MODULE 10

FILLING OF VACANCIES, sec. 28

SEC. 28. Vacancies in the Office of Director or Trustee; Emergency

Board. –
Any vacancy occurring in the board of directors or trustees other
than by removal or by expiration of term, may be filled by the
vote of at least a majority of the remaining directors or trustees,
if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders or members in a regular or special
meeting called for that purpose.
FILLING OF VACANCIES, sec. 28
SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. –
When the vacancy is due to term expiration, the election shall be held no
later than the day of such expiration at a meeting called for that
purpose.
When the vacancy arises as a result of removal by the stockholders or
members, the election may be held on the same day of the meeting
authorizing the removal and this fact must be so stated in the agenda
and notice of said meeting.
In all other cases, the election must be held no later than forty-five (45)
days from the time the vacancy arose.
A director or trustee elected to fill a vacancy shall be referred to as
replacement director or trustee and shall serve only for the unexpired
term of the predecessor in office.
FILLING OF VACANCIES, sec. 28
SEC. 28. Vacancies in the Office of Director or Trustee; Emergency
Board. –
However, when the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent
grave, substantial, and irreparable loss or damage to the
corporation, the vacancy may be temporarily filled from among the
officers of the corporation by unanimous vote of the remaining
directors or trustees. The action by the designated director or
trustee shall be limited to the emergency action necessary, and the
term shall cease within a reasonable time from the termination of
the emergency or upon election of the replacement director or
trustee, whichever comes earlier. The corporation must notify the
Commission within three (3) days from the creation of the
emergency board, stating therein the reason for its creation.
FILLING OF VACANCIES, sec. 28
SEC. 28. Vacancies in the Office of Director or Trustee; Emergency
Board. –
Any directorship or trusteeship to be filled by reason of an increase
in the number of directors or trustees shall be filled only by an
election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the
notice of the meeting.
In all elections to fill vacancies under this section, the procedure set
forth in Sections 23 and 25 of this Code shall apply.
FILLING OF VACANCIES, sec. 28

1. Vacancies filled up by stockholders or members, if it is due to

a. Removal
b. Expiration of term
c. increase in the number of directors
d. Grounds other than removal or expiration of term, e.g. death,
resignation, abandonment, or disqualification where the
remaining directors do not constitute a quorum for the purpose of
filling the vacancy
e. If the vacancy may be filled by the remaining directors or
trustees but the board refers the matter to stockholders or
members.
 FILLING OF VACANCIES
2. Vacancies filled up by the remaining directors constituting a quorum or
by the members of the board if still constituting a quorum, at least a
majority of them are empowered to fill any vacancy occurring in the
board other than by removal by the stockholders or members, expiration
of term or increase in the number of board seats. (Sec. 28)

Note: A director elected to fill vacancy shall serve the unexpired term.
(Sec. 28)
ILLUSTRATION:
If four (4) of nine (9) directors died, the remaining five (5) directors still
constitute a quorum, and a majority of the five (5) or three (3) may fill
the four (4) vacancies.
But if five (5) of the directors died, the vacancies will have to be filled by
the stockholders in a regular or special meeting duly called for the
purpose.
FILLING OF VACANCIES

Which cause of vacancy in the board of directors may be filled by the

board of directors if the remaining directors still constitute a quorum
and by the stockholders if such quorum does not exist?
a. Removal of a director.
b. Resignation of a director.
c. Increase in the number of directors.
d. Expiration of the term of some directors.
FILLING OF VACANCIES
Which cause of vacancy in the board of directors may be filled by the board of
directors if the remaining directors still constitute a quorum and by the
stockholders if such quorum does not exist?
a. Removal of a director.
b. Resignation of a director.
c. Increase in the number of directors.
d. Expiration of the term of some directors.
COMPENSATION
Section 29. Compensation of directors. - In the absence of any
provision in the by-laws fixing their compensation, the directors
shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such
compensation other than per diems may be granted to directors by
the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders'
meeting.
In no case shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. (n)
Directors or trustees shall not participate in the determination
of their own per diems or compensation.
COMPENSATION
Section 29. Compensation of directors. –
XXX
Directors or trustees shall not participate in the determination
of their own per diems or compensation.
Corporations vested with public interest shall submit to their
shareholders and the Commission, an annual report of the total
compensation of each of their directors or trustees.
COMPENSATION
GR: Directors, in their capacity as such, are not entitled to
receive any compensation except for reasonable per
diems.
XPN:
1. When their compensation is fixed in the by‐laws
2. When granted by the vote of stockholders representing at
least a majority of the outstanding capital stock at a
regular or special meeting
3. When they are also officers of the corporation
4. When a BOD/BOT becomes entitled to compensation other
than reasonable per diems
COMPENSATION
LIMITATION on the compensation of directors:
 The total yearly compensation of directors, as such directors
should not exceed 10% of the net income before income tax
of the corporation during the preceding year. (Sec.29)
LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS

SEC. 30. Liability of Directors, Trustees or Officers. – 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 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.
A Director, Trustee, or Officer shall not attempt to acquire, or 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 shall be liable
as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
 SOLIDARY LIABILITY FOR DAMAGES
GR: The directors or trustees are not liable solidarily with the
corporation by reason of their separate and distinct personalities.
XPN:
1. Willfully and knowingly voting for and Assenting to patently
unlawful acts of the corporation; (Sec. 30)
2. Gross negligence or bad faith in directing the affairs of the
corporation; (Sec. 30)
3. Acquiring any personal or pecuniary Interest in conflict of
duty; (Sec. 30)
4. Agreeing or stipulating in a contract to hold himself liable with
the corporation; or
5. By virtue of a specific provision of Law (Uichico vs. NRLC, G.R.
No. 121434, June 2, 1997).
 SOLIDARY LIABILITY FOR DAMAGES
GR: The directors or trustees are not liable solidarily with the
corporation by reason of their separate and distinct personalities.
XPN:
1. Willfully and knowingly voting for and Assenting to patently
unlawful acts of the corporation; (Sec. 30)
2. Gross negligence or bad faith in directing the affairs of the
corporation; (Sec. 30)
3. Acquiring any personal or pecuniary Interest in conflict of
duty; (Sec. 30)
4. Agreeing or stipulating in a contract to hold himself liable with
the corporation; or
5. By virtue of a specific provision of Law (Uichico vs. NRLC, G.R.
No. 121434, June 2, 1997).
 PERSONAL LIABILITY
1. Acting without authority or in excess of
authority or are motivated by ill‐will, malice or
bad faith, which gives rise to consequent
damages. (Lim vs. NLRC, G.R. No. 80685. March
16, 1989)
2. Consenting to the issuance of Watered stocks,
or, having knowledge thereof, failing to file
objections with the secretary. (Sec. 64)
 LIABILITY FOR WATERED STOCKS
SEC. 64. Liability of Directors for Watered Stocks. – A director or
officer of a corporation who:
(a) consents to the issuance of stocks for a consideration less than
its par or issued value;
(b) consents to the issuance of stocks for a consideration other than
cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, does not file
a written objection with the corporate secretary,
shall be liable to the corporation or its creditors, solidarily with the
stockholder concerned for the difference between the value
received at the time of issuance of the stock and the par or issued
value of the same.
CONTRACTS WITH SELF DEALING DIRECTOR
Section 31. Dealings of directors, trustees or officers with the
corporation. - A contract of the corporation with (1) one or more of
its directors, trustees, officers or their spouses and relatives within
the fourth civil degree of consanguinity or affinity is voidable, at
the option of such corporation, unless all the following conditions are
present:
(a) 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;
(b) The vote of such director or trustee was not necessary for
the approval of the contract;
(c) The contract is fair and reasonable under the
circumstances;
CONTRACTS WITH SELF DEALING DIRECTOR
Section 31. Dealings of directors, trustees or officers with the
corporation. Cont’d.

(d) In case of corporations vested with public interest, material

contracts are approved by at least two-thirds (2/3) of the entire
membership of the board, with at least a majority of the
independent directors voting to approve the material contract; and
(e) In case of an officer, the contract has been previously authorized by
the board of directors.
CONTRACTS WITH SELF DEALING DIRECTOR
Section 31, cont’d. Dealings of directors, trustees or officers with
the corporation. –
 Where any of the first three (3) 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:
 Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and the
contract is fair and reasonable under the circumstances.
CONTRACTS WITH SELF DEALING DIRECTOR

PRESENT ABSENT

Alpha Corporation has 9 directors as provided in its AOI.

Alpha Corporation wants to enter into a contract with Director A for the
lease of A’s building to be used as its administrative office.
In the meeting, directors A, B, C, D, E and F were present to approve the contract.
When the voting took place, A, B, C, and D who found the contract fair and reasonable
under the circumstances, voted for its approval.
What is the status of the contract?

VOIDABLE
CONTRACTS WITH SELF DEALING DIRECTOR

PRESENT ABSENT

Alpha Corporation has 9 directors as provided in its AOI.

Alpha Corporation wants to enter into a contract with Director A for the
lease of A’s building to be used as its administrative office.
In the meeting, directors A, B, C, D and E were present to approve the contract.
When the voting took place, A, B, C, and D who found the contract fair and
reasonable under the circumstances, voted for its approval.
What is the status of the contract?

VOIDABLE
CONTRACTS WITH SELF DEALING DIRECTOR

PRESENT ABSENT

Alpha Corporation has 9 directors as provided in its AOI.

Alpha Corporation wants to enter into a contract with Director A for the
lease of A’s building to be used as its administrative office.
In the meeting, directors A, B, C, D, E and F were present to approve the contract.
When the voting took place, A, B, C, D and E who found the contract fair and
reasonable under the circumstances, voted for its approval.
What is the status of the contract?

VALID
 CONTRACTS WITH SELF DEALING DIRECTOR
Contracts which are entered by one or more of the corporate directors/trustees,
or officers (Sec. 31) – Voidable at the option of the corporation, unless:
A. The presence of such director/trustee in the board meeting approving the
contract was not necessary to constitute a quorum;
B. The vote of such director/trustee in the board meeting approving the contract
was not necessary for the approval of the contract;
C. The contract is fair and reasonable under the circumstances;
D. In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the board,
with at least a majority of the independent directors voting to approve the
material contract
E. In the case of an officer, there was previous authorization by the board of
directors.
Question
A, B, C, D, E, F, G, H and I are directors of Strong Cement Corporation
whose articles of incorporation provide for 9 directors. In the meeting
of March 2003, directors A, B, C, D and E were present to approve a contract
for the purchase of cement bags from E who deals in the said product. The
contract was deliberated upon exhaustively by the said directors in the
meeting including E. When the voting took place however, only A, B, C and D
who found the contract fair and reasonable under the circumstances, voted
for its approval. The contract between the corporation and E is:
a. Valid and enforceable.
b. Voidable at the option of the corporation.
c. Unenforceable against the corporation.
d. Void because a corporation must not enter into a contract with any
of its directors since a director occupies a position of trust.
Question
A, B, C, D, E, F, G, H and I are directors of Strong Cement Corporation
whose articles of incorporation provide for 9 directors. In the meeting
of March 2003, directors A, B, C, D and E were present to approve a contract
for the purchase of cement bags from E who deals in the said product. The
contract was deliberated upon exhaustively by the said directors in the
meeting including E. When the voting took place however, only A, B, C and D
who found the contract fair and reasonable under the circumstances, voted
for its approval. The contract between the corporation and E is:
a. Valid and enforceable.
b. Voidable at the option of the corporation.
c. Unenforceable against the corporation.
d. Void because a corporation must not enter into a contract with any
of its directors since a director occupies a position of trust.
CONTRACTS WITH INTERLOCKING DIRECTORS
Section 32. Contracts between corporations with interlocking
directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone:
Provided, That 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 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. (n)
INTERLOCKING DIRECTORS

 X, INC. Y, INC.
GR. Valid if no fraud and fair and reasonable)

DIRECTOR D is a director of both X and Y Inc.

CONTRACTS WITH INTERLOCKING DIRECTORS

Contracts entered into between corporations with

interlocking directors (Sec. 32) – Valid, provided that:
a. The contract is not fraudulent; and
b. The contract is fair and reasonable under the
circumstances.
CONTRACTS WITH INTERLOCKING DIRECTORS

Contracts entered into between corporations with

interlocking directors (Sec. 33) – Valid, provided that:
a. The contract is not fraudulent; and
b. The contract is fair and reasonable under the
circumstances.
CONTRACTS WITH INTERLOCKING DIRECTORS

Contracts entered into between corporations with

interlocking directors (Sec. 32) – Valid, provided that:
a. The contract is not fraudulent; and
b. The contract is fair and reasonable under the
circumstances.
John Gokongwei vs SEC, andres Soriano et.al.
We find merit in the prohibition or disqualification appearing in the
by laws of the company. Prohibition for its director or anybody who is
a director of a competitor not become a member of the BOD of SMC.
The court found the rationale for this to be one w/c goes into the duty
of loyalty or obedience to the company. If you are a director, one of
the duties that you owe to the company is loyalty and you cannot be
expected to be loyal to both corpos who are competitors of each
other. For you to be loyal to one, you need to be disloyal to the other.
And vice versa. That is the inevitable situation that you have to face
if you are directors of two corporations w/c are competing w/ each
other.
INTERLOCKING DIRECTORS

 X, INC. Y, INC.
GR. Valid if no fraud and fair and reasonable)

 20% or less, nominal 20% or less, nominal

INTERLOCKING DIRECTORS

 X, INC. Y, INC.
GR. Valid if no fraud and fair and reasonable

 >20%, substantial >20%, substantial

INTERLOCKING DIRECTORS

 X, INC. Y, INC.
(subject to self-dealing director requirements)

 >20%, substantial 20% or less, nominal

INTERLOCKING DIRECTORS

 X, INC. Y, INC.
(subject to self-dealing director requirements)

 >20%, substantial 20% or less, nominal

CONTRACTS WITH INTERLOCKING DIRECTORS

Effect if the interlocking director’s interest is nominal in one corporation

and substantial in another:
 If the interlocking director’s interest in one corporation or corporations is
“nominal” (not exceeding 20% of the outstanding capital stock) and in the
other substantial, then all the first 3 conditions prescribed in Sec. 32 must be
present with respect to the corporation in which he has nominal interest.
 Where any of the first two conditions is absent, said contract must be
ratified by the vote of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in a meeting called for the
purpose, provided:
 That full disclosure of the adverse interest of the director/ trustee involved
is made at such meeting
 The contract is fair and reasonable under the circumstances.
Disloyalty of a Director

Sec. 33. Disloyalty of a director. — 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,
 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.
This provision shall be applicable, notwithstanding the
fact that the director risked his own funds in the venture,
(n)
DISLOYALTY
What is doctrine of corporate opportunity?
A: 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:
A director shall refund to the corporation all the profits he
realizes on a business opportunity (Sec. 33) which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporations business and is of
practical advantage to it; and
3. The corporation has an interest or a reasonable expectancy.

Note: The rule shall be applied notwithstanding the fact that the
director risked his own funds in the venture.
DISLOYALTY
Doctrine of Corporate Opportunity:
If such act is ratified by a vote of the
stockholders representing at least 2/3 of the
outstanding capital stock, the director is
excused from remitting the profit realized.
 EXECUTIVE COMMITTEE
SEC. 34. Executive, Management, and Other Special Committees. – If the
bylaws so provide, the board may create an executive committee
composed of at least three (3) directors. Said committee may act, by
majority vote of all its members, on such specific matters within the
competence of the board, as may be delegated to it in the bylaws or by
majority vote of the board, except with respect to the:
(a) approval of any action for which shareholders’ approval is also
required;
(b) filling of vacancies in the board;
(c) amendment or repeal of bylaws or the adoption of new bylaws;
(d) amendment or repeal of any resolution of the board which by its
express terms is not amendable or repealable; and
(e) distribution of cash dividends to the shareholders.
 EXECUTIVE COMMITTEE
SEC. 34. Executive, Management, and Other Special Committees.
– cont’d.

 The board of directors may create special committees of

temporary or permanent nature and to determine the
members’ term, composition, compensation, powers, and
responsibilities.
EXECUTIVE COMMITTEE
A body created by the by‐laws and composed of at least three
members of the board which, subject to the statutory
limitations, has all the authority of the board to the extent
provided in the board resolution or by‐laws. The committee may
act by a majority vote of all of its members (Sec. 34).

 Note: An executive committee can only be created by virtue

of a provision in the by‐laws and that in the absence of such
by‐law provision, the board of directors cannot simply create
or appoint an executive committee to perform some of its
functions. (SEC Opinion, Sept. 27, 1993)
 A person not a director can be a member of the executive
committee but only in a recommendatory or advisory capacity.
EXECUTIVE COMMITTEE
Are the decisions of the executive committee subject
to appeal to the board?
A: No. However, if the resolution of the Executive
Committee is invalid, i.e. not one of the powers
conferred to it, it may be ratified by the board (SEC
Opinion, July 29, 1995).
EXECUTIVE COMMITTEE
Limitations on the powers of the executive committee:
It cannot act on the following:
1. Matters needing stockholder approval
2. Filling up of board vacancies
3. Amendment, repeal or adoption of by‐laws
4. Amendment or repeal of any resolution of the Board which
by its express terms is not amendable or repealable
5. Cash dividend declaration. (Sec. 3)
EXECUTIVE COMMITTEE
What are the executive committees provided in the
Revised Code of Corporate Governance?

1. Audit Committee
2. Nomination Committee
3. Compensation and Remuneration Committee
INDEPENDENT DIRECTOR
Who is an independent director?
 Shall mean a person other than an officer or
employee of the corporation, its parent or
subsidiaries, or any other individual having a
relationship with the corporation, which would
interfere with the exercise of independent
judgment in carrying out the responsibilities of a
director (Sec 38, SRC).
INDEPENDENT DIRECTOR
How many independent directors are required for
the corporations covered by the Revised Code of
Corporate Governance (RCCG)?
 At least 2 or such number of independent directors that
constitute 20% of the members of the board whichever
is lesser, but in no case less than 2 (Art. 3 [A], RCCG).
Note: All other companies not covered are
encouraged to have independent directors on
their board.