Can Corporations Operate with a Skeletal Board?
By Ramon Vaughn Dy III on May 5, 2022
From the largest conglomerates to the smallest start-ups, all have at least one thing in common: they are managed by some form of governing body, mostly by a board of directors. With the exception of a one-person corporation, firms have a board that exercises corporate powers, conducts the company’s business and controls its properties (SEC MC 6-2009).
A corporation, being a juridical entity, may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management (Cebu Mactan Members Center Inc. vs Tsukahara, GR 159624, July 17, 2009). Under the Revised Corporation Code (RCC), it should be noted that the minimum number of five elected directors has now been removed. Presently, stockholders of a corporation may elect a board composed of at least two or not more than 15 directors, who shall each serve a term of one year (Sec. 22, RCC). In order to be elected as a director, the individual must own at least one share of stock in the corporation, must be a natural person of legal age, must not be convicted by final judgement of an offense punishable by imprisonment for a period exceeding six years and such other qualifications as may be prescribed by the by-laws of the corporation.
Due to the difficulties presented by the Covid-19 pandemic, many corporations were forced to close shop or halt operations completely. For those struggling corporations that willed through the pandemic, a number experienced vacancies in their boards due to resignations, removal or the unfortunate death of directors.
In SEC OGC Opinion 22-02, the SEC was able to shed light on the issue of a corporation operating with a “skeletal” board of directors/trustees. The term “skeletal,” in this opinion, meant a board with an incomplete number of members as stated in its articles of incorporation (AOI) and by-laws. In this opinion, the board of trustees of the inquiring corporation had elected only six members out of the 25 specified in its AOI.
There were several issues originating from the “skeletal” composition of the board of the inquiring corporation. The most significant issue was the existence of a “quorum,” aptly defined as a majority of the directors or trustees or one-half plus one of the number of directors/trustees fixed in the AOI, which is required to transact corporate business (Section 52, Revised Corporation Code).
The members of the inquiring corporation elected only six members to sit in its board, much less than the number provided in its AOI and by-laws. The SEC opined that the inquiring corporation may not validly act as a corporate body for the reason that it failed to satisfy the required number of trustees to constitute a quorum.
The SEC further advanced this view by citing a related opinion, which stated that the stockholder or members of a corporation may opt to elect a number of directors less than that fixed in the AOI, but this situation would merely give rise to a vacancy in the board which should be filled up in a subsequent special meeting duly called for the purpose. The power of the board is, however, not suspended unless the number is reduced below a quorum (SEC Opinion dated June 10, 1992).
Following the foregoing discussions, an elected board of directors/trustees of a corporation whose membership does not comprise a quorum from its total membership pursuant to its AOI cannot act as a corporate body and as such cannot validly transact business for the corporation.
With this in mind, long-standing corporations and aspiring start-ups must recognize the significance of the existence of a quorum in its board of directors/trustees. A “skeletal” board can be allowed in our jurisdiction so long as the members are of a sufficient number to constitute a quorum. Nevertheless, in order to avoid further complications arising from vacancies in the board, it is highly recommended to fill the vacancy through an election duly called for the purpose pursuant to the relevant provisions of the RCC, as in case of SEC OGC Opinion 22-02.
In the alternative, corporations which foresee difficulties with regard to filling up the total membership of their boards may resolve to reduce the overall membership by amending their AOIs. Corporations can now propose to elect only as few as two directors for its board pursuant to the RCC. In reducing the total membership of the board in the AOI, a board can validly transact business for the corporation with a streamlined number of members conforming to the needs and demands of the corporation and its shareholders.
Ramon Vaughn F. Dy 3rd is a graduate of the Ateneo de Manila University School of Law and an associate of Mata-Perez, Tamayo and Francisco (MTF Counsel).