Attys. Elma Christine R. Leogardo and Cynthia D. Nuval Ambrosio

August 4, 1995 Attys. Elma Christine R. Leogardo and Cynthia D. Nuval Ambrosio Villaraza & Cruz Law Offices 5th Flr.,LTA Bldg.,118 Perea St., Legaspi Village 1229 City of Makati M a d a m : This refers to your letter of July 24, 1995, requesting opinion on the following queries: 1. May the stockholders and the Board of Directors of a corporation validly approve a resolution amending the by-laws of the corporation which would provide that the incumbent Vice-Chairman of the Board of Directors shall automatically be the Chairman of the succeeding Board if he is elected as a member of the succeeding Board? 2. May the stockholders and the Board of Directors of a corporation validly approve a resolution amending the by-laws of the corporation which would provide that the Chairman of the Board may exercise his voting rights in the Board only to break a tie or to create one ? 3. May a stockholder, with the consent of the corporation, transfer or assign one (1) qualifying share of stock from his partially-paid shares of stock to a person who will serve merely as its/his nominee to the Board of Directors of the corporation? The provision of the Corporation Code pertinent to your first query provides: "SECTION 25. Corporate officers, quorum . Immediately after their election ,the directors of a corporation must formally organized 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 ...." (Emphasis supplied) The above provision clearly requires an election of a new set of officers immediately after the election of the newly elected members of the Board. Therefore, the newly elected Board is not bound by the choice of the previous Board. Inasmuch as the proposal would deny the newly elected Board the prerogative to elect the new Chairman, it would be violative of the above provision. Accordingly, your first query is answered in the negative. Relative to your second query, the Commission had previously ruled that any matter or transaction must necessarily fail if the votes attained are less than what the law requires for the particular transaction." ( Ltr. to Mr. Tomas F. Cloma, Jr. dated July 21, 1994 ) Hence, if there is a tie, the issue or proposition simply loses. Moreover, a director cannot be deprived of the right to vote as he is elected as such purposely to participate in the management of the corporation. A director cannot participate in major corporate decisions unless he is given the right to vote. A by-law provision allowing the director, who happens to be elected as the chairman of the Board or presiding officer, to vote only in case of tie or to create one would defeat the very purpose for which a director is elected. Thus, the Commission, in its meeting of August 4, 1995, resolved to answer your query in the negative. Anent your third query, the Commission on several occasions has opined that if the purpose of the transfer of stock is only to qualify the transferee 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",hence, the beneficial interest in such share will remain with the assignor while the assignee will hold only the legal title to the stock. In such case, the transferee should be described in the Deed of Assignment, corporate books and certificate of stock merely as a qualifying shareholder or nominee of the transferor. The fact that the stock standing on the corporate books is in the name of the person only as a qualifying shareholder or that the holder of the stock certificate is described merely as a nominee serves as a notice to the corporation and third parties that the holder thereof does not hold the share in his own right, but holds it only as a nominee for the benefit of the real owner. ( Ltr. to Mr. Carlos S. Nocon dated November 23, 1992 citing previous SEC opinions).This ruling may be applied in the case of transfer or assignment of a qualifying share from a partially paid subscription to a nominee in the Board of Directors, inasmuch as under the situation, the beneficial ownership of the share to be transferred and the obligation to pay the unpaid balance of the subscription would remain in the transferor. Your third query is therefore answered in the affirmative. LibLex (SGD.) FE ELOISA C. GLORIA Associate Commissioner