Mr. Jose V. Loanzon Jr.

July 15, 1996 Mr. Jose V. Loanzon Jr. 4427 Old Sta. Mesa St.,Manila S i r : This refers to your letter dated July 2, 1996 requesting legal advise on the following queries: llcd 1. Is a stockholder with only 10% ownership in a corporation entitled to a seat in the Board of Directors? 2. Does ownership of a company in a similar business automatically disqualify a stockholder to a seat in the Board of Directors? 3. Does a stockholder have access to the corporate books? 4. What recourse does a stockholder have if he is inhibited from inspecting corporate books, barred from the Board of Directors and not invited to stockholder's meeting? 5. Does the SEC provide arbitration or free legal assistance for similar cases? Relative to the first issue, Sections 23 and 24 of the Corporation Code provide: "SECTION 23. The board of directors or trustees . .... Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director." ...(Emphasis supplied) "SECTION 24. Election of directors or trustees . ....In stock 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 cast by him 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. ...Candidates receiving the highest number of votes shall be declared elected. ...Emphasis provided) It is clear from the above provisions that an owner of at least one (1) share can seat in the Board, provided he is elected in accordance with the manner prescribed above. Automatic membership in the Board is not allowed. It is always subject to election by the stockholders. The above cited provision allows " cumulative voting " wherein a stockholder may cumulate his shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of shares he holds. The right of "cumulative voting" is a method of concentrating votes devised to give a minority stockholder the opportunity to secure representation in the Board of Directors.,Accordingly, under the cumulative voting, a stockholder who owns 10% of the outstanding capital stock of a corporation may possibly be elected to the Board of Directors. Relative to the second query, the Corporation Code does not prohibit " interlocking directors ".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. Further, 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 of the Corporation Code by disqualifying a stockholder, director or officer who is also a director or officer of another corporation or one who controls another enterprise, which is a competitor of your corporation from being elected as director or officer. Anent the third and fourth queries, the pertinent provisions of the Corporation Code provides: "SECTION 74. Books to be kept .... xxx xxx xxx. The records of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any directors, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense . Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages ,and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand." ..." (Emphasis supplied) "SECTION 75. Right to financial statements . Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement ,which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. ..." (Emphasis supplied) Thus, a stockholder of a corporation has the right to inspect the corporate books and records and/or request for copies of financial statements. This right is based on the principle that a stockholder has the right to be fully informed as to the status and condition of the corporation, the manner its affairs are conduct and how its capital to which they have contributed is employed or managed. However, the exercise of the right of inspection of corporate books and records should be for a legitimate purpose. In the event the exercise of the above right is wrongfully denied to the person entitled thereto, he may enforce his right by filing with the Commission a petition for a writ of mandamus to compel the officer having charge of the above-mentioned corporate documents to permit him an inspection, or in proper case maintain an action for damages which he may have sustained thereby. As to your right to attend stockholders meeting, Section 50 of the Corporation provides: "SECTION 50. Regular and special meetings of stockholders or members . Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed on any date in April of every year as determined by the board of directors or trustees: Provided, That written, notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws; Provided, However, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member." (Emphasis supplied) The use of the word " shall " in the aforecited provisions indicates that written notice of meeting to each stockholder is mandatory and therefore an essential requisite for validity of stockholders' meeting. Thus, all stockholders of a corporation have the right to attend stockholders meeting. Finally, on the last query, while the SEC does not provide for a free arbitration assistance, the Commission is willing to give corporate advisory assistance to the transacting public. Very truly yours, (SGD.) PERFECTO R. YASAY, JR. Chairman