Understanding Board of Directors Qualifications

Hi guys, welcome to another episode of Attorney Ja Vlogger, Law for the Everyday Layman. Today we continue with the discussion on the Board of Directors and we'll be talking about the qualifications, disqualifications, and other matters concerning the directors, okay? So if you like my videos and you want to see more, please hit the subscribe button. Also, please remember that this is only for educational purposes and is not a substitute for proper legal advice or for studying and understanding. the law. A like on this video or any of my other videos would also be greatly appreciated. Okay, so in the previous episode, we discussed the nature of the board of directors. But how does one, how does a person become a member of the board? Okay, if you remember, when a corporation is incorporated, the incorporators should include the names, nationalities, and residential addresses. of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified. Those persons, they shall be the interim directors who will act for the corporation until the actual directors will be elected and qualified. After incorporation, there must be an election which should be held to select the members of the board. Remember that the directors, whether interim or actually elected, should not be more than 15 in number. So for a person to be a director, he must be a natural person, not a juridical person. He must be a natural person. And they must own at least one share of capital stock. Specifically, they must have legal title and not mere beneficial ownership. In other words... the stock must be registered in his name in the books of the corporation so if a person holds holds stock merely as a pledgy he is not qualified to be a director because he holds the stocks only as security and not as an owner okay so he has to have legal title also he must continue to own that one share at least one share during his term otherwise if he loses that one share no he shall automatically cease to be a director. He's no longer a director. Okay, he's disqualified. But if a person is elected at a time when he does not own stock, he's not yet disqualified right away. If he becomes a stockholder or he acquires at least one share of stock before he assumes the duties of office. The reason for the requirement of owning stock. is that a man or a person with a financial interest at stake will devote more attention to the business. Now, other qualifications may be imposed in the bylaws as long as it is not in conflict with the law. And take note of the Gokong Wei v. SEC case, where the Supreme Court said that corporations have the power to make bylaws declaring a person employed by a competitor to be ineligible for the board. Why? Because he cannot serve both. He will have conflicting interests. And to be a member of the board, take note that there is no citizenship requirement and there is no more residence requirement under the current law. Okay? So no citizenship requirement, no residence requirement. Okay? Now, a person shall be disqualified from being a director if within five years before the election or appointment as such, The person was, first, convicted by final judgment of an offense punishable by imprisonment for a period exceeding six years, or for violating the revised corporation code, or for violating the securities regulation code. A person will also be disqualified if he is found to be administratively liable for any offense involving fraudulent acts. And finally, By a foreign court, if he's found to be liable under the first two by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct similar to those I just mentioned. Take note also that the Philippine Competition Commission or other regulatory agency of the corporation, they may also provide for certain qualifications or disqualifications of. a person running to be a member of the board okay now if a person is voted as director but he either does not have the qualifications or he's actually disqualified He cannot be a director. Take note that just because he was ineligible does not mean that his acts will be invalidated, ha? His acts may still produce effects and bind the corporations. Why? Because third person... or strangers who deal with the corporation, they're not required to ascertain whether directors or officers have the qualifications prescribed or possess none of the disqualifications. If you're dealing with a corporation, you do not have to ask, hey, are you qualified? Hey, do you have any disqualification? No. So a corporation may still be bound even if the director was disqualified or did not possess the qualifications. Because to subscribe to the counter review would be to unduly hamper business. Okay, therefore acts of a director or other officers are valid as far as third persons or strangers. are concerned okay now let's go to uh election how does a person be elected as a member of the board no or as a director first let's review if you remember uh previously in my previous episodes no if there are founders chairs where the exclusive right to vote and be voted for in the election of directors is granted then that must be followed in case of election okay it It is not sure if the founder will win, but he has the right to be nominated if the right to be voted for is granted to him in that share. Just take note that the exclusive right to vote and be voted for is just for a limited period, not to exceed five years from the date of incorporation in case of founder's shares. So that's the first consideration in election. After the exclusive rights granted in the founder's shares expires, then we can have the regular election. election of the board okay the law does not require a specific date for the election it gives the corporation the freedom to set it in the articles or the bylaws but take note that the law also says that the term of a director is one year so substantially the election must take place annually or every year no and in case no election is held no problem because there is what is known as a hold over okay meaning the incumbent director continues to hold office until his successor is elected and qualified we'll talk about that more in a bit okay the law says that 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 and we talked about the qualifications earlier so nomination first okay then notice will be given of the time of the holding of the election, the procedure, and other requirements, and the manner of giving of notice should be provided for in the bylaws. Generally, it should be by written notice, but the law also allows it to be sent by email or other modes which the SEC or the Securities and Exchange Commission may allow. Now, during election proper, there must be present either in person. or through a representative authorized to act by written proxy. There must be present the owners of majority of the outstanding capital stock. Or if there is no capital stock, a majority of the members entitled to vote. The requirement is majority must be present. So that's the quorum requirement. So there must be a quorum, meaning the majority of all the outstanding capital. capital stock or all the members that will constitute the quorum so there must be a quorum for the election to validly proceed now when so authorized in the bylaws or by majority of the board of directors the stockholders or members may also vote through remote communication or even in absencia okay or if they are absent no and in that case they shall be deemed present for purposes of quorum so stockholders have three ways to vote okay personally by attending the meeting through a proxy okay or through remote communication or in absentia now that's only allowed when it is authorized by the bylaws or by majority of directors or in case of corporations vested with public interest even without a provision in the bylaws now the election itself must be by ballot if requested you it should be by ballot if requested by any voting stockholder or member. But if there is no request, then you can have the other modes of voting like Viva Voce voting, meaning by voice, yes and nays, or even roll call voting. Those are valid. The nominees or candidates for directors or trustees receiving the highest number of votes shall be declared elected. Take note, okay, that the law only requires plurality. majority of the votes cast at election meaning that a candidate does not have to get majority or more than 50 percent of all the votes he just needs to get more votes than the other candidates okay he does not have to get 50 plus one of everyone voting he just has to get more votes than the others okay now let's go to the method of voting in stock corporations stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own name in the stock books of the corporation at the time fixed in the bylaws or in case the bylaws are silent then at the time of the election so the stockholder may first he may vote such number of shares for as many persons as there are directors to be elected no and this is known as straight voting okay the stockholder may also accumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of shares owned this is known as cumulative voting for one candidate okay or the stockholder may distribute them on the same principle okay among as many candidates as as may be seen fit meaning a stockholder can accumulate can accumulate his shares no by multiplying the number of his shares by the number of directors to be elected and then he will distribute it to as many candidates as he wants. And that's known as cumulative voting by distribution. Take note that the total number of votes cast shall not exceed the number of shares owned by stockholders as shown in the books of the corporation. multiplied by the whole number of directors to be elected. And take note further that no delinquent stock shall be voted. Okay? So how does this work? It seems very abstract when I just say it like that. Okay? De Leon gives us good examples. So first, let's talk about straight voting. Let's say A. A has 100 shares and there are 5 directors to be elected. So again, we just follow the law. You multiply his shares by the number of directors. He has 100 shares. He has 100 shares. There are 5 directors. So, that gives us 500. He can give... A can now give 100 votes to each of the 5 directors. That's straight voting, no? Okay? In cumulative voting for one candidate, in the same example, A can give all 500 votes to just one candidate, no? He just wants this. then he can give all his 500 votes to that one candidate. But let's say, out of a total of 500 shares, A and B own 400, okay? A and B own 400, and C, D, E, and F own only 100 shares, okay? So if there are five directors to be elected, A and B have 2,000 votes. Why? Again, you multiply 400 by... the number of shares, 400 shares by the number of directors to get 2,000 votes. While C, D, and E who only own 100 shares have 500 votes. You multiply their 100 shares by the number of directors to be elected to get 500 votes. So if A and B spread their votes equally to four candidates, they spread it equally by four candidates, then each candidate gets... 500 each. 2,000 divided by 4 is 500 each. Now, if C, D, E, and F vote individually, there is no assurance that the candidate that they want will win. Why? Because individually, the votes that they have are very little. They only have 100 amongst themselves. And you'll divide that 100 pa amongst them, and they will only have very little votes. But, If they accumulate their votes, pag sama-sama nila, they have 100, no? Then they might have a fighting chance. They can give their 500 votes to just one candidate to make sure that they and their interests are represented in the board. They are the minority stockholders. Why minority? Because they only have 100 shares. So if they want to be represented, they should team up and use all their votes and give it to one candidate. That's the purpose of accumulating votes. This allows minority shareholders. a bigger chance to be represented by the board. And take note under Section 27, a director who is elected because of the vote of the minority stockholders cannot be removed without cause. This protects the right of the minority stockholders to be represented in the board. Now, in cumulative voting by distribution with the same... example, A may distribute his 500 votes to candidates, not different candidates. He can give 100 to W, 150 to X, and 250 to Y. That's 500, no? Or any other combination he wants, as long as the total number of votes that he casts does not exceed the number of shares he owns multiplied by the number of directors to be elected, which again... is 500 okay again he has 100 shares multiply that by the number of directors to be elected so he has 500 votes he can distribute the votes in any way he wants okay so uh that's it for the methods of voting okay what if the minority stockholders want to determine if they can elect three out of 11 directors in a corporation with 20 000 outstanding shares shares. First, we multiply the total shares of 20,000 by the number of directors that the minority wants to elect which is 3 to get 60,000. Then we add the total number of directors which is 11 and we add 1 to get 12. Then we get the 60,000 earlier and divide it by 12 to get 5,000 and we add 1. okay to get 5001 finally to get the number of directors required to elect the desired number of directors we multiply the number of shares necessary to elect the desired number of directors which is 5001 we multiply that by the total number of directors to be elected which is 11. okay so 5001 times 11. because remember you multiply the number of votes by the number of directors so we get fifty five fifty five thousand uh eleven total which may be distributed equally among the three candidates for 18,337 votes each. So that's election for a stock corporation. For a non-stock corporation, members may cast as many votes as there are trustees to be voted for but they may not cast more than one vote per candidate. Okay, now reportorial requirements within 30 days from election, the secretary or any other officer of the corporation shall submit to the SEC the names, nationalities, shareholdings, and residential addresses of the persons who were elected as directors. A report must be submitted. But if no election is held or the owners of the majority of the outstanding capital stock or majority of the members entitled to vote are not present sent in person by proxy or through remote communication or not voting in absentia, then such meeting may be adjourned. Why? Because there's no quorum, no? So if there's no quorum, adjourned. And in case of adjournment, the corporation has to give a report to the SEC containing the reasons why the election was not held. Okay? That report must be given within 30 days from the date of the scheduled election and it should also specify the date for the new election which should not be later than 60 days from the scheduled date if no new date has been designated or if the rescheduled election is likewise not held okay then the sec may upon the application of a stockholder member director or trustee okay and after verification of the unjustifiable non-holding of the election the sec may Samarili order. that an election be held. Another report that must be submitted is when a director, trustee, or officer dies, resigns, or in any manner ceases to hold office. The secretary or the director, trustee, or officer of the corporation will also file a report with the SEC within seven days from knowledge thereof. So now let's talk about term and holdover. If a person is elected as director and he is qualified and he does not have any disqualification, his term is one year. In case of non-stop corporations, the term would be three years. Now what if the one year term or the three year term has expired but the replacement of that person has not yet been elected or has not yet qualified? This is where the holdover prints. principle comes in okay holdover principle see the case of valverde versus africa okay so first we have to distinguish between a term and a tenure the term is the time during which a person may claim to hold office as a matter of right and is not affected by the holdover term on the term is fixed by law okay one year or three years and that does not change simply because the office may have become vacant or because the incumbent holds the office beyond the term due to a successor not having been elected or qualified okay that's term but tenure represents the actual time during which the incumbent actually holds office so tenure may be shorter or in case of holdover it may be longer than the actual term okay so the term in tenure is different now section 22 says that each director shall hold office until his successor is elected and qualified that is the hold over he's holding over no until his successor is elected and qualified that hold over does not affect the one-year term which remains to be one year because it's set by law no the tenure does not affect the term okay when the one-year period has ended if the person still continues to hold the office because there is no successor yet the period of holdover is not part of the original term it's not a new term but it is part of his tenure okay that's why the term and tenure are different holdover implies that the fixed term of one year has expired and the person holding the office holds it until there is a successor who is who has been elected and is qualified now that person holding that office you for the tenure the extended tenure during hold over hold over he is not extending his term his tenure is just long but his term was still one year since his term has expired that is not a vacancy which can be filled by the board but by the stockholders okay and that's the point okay and we'll talk about filling of vacancies later okay and finally the final topic i want to talk about today before we uh break off for the next episode would be compensation of directors now what do the directors get in return for their service no the law allows compensation of directors to be set in the bylaws okay and take note that the total yearly of directors must not exceed 10 percent of the net income before income tax of the corporation during the preceding year okay if the bylaws do not set the compensation then directors are only entitled to receive reasonable per diems okay which is an amount equivalent to a daily allowance not to cover living expenses they're not supposed to get the rich off of this no the directors cannot pass a resolution granting compensation to themselves okay because the law says that directors or trustees shall not participate in the determination of their own per diems or call or compensation. It is only the stockholders representing at least a majority of the outstanding capital stock or majority of the members. Only they can grant the directors or trustees compensation and approve the amount thereof at a regular or special meeting. So as a general rule, when directors perform nothing more than the usual and ordinary duties of their office, they are not entitled to... salary or other compensation general rule okay why because their return on their shares of stock serves as the motivation for them to do a good job if they do a good job then they will be rewarded properly through the whatever they receive by virtue of the shares that they own so directors are only entitled to be reimbursed for legitimate expenses incurred on behalf of the corporation okay so So that's it for this part of the discussion on Board of Directors. Okay, I hope you may have picked up a thing or two. And I hope to see you next episode. See you soon, guys. Bye.

Also, please remember that this is only for educational purposes and is not a substitute for proper legal advice or for studying and understanding. the law. A like on this video or any of my other videos would also be greatly appreciated. Okay, so in the previous episode, we discussed the nature of the board of directors.

But how does one, how does a person become a member of the board? Okay, if you remember, when a corporation is incorporated, the incorporators should include the names, nationalities, and residential addresses. of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified.

Those persons, they shall be the interim directors who will act for the corporation until the actual directors will be elected and qualified. After incorporation, there must be an election which should be held to select the members of the board. Remember that the directors, whether interim or actually elected, should not be more than 15 in number.

So for a person to be a director, he must be a natural person, not a juridical person. He must be a natural person. And they must own at least one share of capital stock. Specifically, they must have legal title and not mere beneficial ownership. In other words...

the stock must be registered in his name in the books of the corporation so if a person holds holds stock merely as a pledgy he is not qualified to be a director because he holds the stocks only as security and not as an owner okay so he has to have legal title also he must continue to own that one share at least one share during his term otherwise if he loses that one share no he shall automatically cease to be a director. He's no longer a director. Okay, he's disqualified. But if a person is elected at a time when he does not own stock, he's not yet disqualified right away.

If he becomes a stockholder or he acquires at least one share of stock before he assumes the duties of office. The reason for the requirement of owning stock. is that a man or a person with a financial interest at stake will devote more attention to the business.

Now, other qualifications may be imposed in the bylaws as long as it is not in conflict with the law. And take note of the Gokong Wei v. SEC case, where the Supreme Court said that corporations have the power to make bylaws declaring a person employed by a competitor to be ineligible for the board. Why?

Because he cannot serve both. He will have conflicting interests. And to be a member of the board, take note that there is no citizenship requirement and there is no more residence requirement under the current law. Okay? So no citizenship requirement, no residence requirement.

Okay? Now, a person shall be disqualified from being a director if within five years before the election or appointment as such, The person was, first, convicted by final judgment of an offense punishable by imprisonment for a period exceeding six years, or for violating the revised corporation code, or for violating the securities regulation code. A person will also be disqualified if he is found to be administratively liable for any offense involving fraudulent acts. And finally, By a foreign court, if he's found to be liable under the first two by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct similar to those I just mentioned. Take note also that the Philippine Competition Commission or other regulatory agency of the corporation, they may also provide for certain qualifications or disqualifications of.

a person running to be a member of the board okay now if a person is voted as director but he either does not have the qualifications or he's actually disqualified He cannot be a director. Take note that just because he was ineligible does not mean that his acts will be invalidated, ha? His acts may still produce effects and bind the corporations.

Why? Because third person... or strangers who deal with the corporation, they're not required to ascertain whether directors or officers have the qualifications prescribed or possess none of the disqualifications.

If you're dealing with a corporation, you do not have to ask, hey, are you qualified? Hey, do you have any disqualification? No. So a corporation may still be bound even if the director was disqualified or did not possess the qualifications.

Because to subscribe to the counter review would be to unduly hamper business. Okay, therefore acts of a director or other officers are valid as far as third persons or strangers. are concerned okay now let's go to uh election how does a person be elected as a member of the board no or as a director first let's review if you remember uh previously in my previous episodes no if there are founders chairs where the exclusive right to vote and be voted for in the election of directors is granted then that must be followed in case of election okay it It is not sure if the founder will win, but he has the right to be nominated if the right to be voted for is granted to him in that share.

Just take note that the exclusive right to vote and be voted for is just for a limited period, not to exceed five years from the date of incorporation in case of founder's shares. So that's the first consideration in election. After the exclusive rights granted in the founder's shares expires, then we can have the regular election.

election of the board okay the law does not require a specific date for the election it gives the corporation the freedom to set it in the articles or the bylaws but take note that the law also says that the term of a director is one year so substantially the election must take place annually or every year no and in case no election is held no problem because there is what is known as a hold over okay meaning the incumbent director continues to hold office until his successor is elected and qualified we'll talk about that more in a bit okay the law says that 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 and we talked about the qualifications earlier so nomination first okay then notice will be given of the time of the holding of the election, the procedure, and other requirements, and the manner of giving of notice should be provided for in the bylaws. Generally, it should be by written notice, but the law also allows it to be sent by email or other modes which the SEC or the Securities and Exchange Commission may allow. Now, during election proper, there must be present either in person. or through a representative authorized to act by written proxy. There must be present the owners of majority of the outstanding capital stock.

Or if there is no capital stock, a majority of the members entitled to vote. The requirement is majority must be present. So that's the quorum requirement. So there must be a quorum, meaning the majority of all the outstanding capital. capital stock or all the members that will constitute the quorum so there must be a quorum for the election to validly proceed now when so authorized in the bylaws or by majority of the board of directors the stockholders or members may also vote through remote communication or even in absencia okay or if they are absent no and in that case they shall be deemed present for purposes of quorum so stockholders have three ways to vote okay personally by attending the meeting through a proxy okay or through remote communication or in absentia now that's only allowed when it is authorized by the bylaws or by majority of directors or in case of corporations vested with public interest even without a provision in the bylaws now the election itself must be by ballot if requested you it should be by ballot if requested by any voting stockholder or member.

But if there is no request, then you can have the other modes of voting like Viva Voce voting, meaning by voice, yes and nays, or even roll call voting. Those are valid. The nominees or candidates for directors or trustees receiving the highest number of votes shall be declared elected.

Take note, okay, that the law only requires plurality. majority of the votes cast at election meaning that a candidate does not have to get majority or more than 50 percent of all the votes he just needs to get more votes than the other candidates okay he does not have to get 50 plus one of everyone voting he just has to get more votes than the others okay now let's go to the method of voting in stock corporations stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own name in the stock books of the corporation at the time fixed in the bylaws or in case the bylaws are silent then at the time of the election so the stockholder may first he may vote such number of shares for as many persons as there are directors to be elected no and this is known as straight voting okay the stockholder may also accumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of shares owned this is known as cumulative voting for one candidate okay or the stockholder may distribute them on the same principle okay among as many candidates as as may be seen fit meaning a stockholder can accumulate can accumulate his shares no by multiplying the number of his shares by the number of directors to be elected and then he will distribute it to as many candidates as he wants. And that's known as cumulative voting by distribution.

Take note that the total number of votes cast shall not exceed the number of shares owned by stockholders as shown in the books of the corporation. multiplied by the whole number of directors to be elected. And take note further that no delinquent stock shall be voted. Okay? So how does this work?

It seems very abstract when I just say it like that. Okay? De Leon gives us good examples.

So first, let's talk about straight voting. Let's say A. A has 100 shares and there are 5 directors to be elected. So again, we just follow the law.

You multiply his shares by the number of directors. He has 100 shares. He has 100 shares. There are 5 directors. So, that gives us 500. He can give...

A can now give 100 votes to each of the 5 directors. That's straight voting, no? Okay? In cumulative voting for one candidate, in the same example, A can give all 500 votes to just one candidate, no?

He just wants this. then he can give all his 500 votes to that one candidate. But let's say, out of a total of 500 shares, A and B own 400, okay? A and B own 400, and C, D, E, and F own only 100 shares, okay? So if there are five directors to be elected, A and B have 2,000 votes.

Why? Again, you multiply 400 by... the number of shares, 400 shares by the number of directors to get 2,000 votes.

While C, D, and E who only own 100 shares have 500 votes. You multiply their 100 shares by the number of directors to be elected to get 500 votes. So if A and B spread their votes equally to four candidates, they spread it equally by four candidates, then each candidate gets...

500 each. 2,000 divided by 4 is 500 each. Now, if C, D, E, and F vote individually, there is no assurance that the candidate that they want will win. Why?

Because individually, the votes that they have are very little. They only have 100 amongst themselves. And you'll divide that 100 pa amongst them, and they will only have very little votes. But, If they accumulate their votes, pag sama-sama nila, they have 100, no?

Then they might have a fighting chance. They can give their 500 votes to just one candidate to make sure that they and their interests are represented in the board. They are the minority stockholders.

Why minority? Because they only have 100 shares. So if they want to be represented, they should team up and use all their votes and give it to one candidate.

That's the purpose of accumulating votes. This allows minority shareholders. a bigger chance to be represented by the board. And take note under Section 27, a director who is elected because of the vote of the minority stockholders cannot be removed without cause. This protects the right of the minority stockholders to be represented in the board.

Now, in cumulative voting by distribution with the same... example, A may distribute his 500 votes to candidates, not different candidates. He can give 100 to W, 150 to X, and 250 to Y. That's 500, no? Or any other combination he wants, as long as the total number of votes that he casts does not exceed the number of shares he owns multiplied by the number of directors to be elected, which again...

is 500 okay again he has 100 shares multiply that by the number of directors to be elected so he has 500 votes he can distribute the votes in any way he wants okay so uh that's it for the methods of voting okay what if the minority stockholders want to determine if they can elect three out of 11 directors in a corporation with 20 000 outstanding shares shares. First, we multiply the total shares of 20,000 by the number of directors that the minority wants to elect which is 3 to get 60,000. Then we add the total number of directors which is 11 and we add 1 to get 12. Then we get the 60,000 earlier and divide it by 12 to get 5,000 and we add 1. okay to get 5001 finally to get the number of directors required to elect the desired number of directors we multiply the number of shares necessary to elect the desired number of directors which is 5001 we multiply that by the total number of directors to be elected which is 11. okay so 5001 times 11. because remember you multiply the number of votes by the number of directors so we get fifty five fifty five thousand uh eleven total which may be distributed equally among the three candidates for 18,337 votes each. So that's election for a stock corporation. For a non-stock corporation, members may cast as many votes as there are trustees to be voted for but they may not cast more than one vote per candidate.

Okay, now reportorial requirements within 30 days from election, the secretary or any other officer of the corporation shall submit to the SEC the names, nationalities, shareholdings, and residential addresses of the persons who were elected as directors. A report must be submitted. But if no election is held or the owners of the majority of the outstanding capital stock or majority of the members entitled to vote are not present sent in person by proxy or through remote communication or not voting in absentia, then such meeting may be adjourned.

Why? Because there's no quorum, no? So if there's no quorum, adjourned.

And in case of adjournment, the corporation has to give a report to the SEC containing the reasons why the election was not held. Okay? That report must be given within 30 days from the date of the scheduled election and it should also specify the date for the new election which should not be later than 60 days from the scheduled date if no new date has been designated or if the rescheduled election is likewise not held okay then the sec may upon the application of a stockholder member director or trustee okay and after verification of the unjustifiable non-holding of the election the sec may Samarili order. that an election be held.

Another report that must be submitted is when a director, trustee, or officer dies, resigns, or in any manner ceases to hold office. The secretary or the director, trustee, or officer of the corporation will also file a report with the SEC within seven days from knowledge thereof. So now let's talk about term and holdover.

If a person is elected as director and he is qualified and he does not have any disqualification, his term is one year. In case of non-stop corporations, the term would be three years. Now what if the one year term or the three year term has expired but the replacement of that person has not yet been elected or has not yet qualified? This is where the holdover prints. principle comes in okay holdover principle see the case of valverde versus africa okay so first we have to distinguish between a term and a tenure the term is the time during which a person may claim to hold office as a matter of right and is not affected by the holdover term on the term is fixed by law okay one year or three years and that does not change simply because the office may have become vacant or because the incumbent holds the office beyond the term due to a successor not having been elected or qualified okay that's term but tenure represents the actual time during which the incumbent actually holds office so tenure may be shorter or in case of holdover it may be longer than the actual term okay so the term in tenure is different now section 22 says that each director shall hold office until his successor is elected and qualified that is the hold over he's holding over no until his successor is elected and qualified that hold over does not affect the one-year term which remains to be one year because it's set by law no the tenure does not affect the term okay when the one-year period has ended if the person still continues to hold the office because there is no successor yet the period of holdover is not part of the original term it's not a new term but it is part of his tenure okay that's why the term and tenure are different holdover implies that the fixed term of one year has expired and the person holding the office holds it until there is a successor who is who has been elected and is qualified now that person holding that office you for the tenure the extended tenure during hold over hold over he is not extending his term his tenure is just long but his term was still one year since his term has expired that is not a vacancy which can be filled by the board but by the stockholders okay and that's the point okay and we'll talk about filling of vacancies later okay and finally the final topic i want to talk about today before we uh break off for the next episode would be compensation of directors now what do the directors get in return for their service no the law allows compensation of directors to be set in the bylaws okay and take note that the total yearly of directors must not exceed 10 percent of the net income before income tax of the corporation during the preceding year okay if the bylaws do not set the compensation then directors are only entitled to receive reasonable per diems okay which is an amount equivalent to a daily allowance not to cover living expenses they're not supposed to get the rich off of this no the directors cannot pass a resolution granting compensation to themselves okay because the law says that directors or trustees shall not participate in the determination of their own per diems or call or compensation.

It is only the stockholders representing at least a majority of the outstanding capital stock or majority of the members. Only they can grant the directors or trustees compensation and approve the amount thereof at a regular or special meeting. So as a general rule, when directors perform nothing more than the usual and ordinary duties of their office, they are not entitled to...

salary or other compensation general rule okay why because their return on their shares of stock serves as the motivation for them to do a good job if they do a good job then they will be rewarded properly through the whatever they receive by virtue of the shares that they own so directors are only entitled to be reimbursed for legitimate expenses incurred on behalf of the corporation okay so So that's it for this part of the discussion on Board of Directors. Okay, I hope you may have picked up a thing or two. And I hope to see you next episode.

See you soon, guys. Bye.

Transcript for:Understanding Board of Directors Qualifications

Transcript for:
Understanding Board of Directors Qualifications