By: Reina G. Fabregas on April 22, 2021

The Revised Corporation Code (RCC) vests in the board of Directors the exercise of all corporate powers, except as otherwise provided by law. As such, the position of a director in a corporation is highly imbued with trust and confidence. In Prime White Cement versus IAC (GR L-68555, March 19, 1993), the Supreme Court held that, owing to the director’s duty of loyalty to his corporation, in case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. This trust relationship “is not a matter of statutory or technical law” as it springs from the fact that directors have the control and guidance of corporate affairs and properties of the corporation.

The Supreme Court, in the case of James Ient versus Tullett Prebon (GR189158, Jan. 11, 2017),citing the commentary of Jose Campos on the Corporation Code, discussed the fiduciary duties of directors: “A director, holding as he does a position of trust, is a fiduciary of the corporation. As such, in case of conflict of his interest with those of the corporation, he cannot sacrifice the latter without incurring liability for his disloyal act. The fiduciary duty has many ramifications, and the possible conflict-of-interest situations are almost limitless, each possibility posing different problems. There will be cases where a breach of trust is clear. Thus, where a director converts for his own use funds or property belonging to the corporation, or accepts material benefits for exercising his powers in favor of someone seeking to do business with the corporation, no court will allow him to keep the profit he derives from his wrongdoing. In many other cases, however, the line of demarcation between the fiduciary relationship and a director’s personal right is not easy to define. The code has attempted at least to lay down general rules of conduct and although these serve as guidelines for directors to follow, the determination as to whether in a given case the duty of loyalty has been violated has ultimately to be decided by the court on the case’s own merits.”

Under the RCC, directors have the three-fold duty of loyalty, diligence and obedience (Philippine Corporate Law Compendium, Aquino, 2018).

Duty of loyalty

The director or officer owes loyalty and allegiance to the corporation – a loyalty that is undivided and an allegiance that is influenced by no consideration other than the welfare of the corporation.

In the case of Gokongwei versus SEC (GR L-45911, April 11, 1979), the Supreme Court, quoting the American case Pepper versus Litton, adopted the fiduciary standards of conduct that the director owes the corporation, its stockholders and creditors. “He who is in such a fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly though the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements.”

The foregoing duty of loyalty may be related to the doctrine of corporate opportunity that states that corporate officers are not permitted to use their position of trust and confidence to further their private interest. Section 33 of the RCC 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 (2/3) of the outstanding capital stock.

Duty of diligence

The duty of diligence is enforced upon directors by Section 30 of the RCC, which holds directors liable for acts of gross negligence or bad faith: “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 there from suffered by the corporation, its stockholders or members and other persons.”

Duty of obedience

The duty of obedience requires directors to faithfully comply with the corporation’s articles of incorporation and by-laws and all applicable laws and regulations, in transactions entered into by them on behalf of the corporation.

Having great power to direct the affairs of a corporation, it is only apt to impose upon directors these fiduciary duties of loyalty, diligence and obedience.

#DutiesofDirectors #FiduciaryDuties #RevisedCorporationCode #DutyofLoyalty #DutyofDiligence #DutyofObedience

Reina G. Fabregas is a legal assistant of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.