Board of Directors or Trustees
The board of directors or trustees is the governing body of a corporation.
- Stock corporation – governed by board of directors
- Non-stock corporation – governed by board of trustees
The board of directors or trustees are the repositories of the power of a corporation. Take note that a corporation, as an artificial being, can only act through natural persons (directors or trustees).
Functions of directors/trustees
The board of directors or trustees shall perform the following duties (RCC Sec. 22):
- exercise corporate powers
- conduct all corporate business
- control and hold corporate properties
Directors and trustees are also expected to perform duties as prescribe by the by-laws of the corporation.
Threefold fiduciary duties of directors/trustees
Directors or trustees of a corporation have the duty to be:
- Diligent – directors must restrict their acts within the scope of the powers of the corporation
- Loyal – directors are obligated to perform their duties with the diligence of a good father of a family (directors are protected by the business judgment rule)
- Obedient – forbids director from acquiring business deals that belong to the corporation
Business judgment rule
What is business judgment rule?
A rule where courts will not interfere in the decisions made by the BOD as regards the internal affairs of the corporation. However there are exceptions such as when contracts are so unconscionable and oppressive as to amount to a wanton destruction of rights of the minority.
Term of Office
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 (principle of holdover).
Qualifications of Directors/Trustees
- Must be continuously the owner of at least one (1) share of stock while being a director. In the case of a non-stock corporation, generally must be a member (exception: independent director).
- Other qualifications provided in the by-laws.
Note: Total directors must not be more than fifteen (15). Total trustees may be more than fifteen (15).
In addition to the qualifications for membership in the Board provided for in the Corporation Code, Securities Regulation Code and other relevant laws, the Board may provide for additional qualifications which include, among others, the following:
- College education or equivalent academic degree;
- Practical understanding of the business of the corporation;
- Membership in good standing in relevant industry, business or professional organizations; and
- Previous business experience.
Disqualification of Directors/Trustees
The following shall be grounds for the permanent disqualification of a
director: (Revised Code of Corporate Governance)
- Any person convicted by final judgment or order by a competent judicial or administrative body of any crime that
- involves the purchase or sale of securities, as defined in the Securities Regulation Code;
- arises out of the person’s conduct as an underwriter, broker, dealer, investment adviser, principal, distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker;
- arises out of his fiduciary relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any of them;
- Any person who, by reason of misconduct, after hearing, is permanently enjoined by a final judgment or order of the Commission or any court or administrative body of competent jurisdiction from:
- acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker;
- acting as director or officer of a bank, quasi-bank, trust company, investment house, or investment company;
- engaging in or continuing any conduct or practice in any of the capacities mentioned in sub-paragraphs (a) and (b) above, or willfully violating the laws that govern securities and banking activities.
The disqualification shall also apply if such person is currently the subject of an order of the Commission or any court or administrative body denying, revoking or suspending any
registration, license or permit issued to him under the Corporation Code, Securities Regulation Code or any other law administered by the Commission or Bangko Sentral ng Pilipinas (BSP), or under any rule or regulation issued by the Commission or BSP, or has otherwise been restrained to engage in any activity involving securities and banking; or such person is currently the subject of an effective order of a self-regulatory organization suspending or expelling him from membership, participation or association with a member or participant of the organization;
- Any person convicted by final judgment or order by a court or competent administrative body of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false affirmation, perjury or other fraudulent acts;
- Any person who has been adjudged by final judgment or order of the Commission, court, or competent administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of any provision of the Corporation Code, Securities Regulation Code or any other law administered by the Commission or BSP, or any of its rule, regulation or order;
- Any person earlier elected as independent director who becomes an officer, employee or consultant of the same corporation;
- Any person judicially declared as insolvent;
- Any person found guilty by final judgment or order of a foreign court or equivalent financial regulatory authority of acts, violations or misconduct similar to any of the acts, violations or misconduct enumerated in sub-paragraphs (1) to (5) above;
- Conviction by final judgment of an offense punishable by imprisonment for more than six (6) years, or a violation of the Corporation Code committed within five (5) years prior to the date of his election or appointment. (Note: Under Revised Corporation Code, this is temporary)
The Board may provide for the temporary disqualification of a director
for any of the following reasons:
- Refusal to comply with the disclosure requirements of the Securities Regulation Code and its Implementing Rules and Regulations. The disqualification shall be in effect as long as the refusal persists.
- Absence in more than fifty (50) percent of all regular and special meetings of the Board during his incumbency, or any twelve (12) month period during the said incumbency, unless the absence is due to illness, death in the immediate family or serious accident. The disqualification shall apply for purposes of the succeeding election.
- Dismissal or termination for cause as director of any corporation covered by this Code. The disqualification shall be in effect until he has cleared himself from any involvement in the cause that gave rise to his dismissal or termination.
- If the beneficial equity ownership of an independent director in the corporation or its subsidiaries and affiliates exceeds two percent of its subscribed capital stock. The disqualification shall be lifted if the limit is later complied with.
- If any of the judgments or orders cited in the grounds for permanent disqualification has not yet become final.
A temporarily disqualified director shall, within sixty (60) business days from such disqualification, take the appropriate action to remedy or correct the disqualification. If he fails or refuses to do so for unjustified reasons, the disqualification shall become permanent.
An independent director is a person who apart from shareholdings and fees received from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director. (RCC Sec. 22)
Requirements regarding independent directors
- At least two (2) independent directors or such number of independent directors that constitutes twenty percent (20%) of the members of the Board, whichever is lesser. (Code of corporate governance)
- Corporations vested with public interest inclusions (RCC Sec. 22 a-c)
Corporations vested with public interest
The following are considered corporations vested with public interest:
- 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.
- Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-need, trust and insurance companies, and other financial intermediaries.
- 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.
Election of Directors or Trustees
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. (RCC Sec. 23)
Requisites before election of directors or trustees
- For elections to be effective, owners of the majority of the outstanding capital stock or the majority of members must be present:
- Representative (authorized by written proxy)
- Remote communication (in absentia), if authorized in the bylaws or by the majority of the directors
Voting in absentia in corporations vested with public interest may be done, notwithstanding the absence of a provision in the by-laws of such corporations.
- Elected at meeting called for the purpose
- The election must be by ballot if requested by any voting stockholder or member.
- No delinquent stock shall be voted
How directors/trustees are elected
The election of directors (stock corporation) is different from the election of trustees (non-stock corporation). This is because of the concept of shares of stock in stock corporations when non-stock corporations have none.
Election in stock corporation
The amount of vote a stockholder may cast equals the total number of stock he owns multiplied by the number of directors to be elected.
Amount of vote = Stocks owned X directors to be elected
Stockholder A owns 5,000 shares out of the 15,000 outstanding shares of XYZ Corp. The articles of incorporation provide for 7 directors.
In this example, A may cast 35,000 votes (5,000 shares X 7 directors).
Supposed nominees for directors are A, B, C, D, E, F, G, H, I, and J.
The 35,000 votes may be casted in the following ways:
- Straight vote – casting 5,000 votes each to any 7 nominees; or
- Cumulative vote – casting all 35,000 votes to himself (A) only; or distributed to more than one (1) nominee (e.g. 20,000 votes casted to A and 15,000 votes casted to B)
Sometimes, the minority needs representation in the board so they needed to determine the number of shares needed to elect a certain number of directors.
Stockholder A owns 1,000 shares out of the 15,000 outstanding shares of XYZ Corp. The articles of incorporation provide for 12 directors. Supposed A and other small stockholder needed to have at least 2 directors to represent them on the board, how many shares do they need?
To determine this, we need to use the formula:
X = [(OS * n)/(N+1)] + 1
X = number of shares needed to elect a certain number of directors
OS = outstanding shares entitled to vote
n = desired number of directors to be elected
N = total number of directors to be elected
X = [(15,000 * 2)/(12 + 1)] + 1
X = 2,309 shares
In this case, they need 2,309 shares in order to guarantee the victory of 2 directors that would represent them on the board.
Election in non-stock corporations
The election of trustees in non-stock corporations is much simpler. Each member may cast only one (1) vote multiplied by the number of trustees to be elected. Cumulative voting is not allowed unless provided in the articles of incorporation or bylaws.
Reports on election and cessation from office
The non-holding of elections and the reasons therefore 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 unjustified 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 orders 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.
Should a director, trustee or officer die, resign or in any manner cease 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.
Removal of Directors/Trustees
The following are the requisite for the removal of directors/trustees.
- Takes place at a regular or special meeting called for the purpose; If special meeting, must be called by the secretary:
- On the order of the president; or
- Written demand by stockholder holding at least majority of outstanding capital stock, or the majority of members
- Previous notice of intention to propose removal given to stockholders or members
- Vote of holders with at least 2/3 outstanding capital stock, or 2/3 of members
Cause of removal
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 of representation to which they may be entitled under section 23 of the revised corporation code.
Filling of Vacancies
Who shall fill the vacancies in the board?
If the remaining directors does not constitute a quorum, or if still constituting a quorum but the vacancy is cause by the following:
- removal by stockholders
- expiration of term
- increase in number of directors
the stockholders should fill the vacancies.
However, if the remaining still constitute a quorum and the cause of vacancy is not among the things mentioned above, the remaining directors may fill the vacancy.
ABC Corporation has 12 directors. 2 directors died. 2 directors have expired terms. 2 directors were removed by stockholders.
Since there were only 6 out of 12 directors remaining, they no longer constitute a quorum (a majority, in this case, must be at least 7). Therefore, the stockholders should fill up the vacancy.
Suppose only 1 director was removed by the stockholders resulting to remaining directors still constituting a quorum.
The 2 vacancies caused by the 2 directors who died may be filled up by the remaining directors. However, the 3 vacancies caused by the 2 expired terms and removal shall be filled up by the stockholders.
Compensation of Directors/Trustees
Directors/trustees, in their capacities as such, receive no compensation except for reasonable per diems if the bylaws is silent.
If, however, the bylaws provide compensation for directors/trustees, the amount should not exceed 10% of the preceding year’s net income before tax.
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.
The following are the officers of a corporation:
- President – must be a director
- Treasurer – may be a director or not but must be a resident of the Philippines
- Secretary – must be a resident and citizen of the Philippines
- Other officers as may be provided in the bylaws
Two (2) or more positions concurrently, except that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in this Code.
The directors will be the one electing officers. In electing officers, the required vote is generally the majority of the total directors.
Meaning, a corporation with 12, directors, 7 votes are needed to elect an officer.
If during the meeting for the election of officer, only 6 directors attended, the meeting would be of no effect since there is no quorum.
However, if 7 attended the meeting, all of them must vote for the officer to be elected since the majority of total directors is also 7.
Liabilities of Directors/Trustees/Officers
The directors or trustees or officers are not liable solidarily with the corporation by reason of their separate and distinct personalities.
The following are the exceptions:
- Both solidary liable with the corporation and liable personally
- Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation
- Gross negligence or bad faith in directing the affairs of the corporation
- Acquiring any personal or pecuniary Interest in conflict of duty
- Solidarily liable with the corporation
- Agreeing or stipulating in a contract to hold himself liable with the corporation
- By virtue of a specific provision of law
- Liable personally
- Acting without authority or in excess of authority or are motivated by ill-will, malice, or bad faith, which gives rise to consequent damages.
- Consenting to the issuance of Watered stocks, or, having knowledge thereof, failing to file objections with the secretary.
A contract between the following is VOIDABLE:
- Directors, trustee, officers or their spouses and relatives within the fourth civil degree of consanguinity; and
- Corporation where the said directors, trustee, or officers belong
There are, however, exceptions:
- 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;
- The vote of such director or trustee was not necessary for the approval of the contract;
- The contract is fair and reasonable under the circumstances;
- 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; and
- 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.
Interlocking directors are directors who are member of the board in multiple corporations.
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.
Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.
Dazai is a director and owns 40% of the outstanding capital stock of Agency Incorporated which is engaged in the trading of computers. Agency, Inc. purchased computer tables from Port Mafia Co. of which Dazai is also a director and owns 15% of its outstanding capital stock. The articles of incorporation of both corporations provide for 5 directors. In the approval of the contract for the said purchase, Dazai did not attend the meeting of the board of directors of Agency, Inc., while in the meeting of directors of Port Mafia Co., which was called for the same purpose, directors Dazai, Mori, Ozaki, and Nakahara were present with all of them voting for the approval of the contract. Assuming that there is no fraud and that the contract is fair and reasonable under the circumstances, the contract between Agency, Inc. and Port Mafia Co. is:
Dazai attending Port Mafia Co. board meeting will raise an issue regarding interlocking directorship. Since Dazai’s shareholding in Port Mafia is nominal while in Agency is substantial, the rule on self-dealing directors will apply.
Initially, the contract between the two corporations would be considered voidable. However, if the exceptions mentioned in the self-dealing rules we mentioned are all met, then the contract will be valid and considered ratified.
(Please refer to the exceptions on self-dealing directors/trustees/officers above)
Exception #1 is considered met because Dazai’s presence in the meeting is not required to constitute a quorum. 4 out of 5 attended the meeting including Dazai. If Dazai did not attend, there will still be a quorum (3 out of 5).
Exception #2 is considered met because Dazai’s vote is not required in order for the contract to be approved. 4 out of 4 voted for the contract affirmatively. If Dazai did not vote, there will still be 3 out of 4 voting for the contract.
Exception #3 is met because it was expressly mentioned in the example that the contract is fair and reasonable
Exception #4 is not applicable since this rule is only applicable to public corporations and there is no mention of Agency or Port Mafia being a public corporation.
Exception #5 is also not applicable since Dazai is a director not an officer.
The contract between Agency Incorporated and Port Mafia Co. is considered valid.
Executive and Other Committees
If the bylaws so provide, the board may create an executive committee composed of at least three (3) directors. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the bylaws or by majority vote of the board, except with respect to the:
- approval of any action for which shareholders’ approval is also required;
- filling of vacancies in the board;
- amendment or repeal of bylaws or the adoption of new bylaws;
- amendment or repeal of any resolution of the board which by its express terms is not amendable or repealable; and
- distribution of cash dividends to the shareholders.
The board of directors may create special committees of temporary or permanent nature and determine the members’ term, composition, compensation, powers, and responsibilities.
- The Audit Committee shall consist of at least three (3) directors, who shall preferably have accounting and finance backgrounds, one of whom shall be an independent director and another with audit experience. The chair of the Audit Committee should be an independent director. This committee is one of the major operating committees of a company’s board of directors that is in charge of overseeing financial reporting and disclosure.
- A Nomination Committee, which may be composed of at least three (3) members and one of whom should be an independent director, to review and evaluate the qualifications of all persons nominated to the Board and other appointments that require Board approval, and to assess the effectiveness of the Board’s processes and procedures in the election or replacement of directors.
- A Compensation or Remuneration Committee, which may be composed of at least three (3) members and one of whom should be an independent director, to establish a formal and transparent procedure for developing a policy on remuneration of directors and officers to ensure that their compensation is consistent with the corporation’s culture, strategy and the business environment in which it operates.
- Regular: Every month, unless the bylaws provide otherwise
- Special: Any time
Anywhere, even outside the Philippines.
Directors may attend in person or via remote communication but not via proxy.
Notice before meeting
2 days prior to scheduled meeting
Chairman of the Board, in his absence, the President