Mr. Jose C. Fuentes

December 15, 1987 Mr. Jose C. Fuentes ADC Bldg.,3rd Floor 6805 Ayala Avenue Makati, Metro Manila Sir : This refers to your letter, dated November 25, 1987, requesting for confirmation of your view that transfer by a stockholder of one (1) qualifying share to his nominee to vest him a seat in the board of directors need not comply with the restriction on transfer clause in the articles of incorporation giving the corporation the right of first refusal thereon. In addition, you pose the following query: In the absence of a quorum in the board of directors, may the stockholders resolve the question affecting the sale or transfer of their shares in the corporation in the light of a by-law provision declaring a quorum for stockholders' meeting? Anent the first issue, please be advised that the Commission in a previous opinion has ruled that transfer of naked ownership of stock is not violative of the restriction clause stated in the articles of incorporation if the purpose thereof is merely to qualify the nominees or trustees as directors. To rule otherwise would create an injustice, specially to corporate stockholders, who under the law, have the right to be represented in the board. ( Letter to PEFTOK Integrated Services, Inc., dated February 12, 1985 ). Hence, the Commission confirms your position that transfer by a stockholder of one (1) share to his nominee for the purpose of qualifying him to a seat in the board of directors need not comply with the restriction on transfer clause prescribed in the charter. Be reminded, however, of the provision of Section 63 of the Corporation Code stating that no transfer of stock shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. llcd In connection with the second issue raised in your letter, the pertinent provision of the Corporation Code provides thus: "SECTION 23. The Board of Directors or trustees . Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks . . .." Almost universally, the management is vested by a general statute or charter provision in the board of directors or trustees. In such case, the powers so vested in the directors must be exercised by them, and cannot be exercised by the stockholders. (5 Fletcher, Cyc. Corp.,1976 rev. vol.,sec. 2097, at 401). There are, however, numerous exceptions to the old conventional rule that a corporation cannot act except by authority of the board of directors in a meeting, duly convened in accordance with the statutes or by-laws, at which directors may consult and counsel each other. (Ballantine on Corporations, 125).There is some support for the view that "The shareholders may waive the necessity for a meeting of the board of directors, and without such meeting may authorize acts to be done by agents of the corporation or ratify acts already done and bind the corporation. The shareholders are the residuary owners, and the rule requiring directors' meetings to authorize acts is for their benefits".(Merchant's and Farmers' Bank v. Harris Lumber Co.,103 Ark. 283, 146 S.W. 508, Ann. Cas. 1914 B 713; and others, cited in Ballantine, Supra.,at 125-126).Likewise, "Where the shareholders, by acquiescence, invest the executive officers of the company with powers of the directors as the usual method of doing business, the board being in active ,the acts of such officers will bind the corporation according to some courts, although not authorized by any vote of either stockholders or directors." (Barkin Const. Co. v. Goodmen, 221 NY 156, 116 N.E. 770, and others, cited in Ballantine at 126). The rule that where the charter or by-laws of a corporation provide for the annual election of officers or directors and no election is held, the former officers hold over until their successors are elected applies to a going concern, where there is no break in the exercise of duties of the officers and directors ." (2 Fletchers Cyc. Corp.,1982 rev. vol.,sec. 344 at 138). Hence, under exceptional situations, stockholders' agreement, though it provides for the exercise of management ordinarily delegated to the board, is valid and enforceable where no creditor, minority stockholders or other persons of the public are affected. However, a mere lack of quorum in the board alone where the body is not inactive, would not justify stockholders' action. Present some extraordinary conditions, your query may be answered affirmatively. Should there be no existing board of directors in the corporation, your attention is invited to the provisions of Section 50 of the Corporation Code prescribing the manner of calling for a special stockholders' meeting to enable the corporation to install a board of directors. cdll Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman