Duties, Liability, and Dealings of Directors in Philippine Corporate Law
The role of directors in a Philippine corporation is both legally defined and heavily regulated to ensure they act in the best interests of the corporation, its shareholders, and, ultimately, the public. The Revised Corporation Code (Republic Act No. 11232) and jurisprudence outline their duties, liabilities, and dealings, balancing corporate autonomy with accountability.
1. Duties of Directors
Under Philippine corporate law, directors are fiduciaries of the corporation and have obligations stemming from principles of good faith, diligence, and loyalty.
a. Duty of Obedience
Directors are required to act in accordance with the corporation's articles of incorporation, bylaws, and applicable laws and regulations. Any action outside the authority granted by these documents is ultra vires, and directors may be held liable for resulting losses.
b. Duty of Diligence
Directors must exercise due care, skill, and diligence as would an ordinary prudent person in a similar position, particularly in making decisions affecting the corporation. The Revised Corporation Code introduces the "business judgment rule," which shields directors from liability if they acted in good faith, with due care, and in a manner reasonably believed to be in the corporation’s best interest. However, gross negligence or failure to inform oneself properly before decision-making may lead to liability.
c. Duty of Loyalty
The duty of loyalty obligates directors to prioritize the corporation’s interests above their own. They must avoid conflicts of interest, refrain from self-dealing, and protect the corporation's assets. They are prohibited from competing with the corporation, using corporate assets for personal gain, or taking corporate opportunities for themselves without full disclosure and approval.
d. Duty to Disclose
Directors must disclose any conflict of interest in transactions involving the corporation. Failure to do so can result in personal liability and invalidate the transaction unless it is fair and benefits the corporation.
2. Liabilities of Directors
Directors are liable for damages and may be held personally accountable under certain circumstances. These liabilities can be classified as follows:
a. Liability for Unlawful Acts and Breach of Fiduciary Duties
Directors are personally liable if they commit acts that are illegal, fraudulent, or beyond their authority. Breach of fiduciary duties—such as the duty of loyalty or duty of care—also results in personal liability.
b. Liability for Fraudulent Transactions
The Revised Corporation Code provides that directors involved in fraudulent actions, particularly those harming creditors, may be liable. This includes hiding assets, manipulating financial records, or fraudulent conveyances to prevent creditors from collecting on debts.
c. Liability for Unauthorized Dividends
Directors approving dividends without proper authorization or when the corporation does not have sufficient retained earnings can be held personally liable for the improper distribution.
d. Liability under the Trust Fund Doctrine
The trust fund doctrine treats a corporation’s assets as a trust fund for the payment of its creditors. Directors who improperly distribute corporate assets, particularly in cases of liquidation, may be personally liable to creditors.
e. Joint Liability for Corporate Debts
In cases of corporate dissolution or insolvency, directors may be held jointly liable for debts if they acted in bad faith, gross negligence, or fraudulently to harm creditors. This liability may extend to actions taken within the "corporate veil," particularly where there is a clear abuse of the corporate form for personal ends.
3. Dealings and Conflicts of Interest
a. Self-Dealing Transactions
Transactions where directors have a personal interest, termed "self-dealing transactions," are scrutinized under the law. These transactions are generally allowed only if they are fair to the corporation and are approved by a majority of disinterested directors or shareholders after full disclosure of the director's interest. Should a director fail to disclose a conflict of interest, the transaction may be voidable at the corporation’s discretion.
b. Corporate Opportunity Doctrine
Directors cannot exploit corporate opportunities for personal gain without offering them first to the corporation. Violation of this rule can result in the director being liable to account for any profits derived from such an opportunity. The corporate opportunity doctrine is strict in prohibiting directors from usurping business chances or competing against the corporation.
c. Insider Trading and Confidentiality
Directors are prohibited from using material, non-public information (insider information) for personal gain, as stipulated by the Securities Regulation Code. This fiduciary duty to the corporation and its shareholders requires directors to maintain confidentiality regarding information that could affect stock prices or financial decisions if disclosed publicly.
4. Indemnification and Insurance
a. Indemnification
Directors may be indemnified for liabilities incurred while performing their duties, provided they acted in good faith and within the bounds of the law. This includes indemnification for legal expenses incurred in defense against lawsuits. However, no indemnity is provided for liabilities resulting from fraud, bad faith, or gross negligence.
b. Directors and Officers (D&O) Liability Insurance
Corporations may purchase D&O insurance policies to protect directors from personal liability claims. However, such policies typically exclude coverage for intentional misconduct, fraud, or criminal activities.
5. Remedies and Enforcement
Shareholders and the corporation have several remedies to hold directors accountable:
a. Derivative Suits
Shareholders may bring a derivative suit on behalf of the corporation if directors act in a manner detrimental to the corporation. This remedy is particularly important where a director’s wrongdoing prevents the corporation from acting in its own interest.
b. Intra-Corporate Disputes
Under the Rules of Procedure on Corporate Rehabilitation, corporate stakeholders, including shareholders, can bring intra-corporate disputes against directors before the Regional Trial Court exercising commercial court jurisdiction.
c. Administrative Sanctions
The Securities and Exchange Commission (SEC) and other regulatory bodies may investigate and impose administrative sanctions against directors for violations of corporate law and regulations. Penalties may include fines, disqualification from serving on corporate boards, and revocation of corporate registration in extreme cases.
d. Criminal Liability
Under specific circumstances, directors may face criminal liability, especially if their actions constitute fraud, misrepresentation, or other offenses under the Revised Penal Code or other special penal laws. The Revised Corporation Code specifies offenses such as fraud in corporate reporting, unauthorized distributions, and certain breaches of fiduciary duty.
Summary
The Revised Corporation Code, along with jurisprudence, enforces stringent standards on directors’ duties, liabilities, and permissible dealings to maintain corporate integrity and protect stakeholders. Directors must navigate their roles with diligence, loyalty, and transparency, balancing the interests of the corporation with regulatory compliance. The various forms of liability—civil, administrative, and criminal—highlight the serious legal consequences directors may face for violations, ensuring that corporate governance standards in the Philippines promote accountability, transparency, and shareholder trust.