Ison Medel & Liwag

March 18, 1981 Ison Medel & Liwag Attorneys-at-law ICB Building, 117 J. Luna St. Binondo, Manila Attention : Bienvenido J . Medel Gentlemen: This has reference to your letter dated 21 November 1980 requesting the opinion of this Commission on the queries posed therein. llcd It appears that the three groups of stockholders of Prime White Cement Corporation (PWCC) entered into an agreement to constitute the eleven (11) members of its board of directors as follows: three (3) shall be designated by Oriental Chemical Industries Co. Ltd. (ORIENTAL), four (4) by National Investment and Development Corporation (NIDC) and the rest by the other stockholders (MAGLANA). You asked whether the more designation without election by NIDC and ORIENTAL of their respective representatives to the board is in accordance with the Corporation Code of the Philippines and whether the election of directors can be subject of a contract among the stockholders. It is not in violation of any rule or principle of law or contrary to public policy for stockholders who own a majority of the stock of a corporation to cause its affairs to be managed in such way as they may think best calculated to further the ends of the corporation, and it is not against public policy or unlawful per se for stockholders to agree or combine for the election of directors or other officers, so as to secure or retain control of the corporation, particularly with regard to a close corporation as distinguished from a public-issue corporation, at least where the subject is to carry out a particular policy with a view to promote the best interests of all of the stockholders alike, and to the corporation (5 Fletcher 2064) However, to execute the aforementioned stockholders' agreement, the mere designation without election of directors will not be sufficient. Section 23 of the Corporation Code, partly quoted hereunder, has this to state: "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, ..." (Emphasis supplied) Thus, NIDC and ORIENTAL have to cast their votes in a duly held election to elect their respective nominees. We answer your first query in the negative. As to its corollary question, please take note of the following: The manner and procedure to be followed in the election of officers and members of the board of directors of a corporation are usually embodied in the by-laws adopted by the stockholders representing a majority of the outstanding capital stock. This procedure, as thus embodied in the by-laws shall govern the members in all their election proceedings, provided that the same is not contrary to the provisions of the Corporation Code. However, should such procedure contained in the by-laws prove inadequate to meet certain situation, the applicable provisions of the Corporation Code of the Philippines will have to be resorted to, in order to remedy the deficiency. ( SEC Opinion dated 23 October 1974 ,SEC Folio, p. 748) cdlex In your last query, it was related that PWCC obtained foreign loan from ORIENTAL and the First National Bank of Chicago guaranteed by NIDC. The guaranty agreement executed between your client and NIDC requires that all appointments to PWCC executive positions should be made only with the approval of NIDC's management. You wanted to know if such condition conforms with the provisions of the Corporation Code of the Philippines. The aforementioned condition, though intended to protect the interest of NIDC, will deny the PWCC board of directors' prerogative to elect corporate officers and violate Section 25 of the Corporation Code of the Philippines which expressly provides as follows: "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. ..." (first sentence, first paragraph) The appointment of officers by the directors cannot be made the subject of a valid contract between the directors and persons seeking such appointment. (2 Fletcher 294 citing McQuade v. Stoneham, 263, 189 NE 234. revg 238 App Div 827, 263 NYS 966.) prcd Your last query is therefore, answered in the negative. Very truly yours, For the Chairman: (SGD.) ROSARIO N. LOPEZ Director Corporate and Legal Department