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Election of directors and the holdover principle

By Nica Marsha Gasapo on June 22,2023

THE board of directors of a corporation is the seat of corporate power. Under the law, the board is clothed with authority to exercise the corporate powers, conduct all business and control all properties of the corporation. The election of the members of the board and their composition are, therefore, key actions for any corporation.The election of directors is usually conducted during the annual shareholders’ meetings. In one case, the Supreme Court explained that, since the policy under the Corporation Code (now the Revised Corporation Code or RCC) is that the powers and affairs of a corporation are carried through the board of directors, the members of the board must have actually been elected by the shareholders on a yearly basis. It is only through this yearly election that the “directors’ continued accountability to the shareholders, and the legitimacy of their decisions that bind the corporation’s shareholders, (may) be assured.” (Valle Verde Country Club Inc., et al. v Africa, GR 151969, Sept. 4, 2009).For an election of directors to be valid, there must be present, in person or by written proxy, the owners of a majority of the outstanding capital stock of the corporation. An election of directors may also be conducted through remote communication or in absentia, when allowed in the bylaws or by majority of the board of directors. In voting for directors, each voting stockholder is allowed as many votes as there are candidates and may give or accumulate votes all to one candidate or in varying numbers to several.

As mandated by the RCC, within 30 days after the election of directors, the secretary of the corporation shall report to the Securities and Exchange Commission (SEC), the names, nationalities, shareholdings and residential addresses of the directors elected. Such a report is submitted to the SEC in the form of a general information sheet, which is submitted annually, unless there are changes or amendments.If no election of directors is conducted or if there is no quorum at a scheduled annual shareholders’ meeting, the meeting for the election of directors may be adjourned. In compliance with Section 25 of the RCC, the non-holding of election of directors, including the reasons for such non-holding, shall be reported to the SEC within 30 days from the date of the scheduled election. The report shall also specify a new date for the election, which date shall not be later than 60 days from the scheduled date.Under the RCC, if no new election date is designated or, if the rescheduled election is still not conducted, the SEC may, upon the application of a stockholder or director, and after verifying the unjustified non-holding of election, summarily order that an election be held. The SEC has the power to issue orders directing the issuance of notices providing for the time and place of the election, presiding officer and the record date or dates for the determination of shareholders entitled to vote.The requirement of reporting the non-holding of election of directors and the grant of express power to the SEC to order an election when the non-holding is shown to be unreasonable or unjustifiable, are among the new amendments introduced by the RCC. These provisions were not contained in the previous Corporation Code. This reporting requirement shows that the law favors the exercise by the shareholders of their right to vote and elect directors, considering that all powers of the corporation are exercised through and by the corporation’s board of directors.Notwithstanding the foregoing new provisions, the RCC still retains the “holdover principle,” which is reflected in Section 22 of the RCC. The “holdover principle” states that directors are elected for a term of one year and shall hold office until their successors are elected and qualified. It must be noted, however, that in an opinion, the SEC emphasized that the “holdover principle” is applicable only so long as the non-holding of election, or the failure to elect directors was caused by valid and justifiable reasons.In cases of vacancy in the board other than by removal or by expiration of term, the RCC provides that, the board, if still constituting a quorum, may fill in said vacancy by a vote of at least majority of the remaining directors.If the vacancy is a result of the expiration of term, an election shall be held no later than the day of said expiration at a meeting called for that purpose. However, if the vacancy is due to a removal by the stockholders, an election may be held on the same day of the removal, and such fact must be noted in the agenda and notice of such meeting. In all other cases, the election must be conducted within 45 days from the time the vacancy arose. A director who is elected to fill a vacancy shall serve only for the unexpired term of the predecessor.Without doubt, the election of directors is an important exercise of a shareholder’s right. Directors occupy a position of trust in relation to the shareholders, considering that the board should exercise care, diligence and utmost good faith in carrying out the affairs of a corporation. Thus, the law places special importance on the election of directors.

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Nica Marsha V. Gasapo is a senior associate of Mata-Perez, Tamayo and Francisco (MTF Counsel).

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