Mr. Jerome M. Tang

July 10, 1995 Mr. Jerome M. Tang Intercon Diagnostic Laboratory P.O. Box 359 S i r : This refers to your letter of June 19, 1995 requesting opinion on the queries posed therein summarized hereunder and answered in the order they are presented: 1. Whether or not a non-stockholder can be authorized to represent a corporation in Stockholders/Board meetings of another corporation of which the former corporation is a stockholder of record? 2. Who are qualified to represent a corporation in Stockholders/Board meetings of another corporation and who is authorized to appoint such representative? 3. Can the authority of the nominee director be delegated ? It is well settled that unless otherwise provided in the corporate by-laws, it is the prerogative of the Board of Directors of a corporation to appoint nominees in the Board of Directors of other corporations of which it is a stockholder, whose acts shall be under the ultimate direction of the Board of Directors of the appointing corporation. While Section 23 of the Corporation Code requires that a Director must be a stockholder of the corporation, the Commission had occasions to rule that "beneficial ownership" is not necessary and that a person who holds the legal title to stock on the books of the corporation is qualified, although the beneficial ownership may be in another. In other words, it is sufficient that the title to the stock, as it appears on the books of the corporation, is in the nominee director, since the legal title is what counts and it is the person whose name appears as owner of the books of the company who is the stockholder and is eligible as director. For instance, a director may hold his stock as trustee and yet be legally qualified. So a person to whom one share of stock has been transferred for the express purpose of qualifying him as a director is eligible. ( Ltr. to Peftok Integrated Services, Inc. dated February 12, 1985 citing 2 Fletcher Cyc. Corp. Sec. 300) Thus, a non-stockholder may qualify as nominee director. However, in order to be qualified as such, the owner of the shares represented must assign at least one qualifying share to the nominee for purposes of qualifying him to be a member of the Board, which assignment must be properly recorded in the corporate books. It has to be emphasized, however, that the powers, duties and responsibilities of an elected director, acting in his capacity as such, cannot be delegated. The reason for this is that the Board of Directors is the governing body of the corporation with whom the management of the corporation is vested, and on account of the Directors responsibilities, they are supposed to exercise their own judgment and discretion in running the affairs of the corporation. The Directors represent the stockholders who voted for them into office presumably because of their personal qualification and business experience. Thus, Section 25 of the Corporation Code is explicit that " Directors or trustees cannot attend or vote by proxy at board meetings ".Accordingly, it is a requirement for directors to attend and vote in directors meeting in person. However, a director acting not in his capacity as a director but as a stockholder of the corporation, may be represented by proxy in stockholders meeting (Sec. 58). 4. Can a person simultaneously act as an accountant and internal auditor of a corporation? The pertinent provision of the Corporation Code provides: "SECTION 25. Corporate officers, quorum . ....Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time." (Emphasis supplied) It is clear from the above provision that two positions may be occupied by one person. Hence, the above query may be answered in the affirmative. However, an accountant or internal auditor cannot be at the same time an external auditor of the corporation. 5. Is an internal auditor entitled to enjoy the same benefits and privileges given to employees? It was previously held that: "The only officers of a corporation are those who are given that character either by the corporation law or its by-laws. The rest can be considered merely as employees or subordinate officers." (Gurrea v. Lezama, No. L-10556, April 30, 1958, cited in SEC Opinion dated May 15, 1969 addressed to General Assembly of the Evangelical Church of Christ, Inc . " Accordingly, if the auditor was elected by the Board as an officer pursuant to the provisions of the by-laws, he cannot be considered an employee. He can be accorded the benefits of an employee only if he was employed as an employee of the corporation. 6. Can a husband and wife be directors and officers in the same corporation? Husbands and wives may become directors and/or officers of a corporation, provided they are qualified under the law and by-laws and elected in accordance with Sections 24 and 25 of the Corporation Code quoted hereunder: "SECTION 24. Election of directors or trustees . At all elections of directors or trustees there must be present either in person or by representative authorized to act by written proxy the owners of the majority of the outstanding capital stock or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock of corporations every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing at the time fixed in the by-laws in his own name on the stock books of the corporation, or where the by-laws are silent at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected .Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if; for any reason, no election is held, or if there are not present or represented by proxy, at the meeting the owners of the majority of the outstanding capital stock or if there be no capital stock, a majority of the members entitled to vote." "SECTION 25. Corporate officers, quorum . Immediately after their election, the directors of a corporation must formally organize by the election of a president who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. LexLib The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and by the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act except for the election of officers which shall require the vote of a majority of all the members of the board . xxx xxx xxx. (Emphasis supplied) 7. Can a stockholder transfer his shares to a third party without first offering the same to the corporation in writing through the corporate secretary as required under the articles of incorporation? It is well settled that shares of stock in a corporation are personal property and that the owner thereof, as in the case of other personal property, has an inherent right as incident of his ownership, to sell and transfer the same at will. This right is expressly recognized by the Corporation Code which provides in part: "SECTION 63. Certificate of stock and transfer of shares . The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner of his attorney-in-fact or other person legally authorized to make the transfer ....(Emphasis supplied) As such, the facility of transferring them must not be unduly hampered by imposing restrictions as would amount to restraint on free alienation of property. The Commission, however, as a matter of policy, allows restrictions on transfer of shares in the articles of incorporation if the same is necessary and convenient to the attainment of the objective for which the company was incorporated, unless palpably unreasonable under the circumstances ( SEC Ltr. to Atty. Merly P. Cunanan dated February 20, 1995 ). Reasonable restrictions on the power to transfer shares of stock as imposed in the charter of a corporation are binding upon all persons who become stockholders thereof, since they are chargeable with notice .Thus, a provision in the articles of incorporation requiring stockholders desiring to sell their stocks to offer it to the corporation or to the existing stockholders at a given reasonable period before disposing of it to third parties may be considered valid and enforceable ( SEC Ltr. to Atty. Vicente G. Villamil dated February 15, 1993 ). However, the Commission on several occasions has opined that if the purpose of the transfer of stock is only to qualify the transferee or nominee for the election in the Board of Directors without giving him the beneficial ownership thereof, the transfer is not violative of the transfer restriction clause in the articles of incorporation. Said transfer would be more of a "trust" and not a transfer of "ownership", since the beneficial interest in such shares remains with the assignor while the assignee merely holds the legal title to the stock. (SEC Opinion dated March 5, 1980, citing Fisher, the Philippine Law of Stock Corporations, p. 234; Letter to PEFTOK Integrated Services, Inc. dated May 21, 1991 ) In this case, the transferee should be described in the Deed of Assignment, corporate books and certificate of stock to be issued merely as qualifying shareholder or nominee of the transferor ( SEC Ltr. to Mr. Carlos S. Nocon dated November 23, 1992 ). llcd Please be advised accordingly. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner