The Threefold Duties of a Director of a Corporation

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The Director and the Board of Directors of a Corporation

A corporation is a juridical being, one which is created by law and it is vested with powers. Having powers as such, the corporation exercises its corporate powers through its board of directors.

The exercise of power by the board of directors shall be through meetings as it must act as a body and a decision must always be reached after affording opportunity for consultation.

James Ient and Maharlika Schulze vs. Tullett Prebon (Philippines), Inc., G.R. No. 189158, 11 January 2017, the Supreme Court discussed the duties of directors of a corporation, to wit:

“In the commentary on the subject of duties of directors and controlling stockholders under the corporation code, Campos explained:

Fiduciary Duties; Conflict of Interest

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.”

Threefold Duties of a Director of a Corporation

Duty to be diligent

Compliance with the duty of a director to act with diligence requires the exercise of reasonable care, prudence, and equate knowledge and skill. The meaning and extent of the duty of diligence is to be understood to mean that those who voluntarily take the position of directors undertake that they possess, at least, ordinary knowledge and skill, and that they will use such in the performance of their obligations.

The level of care, skill and diligence that is required is that which an ordinary prudent man will exercise in similar circumstances. Such, however, varies, depending on the nature of the business of the corporation.

Consequently, a director should exert effort to obtain a basic understanding of the business of the corporation. He must be familiar with its operations. He should be able to prepare himself for board meetings to be able to make an informed decision.

This duty of a director is specifically imposed by the corporation code, when it provides that: directors or trustee who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence in directing its affairs shall be liable jointly and severally with all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. Corollary to this duty of diligence is the protection afforded to directors under the Business Judgment Rule which states that, “If in the course of management, directors arrive at the decision for which there is a reasonable basis and they acted in good faith, as the result of their independent judgment, and uninfluenced by any consideration, other than what they believe to be for the best interests of the corporation, it is not the function of the court to say that it should have acted differently and to charge the directors for any loss or expenditures incurred.”

The duty to be loyal

Directors of a corporation must be loyal to be keeping the interest of the corporation above personal motives. Compliance with this duty of a director requires that the director act in a manner characterized by transparency, accountability and fairness.

The basic principle to be observed is that a director should not use his position to make profit or to acquire benefit or take advantage for himself and/or his related interests. He should avoid situations that may compromise his impartiality. If an actual or potential conflict of interest should arise on the part of directors or senior’s executives, it should be fully disclosed and the concerned director should not participate in the decision-making.

A director who has a continuing conflict of interest of a material nature should consider incubating or resigning. This duty is specifically imposed by the Revised corporation code: in the provisions regarding self-dealing directors, interlocking directors and disloyal directors.

Under the law, a contract between a self-dealing director and a corporation is voidable at the option of the corporation. Notwithstanding, the contract shall be valid when:

(a) presence of the director/trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum;

(b) his vote is not necessary to approve the contract; and

(c) that the contract is fair and reasonable under the circumstances. In the case of an officer, the contract has previously approved by the board.

If however, conditions (a) and (b) are absent, the contract may be ratified by 2/3 vote of the outstanding capital stock in the meeting duly called for such purpose with full disclosure of the adverse interest being made at the meeting and that the contract is nevertheless fair and reasonable. Note that there is no requirement that the corporation suffers damage.

Also under the law, contract between corporations with interlocking directors is valid as long as there is no fraud and the contract is fair and reasonable. The contract is voidable at the option of the corporation if a director’s interest in one corporation is substantial in his interest in the other corporation/s is nominal. The contract shall be subject to the provisions of Section 32 insofar as the corporation/s where he has a nominal share as it is as if the Corporation is transacting with the self-dealing director. Shareholdings in excess of 20% of the outstanding capital stock shall be considered substantial.

The Revised corporation code also states that when a director is disloyal by virtue of his office, he acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profit, he must account for it by refunding the same to the corporation, even if the director risked his own funds in the venture, unless, his act is rectified by a vote of the stockholders owning or representing 2/3 of outstanding capital stock.

The duty to be obedient

Directors must be obedient by keeping within the powers of the corporation. The duty of a director to be obedient simply means that directors are bound to observe the limits of their authority. They should not perform acts which are beyond the powers of the corporation, they should be shown to act in situations where the law has given such prerogative to the stockholders.

Should they go beyond the limits, they are personally responsible for any damages which the Corporation may suffer unless they acted in good faith and with due care in the exercise of their business judgment. This means that the board must keep within the powers of the institution as prescribed in the articles of incorporation, by-laws, and existing laws, rules and regulations. The duty to be obedient is embodied in the concept of ultra vires which is pronounced in the Revised corporation code that: No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred.

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