VII.

BOARD OF DIRECTORS AND TRUSTEES

1.Repository of Corporate Powers (Sec. 23, RCC)

-COLEGIO MEDICO-FARMACEUTICO DE FILIPINAS, INC., PETITIONER, V. LILY LIM AND ALL PERSONS
CLAIMING UNDER HER, RESPONDENT, GR 212034, July 02, 2018

2. Tenure, qualifications and disqualifications of directors (Sec. 22, RCC)

TENURE/TERM
a.) Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the
corporation's book
b.) Trustees shall be elected for a term not exceeding three (3) years

QUALIFICATIONS FOR DIRECTORS

1. For stock corporation, ownership of at least 1 share of the capital stock of the corporation in his own
name.
2. For a non-stock corporation, only members of the corporation can be elected.
3. The director or trustee must be capacitated.
4. The director or trustee must be of legal age.
5. Must not possess any of the disqualifications

Note: Majority of the directors must be residents of the Philippines. Majority, not all. There is no
citizenship requirement, except for nationalized industries. Even foreigners can be voted as directors.

DISQUALIFICATIONS OF DIRECTORS

Section 26. Disqualification of Directors, Trustees or Officers. - A person shall be disqualified from being a
director, trustee or officer of any corporation if, within five (5) years prior to the election or appointment
as such, the person was:

(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as "The Securities Regulation Code";
(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to
those enumerated in paragraphs (a) and (b) above.

*Republic Act 8799, otherwise known as The Securities Regulation Code, was enacted is a landmark
legislation seeking the achievement of a free market that is self-regulating.

*Fraudulent Act means any action that is determined to be fraudulent, or involve other willful or
intentional misconduct, or involve a breach of the duty of loyalty to the Company or its stockholders, or an
action or omission not in good faith or which involves intentional misconduct
3.Corporations vested with public interest (Sec. 22, RCC)

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,
 Corporations 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.

4.Independent directors (Sec. 22, RCC)

-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.

- They are persons believed to be of independent mind. No relationship at all with the corporation except
for some token shareholdings.

Note: Independent directors must be elected by the shareholders present or entitled to vote in absentia
during the election of directors.

Note: 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.

Note: Independent Directors shall make up at least 20% of the board such that when there are 10
members of the BOD, it requires at least two independent directors.

5. Election (Sec. 23, RCC)

HOW ELECTIONS ARE CONDUCTED

*Normally, how do we replace officers?

A: Through an election.

*Who calls the meeting?

A:
(1) It is called by the secretary
a. On the order of the President
b. By a written demand of the stockholders representing at least a majority of the outstanding
capital stock, or a majority of the members entitled to vote

(2) Called by any stockholder or member of the corporation signing the demand by directly addressing
the stockholders or members – if there is no secretary, or the secretary despite demand, refuses or fails to
call the meeting

*When are the elections held?

A: Elections must be held once every year. The Code does not provide when the first election of directors
or trustees shall be held. It authorizes the corporation to provide in the by-laws the time for the holding of
the annual election of directors or trustees.

*Who can elect?

A: Majority of the stockholders

Rule: 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. When so authorized in the
bylaws or by a majority of the board of directors, the stockholders or members may also vote through
remote communication or in absentia.

Shareholders or members must be present either:

(a) In person;
(b) Through a representative authorized to act by written proxy;
(c) Remote communication or
(d) In absentia

*What happens if only a few stockholders appear and there is no quorum?

A: A meeting cannot be validly held because as we said a quorum refers to the number of people required
to validly hold a meeting. To constitute a valid meeting, the majority of the stockholders must be present.

*What happens if the stockholders present for the holding of such election are/is less than the majority?
What happens?
A: In this case, plurality vote sets in, which means that the nominee receiving the highest number of votes
shall be declared elected, even if the majority requirement was not reached.

SUMMARY OF ELECTION

(1) The election must be by ballot if requested by any voting stockholder. Hence, voting by viva voces or
roll call (raising hands) is valid except when there is a request that it be by ballot.

(2) Stockholders shall have the right to vote the number of shares of stock standing in their own names (1
share = 1 vote) as long as 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.

METHODS OF VOTING

a. Straight voting
Vote such number of shares for as many persons as there are directors to be elected.

*Example. A owns 100 shares. If there are 5 directors to be elected, A is entitled to 500 votes multiplying
100 by 5. He may give to the 5 candidates 100 votes each.

b. Cumulative voting (for 1 candidate)

Cumulate said shares and give 1 candidate as many votes as the number of directors to be elected
multiplied by the number of shares owned.

The privilege of cumulative voting is permitted for the purpose of giving minority stockholders
representation in the BOD. Stockholders shall have the right to vote the number of shares of stock standing
in their own names.

A director elected because of the vote of the minority stockholders who untied in cumulative voting cannot
be removed without cause.

*What is the purpose of cumulative voting?

A: The intention of such mode of voting is to protect the interest of the minority shareholder and ensure
that the minority has representation in the Board of Directors.

c. Cumulative voting by distribution

Distribute them on the same principle as many candidates as may be seen fit.

Note: Comparison with non-stock corporations: Members may cast as many votes as there are trustees to
be elected, but may not cast more than 1 vote for 1 candidate, unless otherwise provided in the AOI or in
the by-laws. They cannot cumulate.

(3) No delinquent stock shall be voted.

Delinquent stocks – declared by the Board as delinquent because of their subscribers’ failure to pay the
balance after the same was due or after the Board called for payment

(4) Nominees for directors or trustees receiving the highest number of votes shall be declared elected.

(5) If no election is held, or the owners of the majority of the OCS or majority of the members entitled to
vote are not present in person, by proxy or through remote communication or not voting in absentia at the
meeting, such meeting may be adjourned, and the corporation shall follow the procedures laid out in
Sec.25.

6. Removal (Sec. 27, RCC)

POWER TO REMOVE DIRECTORS OR TRUSTEES

The power to remove directors or trustees belongs to the stockholders or members exclusively.
However, the Securities and Exchange Commission shall, motu proprio 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.

General Rule: Removal of directors or trustees may be with or without cause.

Exception: Removal without cause may not be used to deprive minority stockholders or members of the
right of representation to which they may be entitled under Section 23 of this Code.

REQUISITES FOR REMOVAL

1. The removal should take place at a regular or special meeting duly called for the purpose;
2. The director or trustee can only be removed by a vote of the stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of the members entitled to vote in case of non-stock corporations;
3. There must be a previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting; and
4. The special meeting of the stockholders or members of a corporation for the purpose of removal must
be called by the secretary on order of the president or on the written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock or a majority of the members
entitled to vote.

7. Filing of vacancies (Sec. 28, RCC)

Cause of Vacancies: DARI-DREI

(1) Death
(2) Abandonment
(3) Resignation
(4) Incapacity
(5) Disqualification
(6) Removal
(7) Expiration of Term
(8) Increase in the number of Directors/Trustees

RULES IN FILLING UP VACANCIES

(A) For Removal
-Filled up by the stockholders or members in a regular or special meeting called for that purpose
-When – same day of the meeting authorizing the removal

(B) For Expiration of Term

-Filled up by the stockholders or members in a regular or special meeting called for that purpose
-When – not later than the day of such expiration at a meeting called for that purpose either
through a special or regular meeting

(C) For Increase in the Number of Directors or Trustees

-Filled up by the stockholders or members in a
(a) regular or special meeting called for that purpose or in the same meeting
(b) When – in the same meeting authorizing the increase of directors or trustees if so stated in the
notice of the meeting

(D) For other causes (DARID; death, abandonment, resignation, incapacity, disqualification)
-Filled up by at least the majority of the remaining directors or trustees if still constituting a quorum
– existing board will fill the vacancy
-When – not later than 45 days from the time the vacancy arose

8. Compensation of directors (Sec. 29, RCC)

GEN: The directors or trustees shall not receive any compensation in their capacity as such.

XPN:
(1) Reasonable per diems
(2) As stipulated in their by-laws fixing their compensation
(3) Voted upon by the stockholders representing the majority of the outstanding capital stocks

XPN to XPN: A vote of at least of the majority of the outstanding capital stock or majority of the members
entitled to vote grants the directors compensation in a meeting specifically called for that purpose.

*If they are given compensation, is there a limit?

A: Yes. They should not receive more than 10% of the net income before tax of the preceding year.

*Why are they not paid?

A: Being shareholders, they also receive a share in the dividends.

LIMITATION ON COMPENSATION
In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income
before income tax of the corporation during the preceding year.

Note: Directors or trustees shall not participate in the determination of their own per diems or
compensation.

Note: 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.

9. Disloyalty

a.Business Judgment Rule

Meaning: the board of directors of a corporation is given the freedom to conduct business and is protected
from the courts digging into their business deals or decisions due to unfair or unwarranted allegations.

Under the business judgement rule, a court will not prosecute a director for his or her decisions if it can be
shown that they were made:
- Rationally
- In good faith
 - With the understanding that they were acting in a way that was good for the business

Note:
Directors who assented to the patently unlawful act cannot be liable if such act is drawn from a justifiable
reason such as the business judgment rule.

What is important is that after weighing the pros and cons, the benefit of the corporation outweighs the
negative, as a BOD, opt for what is more beneficial to the corporation, in this case the patently unlawful
act. In short, the Business Judgment Rule prevails.

Based on the BJR, the acts of the BOD bind the corporation. As such, it cannot be questioned or reviewed
by the stockholders or the courts.

Insofar as the BOD exercises their powers under the BJR, the contract is valid but due to gross negligence
they can be held liable.

b.Solidary Liability for Damages (Sec. 30, RCC)

LIABILITY OF DIRECTORS
The directors/trustees are liable to the corporation for the commission of the following:

(1) Knowingly and willfully vote or assent to patently unlawful acts

(2) Guilty of gross negligence or bad faith
(3) Acquire any personal or pecuniary interest in conflict of duty in conducting the affairs of the
corporation

NATURE OF LIABILITY
As such, directors or trustees shall be liable solidarily for all damages suffered by the corporation, the
stockholders, or members and other persons.

In the case of acquiring conflict of interest – the director, trustee or officer shall be liable as a trustee for
the corporation and must account for the profits which otherwise would have accrued to the corporation.

REQUISITES:
Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur:

1. The complainant must allege in the complaint that the director or officer assented to patently unlawful
acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and
2. The complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.