Qualifications and Disqualifications

Qualifications and Disqualifications | Directors, Trustees, and Officers | Corporations | BUSINESS ORGANIZATIONS

In Philippine corporate law, the qualifications and disqualifications of directors, trustees, and officers of corporations are governed primarily by the Revised Corporation Code (RCC) of the Philippines (Republic Act No. 11232), the Securities and Exchange Commission (SEC) regulations, and relevant jurisprudence. Here’s a detailed analysis of each component relevant to their qualifications and disqualifications:

1. Qualifications of Directors and Trustees

The Revised Corporation Code lays down specific requirements for individuals to qualify as directors or trustees of corporations.

A. General Qualifications

  1. Natural Person: Only a natural person may serve as a director or trustee. This excludes juridical entities from holding such positions.
  2. Shareholder Requirement (Directors): Under Section 22 of the RCC, directors must own at least one share of the stock in their name. This requirement ensures that directors have a vested interest in the corporation. However, this provision does not apply to non-stock corporations, where trustees are elected based on qualifications set by the corporation's bylaws.
  3. Age and Capacity: While the RCC does not stipulate specific age requirements, a director or trustee must have the legal capacity to contract (i.e., not incapacitated or disqualified by law).
  4. Corporate Bylaws: Corporations may impose additional qualifications in their bylaws, provided these are consistent with the RCC. This includes requirements related to age, educational background, professional experience, or special skills relevant to the corporation's industry.

B. Number of Directors or Trustees

The RCC mandates that the board shall consist of not less than 5 and not more than 15 directors or trustees, which can be adjusted based on the size and needs of the corporation.

C. Residency Requirements

There are no residency requirements in the RCC for directors or trustees, allowing foreign nationals who meet other qualifications to serve as directors. However, the Foreign Investments Act and other regulations limit the roles of foreign nationals in certain businesses reserved for Filipino citizens (e.g., mass media, retail trade).

D. Educational and Professional Requirements

While the RCC does not mandate specific educational or professional backgrounds, companies often impose these requirements for certain board members, particularly in regulated industries (e.g., banking, insurance, education).

2. Disqualifications of Directors and Trustees

The RCC sets out certain disqualifications to ensure that only individuals of good moral character and legal standing can serve as corporate directors or trustees.

A. Disqualification by Law

  1. Conviction of a Crime Involving Moral Turpitude: Individuals convicted by final judgment of offenses involving moral turpitude or those punishable by imprisonment of more than six years are disqualified from serving as directors or trustees (Section 26, RCC). Crimes involving moral turpitude generally refer to those acts which are inherently vile or depraved, like fraud, theft, and corruption.
  2. Violation of the RCC: A person who has been found administratively liable for any violation of the RCC is barred from becoming a director or trustee. This includes violations related to fraudulent practices, disclosure requirements, and misrepresentation.
  3. Conviction under Special Laws: Individuals convicted by final judgment for violations of special laws, such as the Anti-Graft and Corrupt Practices Act, are similarly disqualified from serving as directors or trustees.

B. Disqualification by Corporate Bylaws or SEC Regulations

  1. SEC Memorandum Circulars: The SEC may issue memorandum circulars that disqualify individuals who have been administratively sanctioned or barred by government regulators from holding board positions in publicly listed or regulated corporations.
  2. Internal Disqualification Provisions: Corporations may impose additional disqualification provisions through their bylaws. These may include:
    • Conflict of interest prohibitions (e.g., individuals with competing business interests).
    • Specific conduct-related disqualifications (e.g., those found to have breached confidentiality or corporate policies).
  3. Rehabilitation and Insolvency: Directors and trustees must not have been judicially declared insolvent or adjudicated as suffering from unsound mental health.

C. Disqualifications for Independent Directors

Independent directors, mandated for publicly-listed companies under SEC rules, face additional disqualifications to ensure they maintain impartiality:

  1. No Business Relationship: Independent directors must not have any business relationship with the corporation or its subsidiaries, affiliates, or related interests that could compromise their independence.
  2. Non-Employment: They must not have been employed by the corporation or any of its related entities within at least two years prior to election as independent directors.
  3. Non-Relative: Independent directors should not be related within the fourth degree of consanguinity or affinity to any director, officer, or substantial shareholder of the corporation.

3. Qualifications and Disqualifications of Corporate Officers

Corporate officers (e.g., President, Treasurer, Secretary) are appointed by the board and may have distinct qualifications and disqualifications under the RCC and the corporation's bylaws. Key provisions include:

A. President

  • Board Membership Requirement: The RCC requires that the President of the corporation must be a director.
  • Disqualifications: As with directors, officers may be disqualified if they are convicted of crimes involving moral turpitude or are administratively sanctioned by regulatory bodies.

B. Treasurer and Corporate Secretary

  • Non-Board Member Eligibility: Unlike the President, the Treasurer and Secretary do not have to be members of the board.
  • Residency Requirement (Secretary): The RCC mandates that the Corporate Secretary must be a resident of the Philippines. This ensures that corporate documentation and regulatory compliance are efficiently managed within the jurisdiction.

4. Additional Guidelines for Disqualification and Removal

Directors or trustees can be removed from office by a vote of stockholders holding at least two-thirds of the outstanding capital stock or a majority of the members in a non-stock corporation, following due process. Grounds for removal may include:

  • Misconduct or Gross Negligence: Directors may be removed for misconduct, dishonesty, or gross negligence in managing the corporation's affairs.
  • Incompetence: Directors who fail to perform their duties with the necessary level of skill and diligence may be removed.
  • Conflict of Interest: Directors involved in actions that compromise the corporation's interests may face disqualification or removal if they breach the duty of loyalty.
  • Violation of Corporate Governance Principles: For publicly listed companies, directors who fail to comply with corporate governance regulations may be removed based on SEC findings.

5. Important Jurisprudence on Director and Trustee Qualifications and Disqualifications

Philippine jurisprudence has established principles that underscore the corporate board’s fiduciary duty, professionalism, and ethical conduct. Notable cases include:

  1. Gokongwei Jr. v. SEC: Affirmed the requirement for directors to have shares recorded in their name, enforcing the shareholder qualification.
  2. Agan, Jr. v. PIATCO: Established that directors who breach fiduciary duties may be personally liable, underscoring the ethical standards expected from board members.
  3. SEC vs. Interport Resources Corp.: Emphasized that corporate governance violations by directors and trustees could lead to disqualification and, in severe cases, criminal liability.

These detailed qualifications and disqualifications aim to maintain a high level of corporate governance, ethical conduct, and competence within the leadership of Philippine corporations, ensuring their alignment with national laws and corporate governance principles.