Section 26: Disqualification of Directors, Trustees, or Officers
A person cannot become a director, trustee, or officer if within 5 years before election or appointment,
they were:
• Convicted (final judgment) of a crime punishable by over 6 years of imprisonment,
• Convicted for violating the Corporation Code or Securities Regulation Code (RA 8799),
• Found guilty of fraud (admin case),
• Found guilty abroad of similar misconduct.
Note: Other agencies may impose additional disqualifications.
Section 27: Removal of Directors or Trustees
• Can be removed by 2/3 vote of stockholders (or members for nonstock corps), in a regular or
special meeting with prior notice.
• Special meeting can be called by the president, secretary, or majority of stockholders/members.
• Removal can be with or without cause, but not to remove minority representation under Section
23.
• SEC can also remove disqualified directors, especially if knowingly retained by the board.
Section 28: Vacancies in the Board
• Not due to removal/term expiration: Filled by majority of remaining directors, if still a quorum.
• Due to expiration: Election must be held on the expiration day.
• Due to removal: Election may be held the same day (if included in notice/agenda).
• Emergency Board: If no quorum, the remaining directors can temporarily fill the vacancy from the
officers to prevent serious harm. SEC must be notified within 3 days.
• Increase in board seats: Filled only via election in a properly called meeting.
Section 29: Compensation of Directors or Trustees
• No compensation unless allowed in the bylaws or approved by majority of stockholders/members.
• Per diems are allowed.
• Cap: Total annual director compensation cannot exceed 10% of net income before tax.
• Directors cannot vote on their own pay.
• Corporations vested with public interest must report directors’ compensation annually.
Section 30: Liability of Directors or Officers
They are personally liable if they:
• Willfully approved illegal acts,
• Acted in gross negligence or bad faith,
• Used their position for personal gain in conflict with corporate interest.
They must account for any profits made from such abuse of trust.
Section 31: Self-Dealing Contracts
Contracts with directors, trustees, officers, or close relatives are voidable unless:
• Their presence and vote were not needed,
• The contract is fair and reasonable,
• Independent directors approve (if applicable),
• Board approves in case of officer contracts.
If those conditions aren’t met, the contract can still be ratified by 2/3 vote of stockholders or members,
with full disclosure.
Section 32: Interlocking Directors
• Allowed if fair and reasonable and not fraudulent.
• If a director has substantial interest (over 20%) in one corp and only nominal in the other, Section
31 rules apply.
Section 33: Disloyalty of a Director
• If a director takes a business opportunity meant for the corporation, they must return the profits.
• Exception: If ratified by 2/3 vote of stockholders.
Section 34: Executive and Special Committees
• Board can create an executive committee (at least 3 directors) if bylaws allow.
• This committee can act on delegated matters, except:
o Actions requiring stockholder approval,
o Board vacancies,
o Amendments to bylaws,
o Distribution of dividends.
Board can also create other special committees as needed.
TITLE IV – POWERS OF CORPORATIONS
Section 35: General Corporate Powers
Corporations can:
• Sue and be sued
• Exist perpetually (unless stated otherwise)
• Own property, issue shares, make donations (except political), enter into agreements, etc.
• Do what’s necessary to fulfill their lawful purpose.
Section 36: Extend or Shorten Corporate Term
• Needs board majority and 2/3 stockholders/members vote.
• Written notice must be sent in advance.
• Dissenting stockholders may exercise appraisal rights.
Section 37: Increase/Decrease Capital or Bonds
• Requires board majority and 2/3 stockholders' vote.
• Submit documentation to SEC.
• SEC won't approve increase unless:
o 25% of the increase is subscribed,
o 25% of subscription is paid in cash or property.
• SEC will deny decrease if it harms creditors’ rights.
Section 38: Preemptive Right
Stockholders have the first right to subscribe to new shares unless:
• Denied in the Articles of Incorporation,
• Shares are issued to public, for property, or to pay debts with 2/3 approval.
Section 39: Sale of Corporate Assets
• Regular sales: Board approval only.
• Sale of substantially all assets: Needs 2/3 stockholders’ vote.
• “Substantial” means it stops the corporation from operating.
• Dissenting stockholders may exercise appraisal rights.
• Board may still abandon the sale even after approval.
Section 40: Corporation Buying Its Own Shares
Allowed if:
• There are unrestricted retained earnings,
• For legitimate purposes like:
o Eliminating fractional shares,
o Settling debts from unpaid subscriptions,
o Paying dissenting stockholders.
Section 41: Investment in Other Businesses
• Needs board approval and 2/3 stockholders’ vote unless:
o Investment is necessary to fulfill its primary purpose.
• Notice must be sent.
• Dissenting stockholders may exercise appraisal rights.
Section 42: Power to Declare Dividends
• Board may declare dividends from unrestricted retained earnings:
o Cash, property, or stock.
• Cash dividends on delinquent stock go to unpaid balance first.
• Stock dividends need 2/3 stockholders’ approval.
• Cannot retain earnings > 100% of paid-in capital unless:
o Expansion plans,
o Restriction by creditors,
o Special circumstances.
Section 43: Management Contracts
• Must be approved by both boards and majority of stockholders/members.
• If interlocking directors or control of 1/3 shares exists: 2/3 vote required.
• No management contract can exceed 5 years.
• Special contracts (like for natural resources) must follow specific laws.
Section 44: Ultra Vires Acts
• A corporation cannot perform acts beyond what’s authorized in:
o This Code,
o Its Articles of Incorporation,
o Necessary/incidental to its corporate purpose.
