Zamora Soller Baluyut & Mendoza

July 6, 1983 Zamora Soller Baluyut & Mendoza 2nd Floor, Singapore Airlines Bldg. H.V. De La Costa St. Salcedo Village, Makati, M.M. Gentlemen: This refers to your letter dated June 8, 1983, requesting the opinion of this Commission on certain corporate issues relative to the right of representation, if any, of holders of a substantial block of shares, although in the minority of the parent corporation, in the Board of Directors of almost wholly-owned subsidiaries. It appears therein that Far East Bank and Trust Company (FEBTC) is 90% owner of the total equity of the Private Development Corporation of the Philippines (PDCP). Your client's group, represented by Mr. John Gokongwei, Jr., holds 20% of FEBTC's total equity. Mr. Gokongwei is presently a director of PDCP by virtue of the group's equity ownership in FEBTC. Representatives of FEBTC in PDCP are all bank officials appointed by FEBTC President. Because of their heavy investment in FEBTC, an additional directorate is being sought by your client, to have a total of two (2) seats in PDCP to protect their interest. With the above premise, you now pose the queries quoted hereunder: 1. Who determines representation in the Board of Directors of PDCP, the subsidiary? Is this determination the exclusive prerogative of the majority stockholders who control the Board of Directors of FEBTC, the parent corporation? 2. Can the 20% owners legally demand for representation in the Board of the subsidiary in proportion to their holdings in the parent entity to protect their FEBTC investments? Or, what legal options do the minority owners have to ensure representation in the Board of the subsidiary? 3. What are the remedies of the 20% equity owners in case of denial of sufficient representation in the Board of the subsidiary? Anent thereto, please be informed that the board of directors of a corporation are entrusted with the management of its business and property for the benefit of all the stockholders and occupy the position of trustees for the collective body of stockholders in respect to such business. It is their duty to administer the corporate affairs for the common benefit of all the stockholders, and exercise their best care, skill and judgment in the management of the corporation business solely in the interest of the corporation (3 Fletcher, Cyc. Corps., sec. 638 at 142-143; 1975 Rev. Vol.). "All powers directly conferred by statute or impliedly granted, of necessity must be exercised by the directors who are constituted by the law as the agency for the doing of corporate acts." (Ballantine on Corporations, sec. 42, at 119). Shareholders entrust their investment in the corporate business to the management of the board of directors, thus, establishing a fiduciary relationship between them. In reply to your first query, the board of directors of FEBTC determines its representation in the board of directors of PDCP, its subsidiary. In this connection, shares standing in the name of another corporation may be voted by such officer, agent, or proxy holder as the by-laws of the other corporation may prescribe. In the absence of such a determination, they may be voted by the chairman of the board, president or any vice-president of such other corporation or by any other person authorized to do so by the chairman of the board, president or any vice-president of such other corporation. (1-A Ballantine & Sterling, sec. 171.07, par. 1, at 9-38). In all cases, however, voting thereon shall be made under the ultimate direction of the board. As regard your second query, please be advised that the stockholders of FEBTC owning 20% of the equity thereon cannot demand proportionate representation in the board of directors of PDCP. It is the sole prerogative and discretion of the board of directors of a parent or holding corporation to choose its nominees in the board of directors of its subsidiary. However, as Douglas, J. said in a Supreme Court case: "A holding company, as well as others in dominating or controlling positions, has fiduciary duties to security holders of its system which will be strictly enforced." (Ballantine on Corporations, sec. 141, at 326, citing Consolidated Rock Products Co. vs. DuBois, 312 U.S. 510, 61 Sup. Ct. 675, 583, 85 L Ed. 982). The learned justice further declared that the dealings of the parent and its directors with the subsidiary will be subjected to rigorous scrutiny, and where their interests are adverse, they may be under a burden to prove not only the good faith of the transaction but also its fairness. (Ballantine, supra., citing Pepper v. Litton, 308 U.S. 295, 60 Sup. Ct. 238, 245, 84 L Ed. 281; etc.). The fiduciary obligations is designed not only for the protection of the minority shareholders but for creditors as well. "But the fiduciary thereof will not be employed merely to enable a minority to dictate corporate policies . . . . ." (Ballantine, supra, sec. 141 at 326-328). prcd Your third query has been rendered academic by the above answers. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman