanction to some unauthorized act of its agent on its behalf. -

Voluntary choice knowingly made.

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Confirmation after conduct, amounting to substitute for a prior authority. Can be express or implied.

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He acts as such, under the color of authority. o Color of authority  – authority derived from an election or appointment, although irregular or informal, so that the incumbent must be more than a volunteer.

**official dealings with third persons are valid.

 

Reason: as a matter of public policy and necessity to protect the interests of the public and individuals where those interests were involved in the acts of officers without being lawful officers.

*disqualifications are not exclusive. Others are contemplated in the other provisions of the code,  AOI, or by-laws….or by-laws….or Code of Corporate Governance.  Governance.    __________________ ____________ 

SEC 28  – REMOVAL OF DIRECTORS OR TRUSTEES COMPENSATION -by-laws may provide provide the officers’ compensation may be fixed by the board.  board.  

Right to remove: prerogative of the stockholders or members of the corporation. It is a corporate act.

- even without provisions, it rests with the board.

REQUISITES OF REMOVAL:

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Fixing compensation is part of the regular business of the corporation that the board conducts.

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SEC26 – REPORT OF ELECTION OF DIRECTORS, TRUSTEES AND OFFICERS

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Rationale: to give public information, under sanction of oath of responsible officers. So that those dealing with it and those who intent to do business with it may know or have the means of  knowing facts concer n ning ing the corporation’s financial resources and business responsibility.  

Take place either at a regular meeting or special meeting called for the purpose There must be previous notice of the intention to remove a director  The removal must be by a vote of the stockholders representing 2/3 of  outstanding Capital stock or 2/3 members. Elected by minority, there must be cause for removal

***the meeting that will fill the vacancy in the board created by removal will be called immediately on the same day that the removal was made or soon thereafter. Removal without cause – cause  – elected by majority Removal with cause- elected by minority

REPORT AFTER ANNUAL ELECTION -

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Submit to the SEC within 30 days after the election the names, nationalities and residences of the elected directors, trustees and officers of the Corporation. o Reason: to keep stockholders and the public transacting business properly informed of their organizational operational status. GIS (General Information Sheet) provided by SEC shall be filed w with ith this commission within thrity days following the date of the annual stockholders or members meeting. Any change in the information in the GIS must be reflected in the amended GIS within 30 days from the effectivity or occurrence of the change. Changes should be underscored.  ___________________ ___________________ _______ 

SEC 27  – DISQUALIFICATION OF DIRECTORS, TRUSTEES OR OFFICERS Grounds for disqualification: 1. He is convicted by final judgment of an offense punishable by imprisonment exceeding 6 yrs 2. Convicted by final judgment of a violation of Corporation Code committed within 5 years prior to the date of his election or  appointment. Rationale: meant to assure that only persons of rectitude can act as directors.

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Disqualification is different from removal

*effect of removal: removes one from being a director only but remails as shareholder.

SEC 29 VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE Vacancy - operative fact that justifies the election or appointment of the replacement.

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Presupposes the vacancy during the director’s term.  term.   Election done by directors: not mandatory. permissive Manner of election is discretionary to the corporarion. o By-laws may provide the procedure 1) Provided it is consistent with the other provisions of the corporation code. Who can fill vacancies? a. Stockholders or members b. Remaining directors or trustees Constituting quorum depending on the reason for the vacancy.

Reasons for replacement/election: a.

Removal

 

b. c.

d.

Expiration of term A ground other than removal or expiration of term (e.g. death, resignation, abandonment) where the remaining directors do not constitute quorum a. Abandonment – director of corporation accepts a position in which his duties Abandonment – are incompatible with which will render him physically incapable of  performing his duties as director. Increase in the number of directors

If the causes other than enumerated : the board can fill the vacancy, if the remaining directors constitute a quorum.

***the directors or trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. Reason: presumption that directors/trustees render services gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation.

– to pay for a day’s services.   PER DIEM  –  -allowances of money for expenses each day.

***in certain cases: the directors are allowed to elect the replacement so that the operation of  the corporation cannot be hampered or jeopardized. There may be too many vacancies in certain cases and there would be no directors to perform their functions.

-power of directors to fix per diems emanates from statute itself. -may vary from year to year provided the same is reasonable.

Reason: avoids expenses and inconveniences attending the calling of stockholders’ or  member’s meeting.  meeting.   –treated treated synonymously with salaries, remunerations, bonuses, gifts COMPENSATION  – (e.g. christmas gifts) or any incentive for services rendered for the corporation.

Effect of vacancy: a.

The board may continue to function provided there is a quorum

b.

Any act, resolution of the board shall be considered valid

-may be given only if there are profits. Not more than 10% of income of the corporation.

Reason: a. if corporation did not earn.no compensation. **remaining hold-over directors cannot replace a director who resigned after the expiration of  their term rests on the theory of delegated power of the board of directors.

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b. protection not only to stockholders but also of the corporate creditors and prospective investors. It is strictly observed.

The vacancy is, in legal effect, not due to resignation but to expiration of the term.

***the director who will fill up the vacancy will not serve for another one-year term. The replacement does not change the length of the term. Term cannot be split into two or more terms. The replacement will serve only for the remaining period of the original term of the director that he replaced.

- derived from ―net income of the preceding year‖ - net income of the year during which the director served. - this applies to trustees if they actually render services to the corporation.

COMPENSATION OF OFFICERS  ___________________ ___________ 

SEC 30 COMPENSATION OF DIRECTORS RULES:

-may be fixed by the board by way of resolution. -prospective in application -not covered by the 10% limit.

a.

The by-laws may provide for a fixed compensation

b.

If by-laws does not provide, compensation may be granted by the vote of  stockholders representing at least a majority of the outstanding capital stock.

c.

Even if by-laws does not provide, the directors are entitled to reasonable per diems (daily allowance, pay etc.)

- it must be reasonable. -covered by business judgment rule.

*if a director is also an officer, he is entitled to receive salaries and not subject to restrictions. *remedy in case of abuse – abuse – may be recovered in a stockholder/member suit.

 

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Criminal liability – liability – personal liability

SEC 31 LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS

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Solidary liability: (piercing the veil of corporate fiction)

Rationale: o

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To assure that the BOD does not act in a manner that is unlawful or to the prejudice of the corporation because of personal or pecuniary interest of the directors.

When directors and trustees are officers of the corporation

1)

Vote for or assent to patently unlawful acts of the corporation 

Patently unlawful acts – acts – one declared unlawful by law which imposes penalties for commission of such unlawful ats.

2) Management duties: o

Obedience 1)

Requires compliance with law and rules.

2)

Duty to act intra vires and within authority.

Act in bad faith or with gross negligence in directing the affairs of the corporation 

Bad faith – faith – dishonest purpose o

o o

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Diligence 1)

Required to exercise due care in the performance of their functions.

2)

Utmost good faith in the management of corporate affairs.

3)

Due care entails examination of the facts and circumstances of a particular case.

4)

Due diligence dictates that they must maintain familiarity with the financial status of the corporation.

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Loyalty 1)

Nature of fraud. Design to mislead or deceive another. All kinds of deception.

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It must be established.it cannot be presumed.

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Example: officers exceeds their authority

Gross negligence – negligence – want of even slight are, acting or  omitting to act in a situation where there is a duty to act, not inadvertently but wilfully and intentionally with a conscious indifference to consequences insofar as other persons may be affected. o

Loyalty that is undivided and an allegiance that is influenced by no consideration other than the welfare of the corporation.

Breach of a known duty through some ill motive or  interest.

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Thoughtless disregard of consequences without exerting any effort to avoid them. Must establish clear and convincing evidence.

2)

Held to the extreme measure of candor, unselfishness and good faith. Thise principles are rigid, essential and salutary.

3)

Guilty of conflicts of interest to the prejudice of corporation and stakeholders

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Cannot serve himself first his cestuis second.

4)

4)

Not permitted to use their position of trust and confidence to further  their private interests.

When a director has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;

5)

There must be loyalty to other stakeholders like creditors.

LIABILITY GENERAL RULE: directors and officers are not solidarily liable with the corporation.

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Water stocks- issued for less than their par or issued value or in any other form other than cash value in excess of its fair value. Liable for the difference between the fair value received at the time of the issuance of the stock and the par or issued vale of the same.

 

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When the director, trustee, or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation.

6)

When a director, trustee or officer is made, by specific provisions of law, personally liable for his corporate actions.

D. In the case of an officer, there was previous authorization by the board of directors or trustees.

**may be ratified (as valid and effective) provided a vote of at least 2/3 of outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose.

Conditions must be present:

DUTIES OF OFFICERS -same with directors, they have duties of obedience and loyalty.

a.

There must be full disclosure of the adverse interest of the the directors/trustees involved is made at such meeting

b.

The contract is fair and reasonable under the circumstances

-the fiduciary duties of officers are subject to the general principles of agency. o

Agent act within the authority given to him by the board, by-laws or AOI

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Avoid conflict of interest situtions.

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Duty if diligence makes an officer liable for damages.

**contract is still voidable if the director did not disclose the disastrous consequences of the contract.

SEC 33  – CONTRACTS BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS

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Effect of interlocking relationship SEC 32 DEALINGS OF DIRECTORS, TRUSTEES OR OFFICERS o

Itself not prohibited under the corporation code unless prohibited by by-laws

WITH THE CORPORATION o

A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone.

SELF-DEALING   – those who personally contract with the corporation, in which they are directors, trustees or officers, o

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IT IS DISCOURAGED because they have fiduciary relationship with the

INTERLOCKING RELATIONSHIP   – when one (or some or all) of the directors in one corporation is (or are) a director in another corporation.

corporation and there can be no real bargaining where the same is acting on both sides of the trade.

EFFECT ON CONTRACTS:

GENERAL RULE: It is VOIDABLE EXCEPTIONS:

GR: VALID. Provided conditions are present: 

 A. The presence of such director/trustee in the board meeting approving the contract was not necessary for constituting a quorum for such meeting. 

B. The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract. C. The contract is fair and reasonable under the circumstances

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The presence of the interlocking director/trustee in a board meeting (corporation which interest is nominal) in which the contract was approved was not necessary to constitute a quorum for such meeting. That the vote of such director/trustee was not necessary for  the approval of the contract That the contract is fair and reasonable under the circumstances

 

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Indispensable requirement for the contract to be valid.

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Absence of 1 and 2   – – voidable

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consonant with its reasonable needs and aspirations for expansion, it may be properly said that the opportunity is in the line of the corporation’s business.

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SEC 34 - DISLOYALTY OF A DIRECTOR

MIXED TEST Apply any two or all the test. Whether the business opportunity is of sufficient importance and is so closely related to the existing or prospective activity of the corporation as to warrant judicial sanctions against it personal acquisition by a managing officer or director or director of the corporation.

– Directors should not give preference to their  DOCTRINE OF CORPORATE OPPORTUNITY  – own personal amelioration by taking the opportunity belonging to the corporation.

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Principle providing that directors, officers, and controlling shareholders of a corporation must not take for themselves any business opportunity that could benefit the corporation. The corporate opportunity doctrine is one application of the fiduciary duty of loyalty (source: Wikipedia) coverage: limited to directors, officers, and controlling shareholders. The doctrine applies regardless of whether the corporation is harmed by the transaction; indeed, it applies even if the corporation benefits from the transaction. The corporate opportunity doctrine only applies if the opportunity was not disclosed to the corporation. If the opportunity was disclosed to the board of directors and the board declined to take the opportunity for the corporation, the fiduciary may take the opportunity for him- or  herself. When the corporate opportunity doctrine applies, the corporation is entitled to all profits earned by the fiduciary from the transaction.

Sec 34 applies if: a. b. c.

Business opportunity is one which the corporation is financially able to undertake From its nature, is in line w with ith corporations business and is of practical advantage to it Is one which the corporation has an interest or a reasonable expectancy

Burden of proof: on the questions of good faith, fair dealing and loyalty of the offender to the corporations should rest upon the officer who appropriated the business opportunity for  his own advantage.  

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Reason: a fiduciary with a conflict of interest should be required to justify his actions and because of the practical reality that the facts with regard to such questions are more apt to be within his knowledge.

***a director who, acquires for himself business opportunity which should belong to the corporation must account to the latter for all such profits by refunding the same. The theory is that profits made and advantage gained by an agent belongs to the principal. ***RATIFICATION – ***RATIFICATION  – 2/3 votes of outstanding capital stock. ***property of business opportunity ceases to be a corporate opportunity and is transformed into personal opportunity where the corporation is definitely no longer able to avail itself of the opportunity. *notice must be given to the corporation that such opportunity exists and the corporation does not want to avail of the opportunity

TESTS 1.

2.

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 – precludes acquisition by corporate officers of  INTEREST OR EXPECTANCY TEST – the property of a business opportunity in which the corporation has a ―beachhead‖ in the sense of a legal or equitable interest or expectancy growing out of pre-existing right or relationship. More restrictive tests – an opportunity as corporate whenever a managing LINE OF BUSINESS TEST  – officer becomes involved in an activity intimately or closely associated with the existing or prospective activities of the corporation. Applied reasonably and sensibly to the facts and circumstances of the particular case. o When a corporation is engaged in a certain business, and an opportunity is presented to it embracing an activity as to which it has fundamental knowledge, practical experience and ability to pursue, which is adaptable to its business having regard for its financial position, and is one that is

*the director must inform the corporation that the loss oa certain business is imminent and the corporation must be given a reasonable chance to undertake the business.  ___________________ __________ 

SEC 35  – EXECUTIVE COMMITTEE – a corporate body ―with standing in law, although alt hough in a sense, it is an EXECUTIVE COMMITTEE  –  agent of the BOD because it performs what otherwise is vested by law in the BOD‖. It gives assistance to BOD in the performance of their functions.

Reason of the code for allowing the creation: the board may not readily face the contingency of confronting urgent matters which requires its attention.

 

 

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May be created only of a provision in the by-laws

Composition:

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not less than 3 members of the board. To be appointed by the board. o

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There can be members of the executive committee who are not directors provided that at least there members are directors. A foreigner can be a member in proportion to the foreign shareholdings in the corporation.

Authority:

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To the extent provided in the resolution of the board or in the by-laws. Actually performs certain duties of the board and in effect, it is acting as the board itself. The resolutions passed and approved by the executive committee are as o valid as the resolutions of the board provided the resolutions have been made at the time the committee is constituted. The board cannot delegate entire supervision and control of the corporation to an executive committee for this is contrary to the charter and the law that requires that the directors shall have general supervision and control of the corporation. Decisions are valid and unappealable. Resolutions may be repealed by subsequent board resolution unless what is involved is an accomplished fact or a contract that is binding on third persons.

– same sa directors Quorum  – – majority vote of committee members Required vote  –

When exec com not validly constituted - De facto officers