1. Duties and Liabilities of Directors 1.1 Duties In General
Duty Violation under §31
Obedience - Willfully and knowingly vote for or assent to patently unlawful acts of the corporation
Diligence - Guilty of gross negligence or bad faith in directing the affairs of the corporation Loyalty - Acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees
Extent of liability: Directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders, or members and other persons
Directors act as a body in formulating corp policies and exercise all powers of management. Hence, they are fiduciaries of the corp. It does not matter who elected them. Once elected, they must represent the interests of all SHs and of the corp as a whole.
Directors must act only within the corp powers. If not, they will be liable for damages, unless they acted in GF and with due diligence
1.2 Duty of diligence
What are required and expected of directors:
o To possess at least ordinary knowledge and skill to enable them to make sound business decision
o To attend directors meetings with reasonable regularity
o To exercise reasonable care in the management of the corporation
o To keep themselves sufficiently informed about the general condition of the business
The degree of care and diligence required is usually that which men prompted by self-interest, generally exercise in their own affairs. In determining whether reasonable diligence has been exercised, the particular circumstances of each case must be considered. The nature of the business is an important factor.
Business judgment rule
GEN RULE: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the corp. & courts will not interfere.
EXCEPTION: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the minority.
Board of Directors has authority to modify the proposed terms of the contracts of the corporation for the purpose of making the terms more acceptable to the other contracting parties…The test to be applied is whether the act in question is the direct and immediate furtherance of the corporation’s business, fairly incidental to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it;
otherwise not. [Montelibano v. Bacolod Murcia Milling Co. (1962)]
Steinberg vs. Velasco
Steinberg is the receiver of Sibugay Trading.
Velasco (Pres) and other directors, approved and authorized unlawful purchases of company’s stock from Ganzon et al. Accdg to Steinberg, this diverted funds supposed to be paid to creditors.
Ganzon et al resigned as directors before the BoD approved the purchase of stocks from them, worth 3,300. At that time, corp owed 13K. The corp also declared dividends in favor of SHs, to be paid in installments so as “not to affect financial condition of the corp.” A/R’s which appeared on books were worthless, because receiver could not collect them.
HELD: If directors dispose of corp prop or pay away its money without authority, they will be required to make good the loss out of their private estates.
Directors are not liable for loss to corp from want of knowledge, or for mistakes of judgment, provided they were honest and fairly within the scope of the powers and discretion confided to mgt.
But acceptance of office of director implies a competent knowledge of the duties assumed, and directors cannot excuse imprudence bec of their ignorance or inexperience. If they commit error of judgment through mere recklessness or want of ordinary prudence or skill, they may be held liable for consequences.
Creditors of corp have right to assume that so long as there are outstanding debts and liabilities, BoD will not use assets of corp to purchase its own stock, and that it will not declare dividends to SHs when corp is insolvent.
Directors held liable.
Stock purchases and dividends were funded out of remaining assets. But assets < liabilities.
Ganzon et al were favored bec they were able to get money ahead of creditors
Recipients of dividends can be held liable by receiver. Ratio: SHs are accessories. Remember, they were the ones who chose directors.
1.3 Duty of loyalty
The determination as to whether, in a given case, the duty of loyalty has been violated has ultimately to be decided by the court on the case’s own merits. The ff. are more common situations involving such conflict of interests:
a. Self-dealing director (§32)
A contract of the corporation with one or more of its directors or trustees is voidable, at the option of such corporation, unless all the following conditions are present:
o That 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;
o That the vote of such director or trustee was not necessary for the approval of the contract;
o That the contract is fair and
reasonable under the
circumstances; and
o That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two 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
Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting provided, however, that the contract is fair and reasonable under the circumstances
The contract is voidable whether the corporation suffered damages or not
The burden of proving fairness is on the director
b. Fixing compensation of directors and officers (§30)
General rule: Directors are only entitled to per diems, which are reasonable
Exception: When AOI, by-laws, or an advance contract provides for compensation
Assuming compensation is intended, only SHs can fix the amount. In fact, the SHs should approve the granting of compensation because this entails a reduction of the amount that could be distributed to them as dividends
SH’s resolution to grant compensation can only refer to future services (Barreto v La Previsora Filipina (1932))
Western Institute of Technology v. Salas (1997)
The position of being chairman and Vice-Chairman, like that of treasurer and secretary, are not considered directorship positions but officership positions that would entitle the occupants to compensation. Likewise, the limitation placed under Sect. 30 of the Corporation Code that directors cannot receive compensation exceeding 10% of the net income of the corporation would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not a board members.
Barreto v La Previsora Filipina (1932) Barreto, et al. are directors of La Previsora Filipina, a mutual building and loan assoc. By-laws provide compensation of 1% of profits to each director.
Compensation to apply retroactively.
Held: By-laws do not create a legal obl to pay life gratuity or pension out of its net profits => beyond powers of mutual bldg and loan assoc.
Corp Law authorizes compensation only for future services, and cannot authorize continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by them to the corp.
Building and loan associations are founded on strict mutuality and equality of benefits and obligations.
Any contract or by-law in contravention of a statute is ultra vires and void. There is an implied contract with members that it shall not divert funds or powers to purposes other than for which it was created. All members must participate equally in profits and bear losses. Any diversion of funds to unauthorized purposes violates principle of mutuality between members.
Also, there was no valid consideration bec the past services were rendered gratuitously.
c. Interlocking directors (§33)
A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone, except cases of fraud.
The contract is fair and reasonable under the circumstances.
If the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section (§32) insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.
Requisites of a valid contract between the corporation and one or more of its directors, trustees or officers (§32):
1. That 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. That the vote of such director or trustee was not necessary for the approval of the contract
3. That the contract is fair and
reasonable under the
circumstances
4. That in case of an officer, the contract with the officer has been previously authorized by the Board of Directors
d. Seizing corporate opportunity; Disloyalty (§34)
Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same (§34)
UNLESS his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock.
o Hence, a majority SH can actually compete with the corporation if he owns 2/3 of the OCS
o This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture.
o Requires prejudice. If there’s no prejudice to the corporation, the director or officer can still be held liable under §31.
o §34 covers only directors.
However, according to Campos, officers can be held liable under
§31 (2nd par.).—“When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a liability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.”
The last paragraph of Section 31 and Section 34 contain the doctrine of corporate opportunity. In case of such conflict of interests, and the director acts against the good of the corporation, he shall be accountable for the profits he obtained, even if he had risked his own funds.
Corporate right , opportunity or expectancy arises only when: (a) directors were negotiating on behalf of the corporation; (b) the corporation was in need of the particular business opportunity to the knowledge of the directors, or (c) the business opportunity was seized and developed at the expense and with the facilities of the corporation. (Litwin v Allen)
e. Using inside information (Cf §3.8, 23.2, 27, 61, 71.2, Securities Regulation Code)
The fiduciary position of insiders3, directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest.
The liability of a director or officer guilty of using inside information is to the corporation and not to any individual stockholder
Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information
It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation
General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with them at arm’s length. No duty to disclose facts known to the director or officer
Special facts doctrine (Strong v Repide, 1909) – Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances o facts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud.
2. Duties and Liabilities of Officers
The provisions on seizing corporate opportunity and disloyalty (§31¶1 and §34) shall also apply to corporate officers
Note: Members of the BOD who are also officers are held to a more stringent liability because they are in-charge of day-to-day activities (Campos).
3. Duty of controlling interest
A majority stockholder is subject to the duty of good faith when he acts by voting at a stockholders’ meeting with respect to a matter in which he has a personal interest
Controlling stockholders may dispose of their shares at any time and at such price as they choose provided they do not pervert these prerogatives by transferring office to persons who are known as intending to raid the corporate treasury or otherwise improperly benefit themselves.
3“Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders (§3.8, Sec Regulations Code)
It is fraudulent for a stockholder to buy from another stockholder without disclosing his identity
Principal stockholders are likewise prohibited from using inside information in the purchase and sale of equity security
4. Remedies of stockholder in case of mismanagement or abuse of powers
Receivership
Injunction if the act has not been done
Dissolution if the abuse amounts to a ground for quo warranto but the Solicitr General refuses to act
Derivative suit a complaint filed with the RTC
Uichico, et al. vs. NLRC (1997)
The petitioners, who are officers and directors of Crispa, Inc., assailed the decision of the NLRC holding them solidarily liable with Crispa for the payment of separation pay and backwages to the private respondents. It was the contention of the petitioners that the award of separation pay and backwages is a corporate obligation and must therefore be assumed by Crispa alone.
HELD: While the general rule is that obligations incurred by a corporation, acting through its directors, officers and employees, are its sole liabilities, there are times when solidary liabilities may be incurred such as in this case where it is undisputed that petitioners had a direct hand in the illegal dismissal of respondent employees. They were the ones, who as high-ranking officers and directors of Crispa, signed he Board resolution retrenching the private respondents on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited profit and loss statement which had no evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners for which they can be held jointly and severally liable with Crispa for all the money claims of the illegally terminated respondent employees.
Tramat Mercantile, Inc. vs. CA (1994) Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:
o He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
o He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
o He agrees to hold himself personally and soidarily liable with the corporation; or o He is made, by a specific provision of law,
to personally answer for his corporate action
Reiterated in Atrium Management Corp. v. CA, 2001
Chapter IX
THE RIGHT OF INSPECTION