Atty. Earnest A. Soberano

September 27, 1993 Atty. Earnest A. Soberano Consolidated Rural Bank (Cagayan Valley),Inc. Santiago, Isabela S i r : This refers to your letter of September 16, 1993 requesting opinion on the following queries: 1. Is it mandatory that the by-laws expressly provide for the creation of an executive committee? 2. If yes, will not a provision in the by-laws "authorizing the board to create such committees as the board may deem necessary",be a substantial compliance with the requirement of the law? 3. If no, what would be the status of an executive committee that is created without an express authority in the by-laws? Will it constitute an ultra-vires act of the corporation? The pertinent provision of the Corporation Code provides: "SECTION 35. Executive committee . The by-laws of a corporation may create and executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which stockholder' s approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders." (Emphasis supplied). It is construed from the above provision that the "Executive Committee" can only be created by virtue of a provision in the by-laws. In other words, the Board of Directors cannot simply create or appoint an executive committee to perform some of its functions if there is no such authority in the by-laws. This interpretation is supported by the following statements in the Proceedings of the Batasan Pambansa on the Corporation Code. "Mr. Badoy. ...Is it intended that an executive committee may be created only if so authorized in the by-laws? Mr. Abello. Yes, that is right. Mr. Badoy. In other words, in corporations where the by-laws are silent the board may not create such an executive committee, would that be the intent. Your Honor? Mr. Abello. Correct." Relative to your second query, because of the nature of the function of the "Executive Committee", the authority to appoint such body should be clearly spelled out in the by-laws, and a provision in the by-laws which states that "authorizing the board to create such committees as the board may deem necessary" is not a sufficient authority for its creation and appointment. The "Executive Committee" referred to under Section 35 of the Corporation Code should be distinguished from other committees which are within the competence of the Board to create at any time and whose actions requires confirmation by the Board itself. The former body is as powerful as the Board of Directors, as it actually performs certain duties of the Board, and in effect, it is acting as the Board itself. It is to be noted that the Board of Directors only performs acts delegated to it by law and it is a general principle of law that delegated powers cannot be further delegated. And so, to avoid any doubt as to whether this practice of creating an "executive committee" to perform certain delegated functions of the Board is proper or not, the Corporation Code requires that before it can be done, it has to be expressly authorized in the by-laws. The Batasan deliberation on the matter further states. thus: "Mr. Mendoza. If this Code is enacted with the provision on executive committees, then it will be a corporate body, a body, rather, of a corporation or an instrumentality of a corporation with a standing in law ,although, in a sense, it is an agent of the Board of Directors because it performs what otherwise is vested by law in the Board of Directors. However, its authority is not simply derived from the Board of Directors since the organization or creation of the executive committees would be through the by-laws .(Emphasis supplied). Anent your third query, the principle on "de facto officers" may be applied in so far as third parties are concerned. A person is a de facto officer where he acts as such, under color of an election or appointment. In other words, he holds office under color of authority, through designation or election, but fails being a "de jure officer" by some irregularity or failure to qualify as required by law. By color of authority is meant authority derived from an election or appointment, although irregular or informal, so that the incumbent must not be a mere volunteer. In the leading case on the subject of "de facto officers" decided in Connecticut in 1871 in relation to a public officer, the reasoning of which applies equally well to an officer of a private corporation. Chief Justice Butler stated the reason for the rule as follows: The de facto doctrine was introduced as a matter of policy and necessity, to protect the interests of the public and individuals, where those interests were involved in the official acts of persons exercising the duties of an officer, without being lawful officers. The reason for the rule was also well stated by Justice Clopton in Alabama as follows: "The doctrine of the validity of the acts of officers de facto rests on public policy and justice. The official dealings of directors de facto with third persons are sustained as rightful and valid, on the ground of continuous acquiescence by the corporation, and suffering them to hold themselves out as having such authority; thereby inducing others to deal with them in such capacity. The principles sustaining the validity of their official acts, are that, though wrongfully in office, yet exercising power and functions appertaining to such office, justice and necessity require, for the protection and preservation of the rights and interests of third persons, that their acts, within the scope of official authority and duty, shall be sustained. Clearly it would be impracticable for third persons to deal with corporations at all, if each one must investigate the legality of the title of each corporation officer as a condition precedent to a business transaction. However, insofar as the corporation is concerned, the unauthorized act of appointment of an Executive Committee may be subject to Section 144 of the Corporation Code which provides for penalties in case of violation of any of the provisions of the Code. It is thus advised that if the present by-laws of corporation referred in your letter is silent on the authority to create an "Executive Committee", it should be amended in accordance with Sec. 48 of the Corporation Code to reflect such authority so as to legalize the creation and appointment of said corporate body. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman