Mr. Publio P. Tibi, Jr.

June 22, 1995 Mr. Publio P. Tibi, Jr. A-401 Manila Bankers Building Ayala Avenue, Makati City S i r : This refers to your letter of June 9, 1995 requesting opinion on the issue raised therein. As stated, you have an operating corporation wherein the President and Executive Vice-President are husband and wife, and both are members of the Board. At the same time, said officers also own a realty firm handling the marketing aspect of the corporation on commission basis. Last year, said husband and wife organized their own corporation engaged in the same development activities. Due to the patent conflict of interest, the situation caused some corporate problems in the operation of your corporation. Your query is: Can the husband and wife lawfully continue to hold their present positions in the Corporation as President and Executive Vice-President and as members of the Board. The Corporation Code does not prohibit the above situation. An individual may be a stockholder in different corporations and it is not unusual to find a director or corporate officer occupying the same position in another corporation not only because one has investments therein but also because his services may have been proven to be valuable and efficient. However, while such situation is allowable, dealings of interlocking directors are subject to Sections 31, 33 and 34 of the Corporation Code, quoted hereunder: "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 corporation 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." "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 the 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." "SECTION 34. Disloyalty of a director . Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to a corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter 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." However, while there is no provision in the Corporation Code prohibiting interlocking directors/officers, Section 47(5) of the Code expressly empowers a corporation to provide in its by-laws additional qualifications of its directors other than the minimum qualification of directors/officers under Section 23 and 25 thereof. The Corporation Code provides: "SECTION 47. Contents of by-laws . Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws: xxx xxx xxx. 5. The qualifications ,duties and compensation of directors or trustees, officers and employees;" (Emphasis supplied) Thus, as a device to protect the interest of a corporation, a provision disqualifying a stockholder, director or officer who is also a director or officer of another corporation or one who controls another enterprises which is a competitor of your corporation from being elected as director or officer, may be provided for in the By-laws. Such a disqualification would prevent the situation mentioned in your letter. Any amendment to the corporate by-laws, however, shall be subject to the following provision of the Corporation Code. "SECTION 48. Amendments to by-laws . The board of directors or trustees, by a majority vote thereof; and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendments or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission, the same to be attached to the original articles of incorporation and by-laws. cdlex The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code." (Emphasis supplied) Please be advised accordingly. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner