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Breach of director’s fiduciary duty

By: Atty. Cara Angela N. Flores on April 20,2023

THE board of directors exercises the powers, conducts all business and controls all properties of a corporation (Section 22, Revised Corporation Code).

Being the vessel of corporate powers, the directors have fiduciary duty toward the corporation. The Supreme Court in the case of Schulze v Prebon (GR 189158, 189530, Jan. 11, 2017) stated that a director, holding as he does a position of trust, is a fiduciary of the corporation. As such, in case of conflict of interest with those of the corporation, he cannot sacrifice the latter without incurring liability for his disloyal act.

There are recognized instances under our Revised Corporation Code and jurisprudence where a director commits a breach on his fiduciary duty. These are the following: (1) engaging in self-dealing transactions; (2) competing with the business corporation he is engaged in, this is known as the doctrine of corporate opportunity; (3) willfully and knowingly voting or assenting to unlawful acts; (4) acquiring any personal or pecuniary interest in conflict with their duty, and (5) tolerating graft and corrupt practices.

Self-dealing transactions

A self-dealing transaction means a transaction to which the corporation is a party and in which one or more of its directors has a material financial interest.

Transactions with self-dealing directors are voidable, but they may be valid provided that that the requirements under Section 31 of the Revised Corporation Code are complied with. Under said section, a contract between the corporation with one or more of its directors or trustees or the directors’ or trustees’ spouses and relatives within the fourth civil degree of consanguinity or affinity is valid if the following requisites are followed:

1. The presence of the director or trustee involved in the board meeting where the contract was approved was not necessary to constitute a quorum for that meeting;

2. The vote of the director involved was not necessary for the contract’s approval;

3. The contract is fair and reasonable;

4. For 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 contract; and

5. In case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first three conditions is absent, the contract may be ratified by the vote of the stockholders representing at least two-thirds of the outstanding capital stock or the members. However, full disclosure of the adverse interest of the director/s or trustee/s involved is made, and the contract is fair and reasonable under the circumstances.

Doctrine of corporate opportunity

In Schulze v Prebon, the Supreme Court also held that a director is prohibited from competing with the business in which his corporation is engaged in as otherwise he would be guilty of disloyalty where profits that he may realize will have to go to the corporate funds except if the disloyal act is ratified. This is the doctrine of corporate opportunity.

In Gokongwei Jr. v Securities and Exchange Commission (GR L-45911, April 11, 1979), the Supreme Court also discussed this doctrine, stating that this is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection.

In this regard, Section 33 of the Revised Corporation Code provides that 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 that the director risked one’s own funds in the venture.

Unlawful acts/interests in conflict

Section 30 of the Revised Corporation Code provides directors or trustees shall be solidarily liable for damages suffered by the corporation, its stockholders or members if:

1. There was a willful vote or assent to patently unlawful acts of the corporation;

2. The director or trustee is guilty of gross negligence or bad faith in directing the affairs of the corporation; or

3. The director or trustee acquire any personal or pecuniary interest in conflict with their duty as director or trustee.

Likewise, a director, trustee or officer should not attempt to acquire or acquire any interest adverse to the corporation regarding any matter which has been reposed in them in confidence. Otherwise, the director, trustee or officer is liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

It should also be stressed that the Revised Corporation Code also now expressly sanctions directors who knowingly fail to report or file the appropriate action with proper agencies or allows or tolerates graft and corrupt practices or fraudulent acts committed by the corporation, its directors and trustees.

All the foregoing shows that it is imperative for directors to be faithful to their fiduciary duties to the corporation.

Cara Angela N. Flores is an associate of Mata-Perez, Tamayo & Francisco (MTF Counsel).

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