The SC on the doctrine of corporate opportunity
By Ellaine Anne Bernardino on July 21, 2022
A COMPANY director holds a position of trust and confidence and should be loyal to the corporation he or she serves. As such, a director puts the corporation’s interests first over his or her own in case a business opportunity presents itself. This is known as the Doctrine of Corporate Opportunity.
Section 33 of the Revised Corporation Code states: “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, the director must account for and refund to the latter all such profits, unless the act has been ratified by a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked one’s own funds in the venture.”
In the case of John Gokongwei Jr. vs Securities and Exchange Commission (GR L-45911, April 11, 1979), the Supreme Court held the doctrine applicable when a fiduciary acts for two entities with competing interests. The test must be whether the businesses do in fact compete. In relation to this, there is “competition when there is a struggle for advantage between two or more forces, each possessing, in substantially similar if not identical degree, certain characteristics essential to the business sought.”
In the fairly recent case of Total Office Products and Services (Topros) Inc. vs John Charles Chang Jr., et. al (GR 200070-71, Dec. 7, 2021), the Supreme Court laid down parameters in determining the liability of corporate officers and directors who unfairly usurp business opportunities that belong to the corporation they serve.
In this case, the spouses Ty wanted to establish a corporation that would be the sole distributor of Minolta plain paper copiers in the Philippines. Chang, a former employee, was given shares in the new corporation with the duty to manage the same as president and general manager. Topros eventually grew into a multimillion enterprise but despite its success, no substantial cash dividends were distributed to stockholders since, according to Chang, the corporation was investing its funds in several properties.
The Tys later found out that Chang was siphoning off assets, funds and the goodwill of Topros into respondent corporations that he had incorporated. Likewise, the products and services from Topros were issued receipts and vouchers from the respondent corporations.
Chang was then alleged to have violated the Doctrine of Corporate Opportunity as an officer and director of Topros.
For his part, Chang asserted that the Ty family knew that he organized the respondent corporations during his incumbency as Topros president and general manager. He also explained that he had even used his own funds to pay off Topros’ liabilities.
The following guidelines were set by the Supreme Court in determining whether a claim of damages is proper when a corporate officer or director takes a business opportunity for his or her own:
– the corporation is financially able to exploit the opportunity;
– the opportunity is within the corporation’s line of business;
– the corporation has an interest or expectancy in the opportunity; and
– by taking the opportunity for his own, the corporate director, trustee or officer will consequently be placed in a position inimical to his duties to the corporation.
The court clarified that opportunity was within the corporation’s line of business if the involved corporations were in competition with each other: being engaged in related areas of businesses and producing the same products with overlapping markets.
The court ruled that the Doctrine of Corporate Opportunity was applicable to Chang and that his actions constituted acts of disloyalty. The records showed that:
– Chang owned majority of the shares in respondent corporations;
– the respondent corporations were in the same line of business as Topros;
– one of the corporations entered into a service contract with a client at the same time that Topros was servicing it;
– rental payments due Topros were instead paid to one of the respondent corporations; and
– Chang bought the land where Topros’ building was located in the name of one of the respondent corporations.
The Supreme Court ruled that the fact that Chang risked his own funds in running Topros and paying off its obligations did not absolve him of his duties as director and officer of Topros. Likewise, even if the Tys knew, tolerated, or even acquiesced to Chang’s establishment of the respondent corporations, it would not absolve a director from disloyalty.
In conclusion, a director must not use the trust and confidence of their position to serve personal interests. As stated by the Supreme Court, a person cannot serve two hostile masters without detriment to one. Where a director is employed in the service of a rival company, he cannot serve both but must betray one or the other.
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Ellaine Anne L. Bernardino is a junior associate of Mata-Perez, Tamayo and Francisco (MTF Counsel).