Lecture Notes: Board of Directors

Introduction

• Topic: Qualifications, disqualifications, and other matters concerning directors.
• Previous Discussion: Nature of the Board of Directors.
• Disclaimer: Educational purposes only; not a substitute for legal advice.

Becoming a Member of the Board

• Incorporation:
  • Names, nationalities, addresses of interim directors included in articles until first election.
  • Election held post-incorporation to select board members.
• Director Limit: Maximum of 15 directors.
• Requirements:
  • Must be a natural person.
  • Must own at least one share of capital stock with legal title.
  • Must maintain ownership of one share during term.
  • No immediate disqualification if not a stockholder at election, provided they acquire a share before assuming duties.
• Additional Qualifications:
  • Can be imposed by bylaws if not conflicting with law.
  • Case Reference: Gokong Wei v. SEC – corporations can declare employees of competitors as ineligible.
• No Citizenship or Residence Requirement.

Disqualifications

• Conviction by final judgment for an offense with imprisonment exceeding six years or certain violations.
• Found administratively liable for fraudulent acts.
• Liable under foreign court/authority for similar acts.
• Philippine Competition Commission or other agencies may impose additional qualifications/disqualifications.

Effects of Ineligibility

• Acts of ineligible directors may still bind corporations to third parties.
• Ineligible directors’ actions remain valid to avoid business disruption.

Election Process

• Founders Shares: Exclusive voting rights for limited period (max 5 years).
• Election Timing: Corporation sets date; annual election required due to one-year term.
• Holdover: Incumbent continues until successor elected and qualified.
• Nomination and Notice:
  • Stockholders nominate eligible candidates.
  • Notice procedure detailed in bylaws.
• Quorum:
  • Majority of capital stock or voting members must be present.
• Voting:
  • Methods: In person, proxy, remote communication (if authorized).
  • Election by ballot if requested.
• Vote Requirement: Plurality (not majority) of votes required.

Voting Methods in Stock Corporations

• Straight Voting: Number of shares x number of directors.
• Cumulative Voting for One Candidate: All shares for one candidate.
• Cumulative Voting by Distribution: Distribute votes among multiple candidates.
• Minority Representation: Cumulative voting protects minority interests.

Reportorial Requirements

• Reports to SEC within 30 days of election; includes director details.
• Report adjournment and reasons if no quorum.
• SEC may order election if unjustifiably not held.

Term and Holdover

• Term: One year for directors, three years for non-stock corporations.
• Holdover: Incumbent holds office until successor elected/qualified.
• Distinction:
  • Term: Fixed by law.
  • Tenure: Actual time in office, may exceed term during holdover.

Compensation of Directors

• Set in Bylaws: Maximum 10% of net income before tax.
• Per Diems: If no bylaw specification, directors receive reasonable per diems.
• Directors cannot self-determine compensation.
• Compensation approval requires stockholder majority.
• General Rule: No salary/compensation for usual duties.
• Reimbursement: For legitimate corporate expenses.

Conclusion

• Summary of director board election and responsibilities.
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