RECOMENDACIONES

Term of office of BOD/BOT

GR: The regular director shall hold office for 1 year. XPN: If no election is held, the directors and officers will continue to occupy position even after the lapse of 1 year under a hold-over capacity until their successors are elected and qualified.

NOTE: This is applicable to a going concern where there is

no break in the exercise of the duties of the officers and directors (SEC Opinion, Dec. 15, 1989).

Common qualifications of a director and trustee 1. Majority of the directors/trustees must be

residents of the Philippines (Sec. 23, CC).

2. He must not have been convicted by final judgment of an offense punishable by imprisonment for period exceeding 6 years or a violation of the Corporation Code, committed within 5 years prior to the date of his election

(Sec. 27, CC).

3. He must be of legal age

4. Other qualifications as may be prescribed in special laws or regulations or in the by-laws of the corporation

A director cannot be elected without owning any stock in the corporation

A person who does not own a stock at the time of his election or appointment does not disqualify him as director if he becomes a shareholder before assuming the duties of his office (SEC Opinions, Nov. 9, 1987 &

Apr. 5, 1990).

Q: Grace Christian High School is an educational institution at the Grace Village in Quezon City. Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village. A committee of the board of directors of the Association prepared a draft of an amendment to the by-laws. The draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, Grace Christian High School was given a permanent seat in the board of directors of the association. After some time, the association’s committee on election informed James Tan, principal of the school, that all directors should be elected by members of the association. For this reason, Tan was told that the proposal to make the Grace Christian High School representative as a permanent director of the association, although previously tolerated in the past elections should be reexamined. Grace Christian High School argues that it had acquired a vested right to a permanent seat in the board of directors. Did Grace Christian High School acquire vested right to a permanent seat in the board of directors?

A: No. The board of directors of corporations must be elected from among the stockholders or members. Section 28 of the Old Corporation Code provides that unless otherwise provided, the corporate powers of all corporations formed under this Act shall be exercised, all business conducted and all property of such corporations controlled and held by a board of not less than five nor more than eleven directors to be elected from among the holders of stock or, where there is no stock, from the members of the corporation. Section 29 also states that directors of the corporation shall be elected annually by the stockholders if it be a stock corporation or by the members if it be a nonstock corporation, and if no provision is made in the by-laws for the time of election the same shall be held on the first Tuesday after the first Monday in January. Moreover, the term of the board of directors or trustee is embodied in Section 23 stating that a member of the board of director should be elected from among the holders of stocks, or where there is no stock, from among the

193

one (1) year and until their successors are elected and qualified. Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity (Grace Christian High School v.

CA, et al., G.R. No. 108905, October 23, 1997).

Additional qualifications provided by the Revised Code of Corporate Governance

A director should have the following:

1. College education or equivalent academic degree 2. Practical understanding of the business of the

corporation

3. Membership in good standing in relevant industry, business or professional organizations 4. Previous business experience (Art. 3 [D], RCCG)

Grounds for disqualification of a director

1. Conviction by final judgment of an offense punishable by imprisonment exceeding 6 years; 2. Violation of the Corporation Code committed

within 5 years prior to his election or appointment (Sec. 27, CC).

NOTE: Disqualification by reason of violation of the

Corporation Code does not require conviction for the reason that the decision of the SEC is final and executory unless appealed in CA and a TRO is obtained.

Q: John Gokongwei Jr., as stockholder of San Miguel Corporation, filed with SEC a petition for declaration of nullity of amended by-laws against the majority of the members of the Board of Directors and San Miguel Corporation. Among others, it was claimed that prior to the questioned amendment, Gokongwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof, that as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors, and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. Is a provision on the by-law disqualifying a person for a position in the board of directors on the ground that he is engaged in a business which competes with that of the Corporation valid?

A: Yes. A corporation is authorized to prescribe the qualifications of its directors. A provision in the by-laws of the corporation that no person shall qualify or be eligible for nomination for elections to the board of directors if he is engaged in any business which compete with that of the Corporation is valid; provided, however, that before such nominee is disqualified, he should be given due process to show that he is not covered by the disqualification. A director stands in fiduciary relation to the corporation and its stockholders. The disqualification of a competitor from being elected to the board of directors is a reasonable exercise of corporate authority. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty to loyalty may well require that he discloses this information to a competitive rival (John Gokongwei, Jr. v. SEC, et al.,

G.R. No. L-45911, April 11, 1979).

Foreigners are not disqualified from being elected/ appointed as members of the BOD

While foreigners are disqualified from being elected/ appointed as corporate officers in wholly or partially nationalized business activities, they are allowed representation in the BOD or governing body of said entities in proportion to their shareholding

(Anti-Dummy Law, Sec. 2-A; Constitution, Sec. 11, Art. XII).

Reason: The BOD/ governing body performs specific duties

as a “body”. Unlike corporate officers, each member of the BOD/ governing body has no individual power or authority to perform management functions (De Leon, supra, pg.

319).

ELECTIONS

Requirements for the election of directors in a stock corporation

1. Stockholders, representing a majority of the outstanding capital stock of the corporation must be present, either in person or by a representative authorized to act by written proxy,

2. The election must be by ballot, if requested by any voting stockholder or member.

3. The total number of votes cast by him must not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: 4. No delinquent stock shall vote or be voted for.

Limitations on the election of directors/ trustees 1. At a meeting of stockholders or members called

for the election of directors or trustees, there must be present either in person or by representative authorized to act by written proxy, the owners of the majority of the outstanding capital stock or majority of the members entitled to vote.

2. The election must be by ballot if requested; 3. A stockholder cannot be deprived in the articles

of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors;

4. No delinquent stock shall be voted;

5. The candidates receiving the highest number of votes shall be declared elected (Sec. 24, CC).

Permanent representation is not allowed in the BOD The board of directors of corporations must be elected from among the stockholders or members directors every year. Estoppel does not set in to legitimize what is wrongful (Grace Christian High

School v. CA, G.R. No. 108905, Oct. 23, 1997).

Jurisdiction over election contests in stock and non-stock corporations

As amended by R.A. 8799 (The Securities Regulation Code), the jurisdiction of the SEC under Sec. 5 P.D. No. 902‐A (SEC Reorganization Act) is now transferred to Courts of General Jurisdiction (Regional Trial Court). Thus, RTC now has jurisdiction over election contest.

Q: In case where there are 2 lists of BOD submitted to SEC, which one is controlling?

A: It is the list of directors in the latest general information sheet as filed with the SEC which is controlling (Premium Marble Resources, Inc. v. CA,

G.R. No. 96551, Nov. 4, 1996).

CUMULATIVE VOTING/ STRAIGHT VOTING