Hi guys! Welcome to another episode of Atty. Javlogger, Law for the Everyday Layman. Today, we continue with our discussion on the Board of Directors and specifically, we'll be talking about the responsibilities and liabilities of directors, okay?
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Now, in this jurisdiction, in the Philippines, the members of the board of directors have a three-fold duty. Namely, obedience, diligence, and loyalty. Again, obedience, diligence, and loyalty.
Accordingly, the directors shall direct the affairs of the corporation only in accordance with the purposes for which it was organized. This is the duty of obedience and the basis is Section 23. The directors or trustees elected shall perform their duties as prescribed by law, the rules of good corporate governance, and the bylaws of the corporation. Okay? Now, directors shall also exercise due care in the performance of their functions and shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation.
They shall not act in bad faith or with gross negligence in directing the affairs of the corporation. This is the duty of diligence and is found in Section 30. And finally, directors owe loyalty and allegiance to the corporation. A loyalty that is undivided and allegiance that is influenced by no consideration other than the welfare of the corporation.
The basis is also Section 30, which says that directors shall not acquire any personal or pecuniary interest in conflict with their duty as such directors. Okay? As I previously discussed, the directors manage the affairs of the corporation, and as such, they occupy a fiduciary relationship to the corporation and the stockholders.
As a whole, in the performance of their official duties, they are under the obligation of trust and confidence to the corporation and stockholders. And therefore, they must act in good faith and for the interest of the corporation or its stockholders with due care and diligence within the scope of their authority. As such, as a general rule, directors and officers are not personally liable for business losses.
incurred because of honest judgment. They will only be liable if that loss amounts to bad faith or gross negligence. This is consistent with the business judgment rule which I discussed in a previous episode. That questions of policy or management are left to the honest decisions of directors and or officers and the courts are without authority to substitute its judgment.
For that of the board. The board is the business manager of the corporation and so long as the board acts in good faith, then its orders cannot be reviewed by the courts. Okay? So again, as a general rule, directors and officers are not personally or solidarily liable with the corporation. However, directors may be held personally liable in the following cases.
First, When they willfully and knowingly vote for and assent to patently unlawful acts of the corporation. Second, when they acquire any personal or pecuniary interest in conflict with their duty. Third, when they are guilty of gross negligence or bad faith in directing the affairs of the corporation. Fourth, when they consent to the issuance of watered stocks or having knowledge thereof.
They fail to file objections with the corporate secretary. Fifth, when they agree or stipulate in a contract to hold themselves personally liable with the corporation. And finally, by virtue of a specific provision of law. Okay?
In these instances, the erring board member shall be held solidarily liable for all the damages resulting from such acts. suffered by the corporation, the stockholders, or the third person, such as corporate creditors, no? Also take note that a director is not liable for the misconduct of his co-directors or other officers unless he will be liable okay?
He will be liable if he either connives or conspires or participates in such misconduct or if he is negligent in not discovering or not acting to prevent that misconduct. Okay? So kung wala siyang kinalaman, he won't be held liable. But if he finds out about it and he does nothing, ayan, he can be held liable. Or especially where he actively participates, he can be held liable for that misconduct.
So under Section 30, directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or or Who acquire any personal or pecuniary interest in conflict with their duty as such 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. Okay? A director, trustee, or officer shall not attempt to acquire any interest adverse to the corporation In respect of any matter which has been reposed in them in confidence and upon which equity imposes a disability upon themselves to deal in their own behalf. Otherwise, the said director, trustee, or officer, okay, shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.
Okay? So, in other words, no? If a director gets an interest that properly pertains to the corporation and he derives profit, he should hold that profit in trust and later account to it and give it to the corporation because it was an interest that should have been taken advantage of by the corporation.
So some remedies in case directors mismanage the corporation would include dissolution, receivership, injunction, or a derivative suit. And we'll talk about those in future episodes. So let's talk more about self-dealing directors under Section 31. Remember that a director has a fiduciary relation to the corporation and the stockholders, and therefore he should not prioritize his self-interest over the interest of the corporation and the stockholders.
Unahin niya yung stockholders. Their interests come first. Okay?
And the self-dealing directors are those that personally contract with the corporation in which they are performing duties as directors. In case a director or their spouse or their relatives within the fourth civil degree of consanguinity or affinity, in case any of them enters into a contract with the corporation for his own benefit as a general rule, These contracts are voidable. Okay, remember my oblikon, ha?
Remember your oblikon, rather, no? These contracts are voidable at the option of the corporation. It's the corporation who can claim annulment, okay?
It's not the self-dealing director. The corporation can claim annulment and it is not even required that the corporation should have suffered injury or damage as a result of the contract. for the contract to be annulled. Damage is not an element. The law, however, provides for conditions when the contract between the self-dealing director and the corporation will not be voidable.
In other words, they will be valid. And these are as follows. First, 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.
It didn't have to be there. Second, the vote of such director or trustee was not necessary for the approval of the contract. Even without his vote, the contract would still have been approved.
Third, the contract is fair and reasonable under the circumstances. Fourth, in case of corporations vested with public interest, material contracts are approved by at least two-thirds of the entire membership of the board with at least a majority of the independent directors. voting to approve the material contract.
And finally, in case of an officer, the contract has been previously authorized. by the board of directors. Anyway, that's codal, no?
You don't need to take down what I said. Just check the law for that list, ha? So, take note of the law now, no?
The law says, in case any of the first three conditions is absent. Okay? Compare this with the previous law, which just says, in case any of the first two are absent.
There must have been an oversight in drafting this law because the law says in any case, if any of the first three conditions are absent, and the third condition is the contract is fair and reasonable, which is an absolute requirement. I'll show you. So when the law says in case any of the first three conditions is absent, namely presence was not necessary for quorum or vote was not necessary for approval, in case of a contract, With the director or the trustee, that contract may be ratified by the vote of the stockholders representing at least two-thirds of the outstanding capital stock or of at least two-thirds of the members in a meeting duly called for the purpose. Okay?
Provided. This is where the contract is fair and reasonable is an absolute requirement. Provided that full disclosure of the adverse interest of the directors or trust is involved is made at such meeting. In other words, in the meeting, for ratification of that act or contract, the director must disclose his adverse interest, okay?
He should tell them that, hey, there might be a conflict, okay? And it is required, absolutely required, that the contract is fair and reasonable under the circumstances. So that might be the oversight of the law, okay?
Because the third condition that the contract must be fair and reasonable and must be present in case of ratification. Okay? Just take note that the contract must always be fair and reasonable under the circumstances. Okay?
And that's consistent also with the previous version of this law, the old law. Now, let's talk about contracts between interlocking directors under Section 32. or contracts between corporations with interlocking directors. Now, this is different from what I just discussed on self-dealing directors wherein the director of a corporation has a contract with the corporation. In this section, there are directors of this corporation who are also the directors of another corporation.
Section 32 recognizes as valid A contract between two or more corporations which have interlocking directors as long as there is no fraud and that the contract is fair and reasonable under the circumstances. When we say interlocking directors, it means that one, some, or all of directors in one corporation are also the directors in another corporation or corporations. Now, Interlocking directorship by itself is not prohibited by law, but the bylaws of the corporation may contain provisions disallowing interlocking directorship. Now while contracts between corporations with interlocking directors shall not be invalidated on that ground alone, alone according to the law, no?
Contracts between corporations with interlocking directors shall not be invalidated on that ground. ground alone. The law says that if the interest of an interlocking director in one corporation is substantial, he has a substantial interest in this corporation. And the interest in the other corporation is merely nominal, then the contract shall be subject to the same conditions for the validity of a contract of self-dealing directors.
with regard to the corporation where the director has a nominal interest. Okay? In other words, the conditions I said earlier, no?
The presence was not necessary for a quorum. The vote was not necessary for approval of the contract. Contract is fair and reasonable under the circumstances. In case of corporations with the public interest, they are approved by at least two-thirds of the entire membership of the board.
And in case of an officer, the contract has been previously authorized. by the board. Okay? Also, remember, as previously discussed, if the first two conditions are absent, the contract may still be ratified, provided full disclosure is made, and the contract is fair and reasonable under the circumstances.
And how do we know? Remember, has substantial interest in one corporation and nominal in the other. How do we know if the director has substantial interest? The law says that stock holdings exceeding 20% of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Okay?
Now let's move on to section 33. Remember that a director or owes a duty of loyalty to the corporation and to the stockholders and therefore the director should prioritize the interests of the corporation and stockholders over his own interests. So Section 33 gives us the doctrine of corporate opportunity where a director by virtue of such office acquires a business opportunity which should belong to the corporation. thereby obtaining profits to the prejudice of such corporation, then that director is guilty of disloyalty. He's guilty of disloyalty.
Since he is guilty of disloyalty, he must account for and refund to the latter all such profits even if the director used his own funds in the venture. Even if he... Naglabas siyang pera. Okay?
Sorry. If you receive profit, give it to the corporation. In other words, A director shall refund to the corporation all the profits he realizes on a business opportunity which the corporation is financially able to undertake, from its nature is in line with the corporation's business and is of practical advantage to it, and the corporation has an interest or a reasonable expectancy thereof. Now take note that a business opportunity will only cease to be a business opportunity.
be a corporate opportunity and transforms into a personal opportunity which the director may take if the corporation refuses or is definitely no longer able to avail itself of the opportunity. And that's the time when the director can take advantage of it for his own personal gain. Take note also that the doctrine of corporate opportunity does not preclude a director from engaging in a distinct relationship.
enterprise. Iba, no? Distinct enterprise of the same general class of business as that which his corporation is engaged in, so long as he acts in good faith. And the doctrine of corporate opportunity does not apply where the opportunity is one which is not essential to the corporation's business, or where the director does not exploit the opportunity by using the corporation's resources. And finally, take note that in In case a director does acquire a business opportunity which should belong to the corporation, this act may still be ratified by a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock.
Okay? So that's it for the responsibilities and liabilities of the directors. Okay?
We'll talk about removal, vacancy, etc. in the next episode. Okay? So I hope you may have picked up a thing or two and I hope to see you in the next episode.
Okay? See you soon guys. Bye!