Mercantile and Taxation Laws: Corporations

Focus: Directors, Trustees, and Officers — Term, Holdover, and Removal

In the Philippine corporate framework, governed by the Revised Corporation Code (RCC) of 2019 (Republic Act No. 11232), the principles surrounding corporate governance of directors, trustees, and officers form a critical foundation. This overview will cover essential aspects, including term limitations, holdover arrangements, and grounds or processes for the removal of directors, trustees, and officers.

1. Term of Office for Directors and Trustees

Regular Term:
- Section 22 of the Revised Corporation Code provides that directors and trustees are generally elected to a one-year term unless otherwise specified in the corporation’s bylaws.
- Terms begin immediately following election by the stockholders or members during the annual meeting and are considered concluded after the subsequent annual election.
- The board composition must include at least five (5) but not more than fifteen (15) directors or trustees, aligning with regulatory standards set by the Securities and Exchange Commission (SEC).
Staggered Terms for Non-Stock Corporations:
- The RCC allows non-stock corporations to adopt staggered terms for their trustees, allowing them to serve terms longer than one year to ensure continuity and stability within the board. However, this must be explicitly allowed under the corporation's articles or bylaws.
Independent Directors:
- Pursuant to SEC regulations, listed corporations and certain public corporations are required to have independent directors who are likewise elected for a one-year term, subject to reelection up to a maximum cumulative term of nine (9) years.

2. Holdover Principle

Definition and Scope:
- The holdover principle refers to a director or trustee’s capacity to continue serving beyond their term until a successor is duly elected and qualified. This is intended to prevent a vacuum in governance and maintain the continuity of corporate administration.
Statutory Basis:
- Section 22 of the RCC explicitly provides for the holdover of directors and trustees, stating that those whose terms have expired shall continue to hold office until their successors are elected and qualified. This mitigates the risk of disrupting corporate operations due to board vacancies.
Limitations on Holdover:
- While the holdover provision is essential, it cannot be abused to perpetuate control by a particular set of directors indefinitely. Hence, corporations are encouraged to ensure timely elections in accordance with their bylaws.
Judicial Precedents:
- In Philippine jurisprudence, the Supreme Court has upheld the holdover principle to maintain corporate stability, provided that elections are held within a reasonable period. Cases where no reasonable attempt is made to elect new directors could result in the intervention of the SEC to enforce corporate governance norms.

3. Removal of Directors, Trustees, and Officers

Grounds and Procedures for Removal:
- Directors or Trustees:
  - For Cause:
    - Directors or trustees may be removed for cause at any regular or special meeting of the stockholders or members called for that purpose. However, “cause” must be based on grounds such as dishonesty, gross misconduct, conflict of interest, or incompetence.
  - Without Cause:
    - Stockholders or members holding or representing at least two-thirds (2/3) of the outstanding capital stock or membership are empowered to remove a director or trustee from office, even without cause, provided that cumulative voting rights are observed.
    - Removal without cause applies only to directors or trustees who do not hold vested rights in their office (i.e., non-proprietary interest), aligning with the corporation’s best interests.
Voting and Notice Requirements:
- The RCC mandates that removal must be voted upon by at least a two-thirds (2/3) majority of the stockholders in a regular or special meeting, ensuring that due process is observed.
- Directors or trustees facing removal must be given prior written notice, ensuring transparency and fairness.
- Removal proceedings must adhere strictly to procedures stated in the bylaws and follow any additional requirements imposed by the RCC or the SEC.
Filling Vacancies Post-Removal:
- When a vacancy occurs due to removal, the RCC provides that it must be filled in accordance with the corporation’s bylaws. Generally, the stockholders or members, not the board itself, have the right to fill vacancies resulting from removal.
Officers:
- Unlike directors or trustees, corporate officers, such as the president, treasurer, or corporate secretary, can be removed with or without cause by the board of directors. This flexibility stems from the officers’ direct accountability to the board rather than the stockholders.
- Removal and replacement of officers are integral to the board’s oversight functions, allowing them to address performance concerns or realign leadership as necessary.

4. Special Considerations and SEC Regulations

Mandatory Removal for Disqualified Directors:
- Certain situations, such as a director’s conviction for offenses punishable by imprisonment of more than six years, fraud, or violation of the Revised Corporation Code, may render a director or trustee disqualified from office. In such cases, removal is mandatory, often prompted by SEC action.
Rules on Independent Directors:
- SEC rules mandate that independent directors are subject to specific qualifications and restrictions. They can only serve for a maximum of nine years cumulatively in the same corporation, ensuring board independence and impartiality.
Court Intervention:
- In instances of board deadlock or refusal by the board to honor valid removal actions, stockholders may seek judicial intervention. Courts can compel compliance with the Revised Corporation Code’s provisions on removal to maintain corporate governance standards.

Conclusion

Understanding the term, holdover, and removal of directors, trustees, and officers in Philippine corporations is essential for legal compliance and effective corporate governance. The Revised Corporation Code provides a structured framework that seeks to balance continuity in management with the accountability of directors and officers to the stockholders and members. Strict adherence to the Code’s mandates, along with SEC oversight, ensures a functional and legally compliant corporate environment.