Atty. Felisa B. Baguilat

March 14, 1989 Atty. Felisa B. Baguilat Quasha Asperilla Ancheta Pea & Nolasco Don Pablo Building 114 Amorsolo Street Makati, Metro Manila Madam: This refers to your letter dated March 8, 1989, requesting for opinion on the queries posed therein. It appears therein that Mansalay Mining Corporation was granted by the Bureau of Mines a permit to explore the Mansalay Forest Reservation and it conducted exploration work in the area which led to the discovery of rich deposits of silica. A project feasibility study was prepared on the basis of which the Bureau of Mines conducted a geological evaluation of the silica deposits. The Bureau of Mines thru the Secretary of Natural Resources recommended exclusion of about 3,921 hectares of mineable silica from the forest reservation. On September 7, 1987, President Corazon C. Aquino signed a proclamation excluding the area from the forest reservation and opening the same for mining purposes. Shortly, thereafter, without securing any clearance from the Board of Directors, the President and his wife who are both directors of the corporation, together with their children filed individual declarations of claims over the areas also previously explored by the Mansalay Mining Corporation. When the other officers and directors came to know about this, the General Manager who is also a director filed declarations and application over the mining claims on behalf of the corporation to protect the rights of the corporation without securing specific authority from the Board of Directors considering that the President and his group control 50% of the outstanding shares of the corporation. The President who is presently working to finalize the claims for himself his family and associates, has formed another corporation which is also engaged in the mining of silica. Your queries are: 1. May the President and Director of the Corporation file applications for mining claims over areas being claimed by the Corporation without violating his fiduciary duty to the stockholders as President and director and being guilty of bad faith in directing the affairs of the Corporation? 2. Under the circumstances, did the General Manager/director in filing the application for mining claims on behalf of the Corporation to safeguard and protect its rights, acts in excess of his authority as General Manager in the absence of a specific authority from the Board to file the claims and represent the corporation in pursuit of said claims? In connection therewith, please be advised that as a matter of policy, the Commission refrains from answering queries based on allegations involving justiciable issues which could only be clarified and determined in a proper proceeding. Like in other letter-queries of similar nature, the Commission has adopted the policy of not taking any action on justiciable issues and/or anticipatory questions presented before it for the reason that the opinion which may be rendered thereon would not be binding upon private parties who would in all probability, if the opinion happens to be adverse to their interest take issue therewith and contest it before the court. However, for purposes of information only, the following may be imparted: Anent your 1st query, the pertinent provisions of the Corporation Code provide: "SECTION 31. Liability of directors, trustees or officers . Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporations or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders, or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation." (Emphasis supplied) Section 34 of the Code further provides: "SECTION 34. Disloyalty of a Director . Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account for all such profits by refunding the same ,unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture." (Emphasis supplied) The foregoing provisions are similar to the rule on agency under Article 1889 of the Civil Code which provides: "ARTICLE 1889. The agent shall be liable for damages if, there being a conflict between his interests and those of the principal, he should prefer his own." The provision also reinforce the principle that directors and officers occupy a fiduciary relation to the corporation and the stockholders as a body. (3 Fletcher 147). Thus, they are obliged to act with utmost care and diligence and fair dealing in the interest of the corporation without taint of selfish motives. Our own Supreme Court in the case of Legarda vs. La Previsora, G.R. No. 44451, December 16, 1938, 66 Phil. 123 held "the board of directors thereof in drawing to themselves the power of the corporation, occupies a position of trusteeship in relation to the stockholders in the sense that the board should exercise not only care and diligence, but utmost good faith in the management of corporate affairs." Relative to your 2nd query, the general rule is that the power to bind a corporation by contract rests in its Board of Directors ( SEC letter dated December 21, 1988, addressed to Mr. Rodolfo P. Gonzales ). However, it is a settled rule of jurisprudence that where similar acts have been approved by the directors as matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors .Stated otherwise, existence of such authority is established by proof of the course of business, the usages and practices of the company and by the knowledge of which the Board of Directors has, or must be presumed to have , of the acts and doings of its subordinates in and about the affairs of the corporation. (Agbayani citing Board of Liquidators v. Kalaw, L-18805, Aug. 14, 1967). Thus, it was held that where the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its trading activities for and in the corporation's behalf without prior approval of the Board, it was held that the Board itself by its acts and through acquiescence, practically laid aside the requirement of prior approval of the Board. (Ibid.) Likewise, when an officer or agent of a corporation is entrusted by shareholders or directors with the general charge and management of the business of the corporation, the general rule is that he has the implied authority to make any contract or do any other act appropriate in the ordinary business of the corporation. But his authority does not extend to any matter, or transactions which are not properly incidental to the management of the ordinary business (Sec. 56 Ballantine p. 144) cdll Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman