Hon. Gloria Macapagal-Arroyo

December 21, 1992 Hon. Gloria Macapagal-Arroyo Senate 3rd Floor, East Wing, Velco Center Bldg. cor. 13th Street and Chicago Street Port Area, Manila S i r : This refers to the letter of your office dated December 7, 1992 requesting comments on Senate Bill No. 662, entitled "AN ACT TO PROHIBIT A PUBLICLY-LISTED FIRM FROM ENTERING INTO OR HAVING ANY KIND OF FINANCIAL OR BUSINESS TRANSACTION WITH A FIRM THAT IS DIRECTLY OR INDIRECTLY OWNED OR CONTROLLED BY A PERSON WHO IS HOLDING A POSITION OF PRESTIGE, POWER OR INFLUENCE IN SUCH PUBLICLY-LISTED FIRM OR COMPANY". It is not unusual to find a corporate officer occupying the same position in another corporation not only because one has big investments therein but also because his services may have proven to be valuable and efficient. Usually, we often find interlocking directors in two or more corporations that transact business with one another on a regular basis because of some legitimate business reasons. These transactions usually occur in a parent-subsidiary relationship between corporations. Hence, in some cases the contract between two corporations may require that representatives of one corporation sit in the board of the other. Because of the above realities of business expediencies, it would be impractical to prevent transactions referred to in the proposed Bill. The people that would be affected by the Bill are the moneyed people who can venture in any business they thought would be profitable and whose efficient managements skills, competence or technical expertise can improve business activities of the country. To inhibit business transactions of one corporation with another corporation controlled by the former would discourage business formation of business subsidiaries and therefore would run counter to the policy of the government to promote investments. Such a prohibition would discourage rather than encourage investments and would hamper capital market development in the country. It is worth-mentioning that under the Corporation Code, business contracts or transactions of corporations with interlocking directors/officers or owners are already covered and governed by Sections 32 & 33 thereof, quoted hereunder: "SECTION 32. Dealings of directors, trustees or officers with the corporation . A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in the case of an officer, the contract with the officer has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. SECTION 33. Contracts between corporations with interlocking directors . Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors." Moreover, under Section 44 of the same Code, where a management contract is entered into between corporations with interlocking directors/ stockholders, such management contract must be approved by the required vote of the stockholders of both corporations. Unless approved by the required vote of the stockholders, the management contract cannot take effect. The Code provides, thus: "SECTION 44. Power to enter into management contract . No Corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreement or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations." We are of the view that business transactions of corporation with interlocking directors, officers or stockholders are already properly regulated by the above provisions. It is worth mentioning in this connection that the government 's present policy is to deregulate economic business activities as much as possible. Too much or strict regulation would be inconsistent with the present investment policy of the government. llcd Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman