Mr. Godofredo Marquez

March 4, 1982 Mr. Godofredo Marquez Congressional Avenue Carmel 2 Subdivision Project 6, Quezon City Dear Mr. Marquez: This refers to your letter-query dated March 1, 1982 requesting opinion relative to the provision of Section 34 of the Corporation Code of the Philippines on Disloyalty of a Director. LexLib It appears from your letter that a director-officer of corporation A is also a director of corporation B; that said director acquired for corporation B (not for himself) business opportunity identical to the business of corporation A; that he could not give said business opportunity to corporation A because it follows established policy which strongly impedes its chances of winning said business; that corporation A was incorporated on January 4, 1978 and that you wish to be informed if under the set-up, said director has violated Section 34 of the Corporation Code on disloyalty of director. Although the query is hypothetical in nature and as a policy, the Commission does not ordinarily entertain similar requests for opinion, nevertheless for general information, we are transmitting to you the following reply. Section 34 of the Corporation Code enunciates the doctrine of "corporate opportunity" which is one phase of the cardinal rule of "undivided loyalty" on the part of fiduciaries (directors). This is pursuant to jurisprudence which rules that "one who occupies a fiduciary relationship to a corporation may not acquire in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence." (11 Fletcher, Cyc. Corp. 227). However, this property or business opportunity ceases to be a "corporate opportunity" and transforms into a "personal opportunity" where the corporate is definitely no longer able to avail itself of the opportunity, to wit: "...The inability to avail itself of a business opportunity may arise from financial insolvency, or from legal restrictions, or from any other factor which prevents it from acting upon the opportunity for its own advantage." (Fletcher, ibid, 241) Let us apply the foregoing principles to your case. It appears that corporation A can not engage competitively because of its alleged settled policy. Therefore it may not be said that by delivering the business opportunity to Corporation B, the director directly or indirectly competed with the business of or is disloyal to corporation A. Please be informed also that a similar hypothetical problem was discussed by the lawmakers in the deliberation of the Corporation Code, and they concluded that there was no disloyalty under Section 34 thereof, to wit: "MR. SOLLER. Let us take concrete example. Let us assume that I am a member of the board of San Miguel Corporation and also a member of Consolidated Foods. Let us assume also, Mr. Speaker, that a business opportunity is presented to me, which business opportunity is in line with the business of San Miguel and in line with the business also of Consolidated Foods. To whom the business opportunity belongs? LexLib MR. ABELLO. It belongs to both. If he is a member of the board of both, then it belongs to both corporations and if he takes advantage of that business opportunity to the prejudice of either the San Miguel or the Consolidated Foods or to both, then, he has to account to either one or to both for the profits that have been obtained by him to the prejudice of the corporation(s)." xxx xxx xxx MR. SOLLER. In that example, Mr. Speaker, if I present the opportunity to San Miguel, would I, then, be disloyal to Consolidated Foods? MR. ABELLO. As far as Consolidated is concerned, he is. MR. SOLLER. And if I would present it to Consolidated Foods, would I, then, be disloyal to San Miguel Corporation? MR. ABELLO. But in that case, you did not profit ,because you gave it to one of them; in which case, you do not come under Section 34 .It must be a profit that you have obtained to the prejudice of the corporation of which you are a director. So, if there was no profit, then, you are not responsible under section 34 because you did not profit personally from the business opportunity that was available to one or both of the corporations of which you are a director. MR. SOLLER. It is not proper to say, Mr. Speaker, that ultimately I will profit from the opportunity because being a director and a stockholder, surely some profit will come to me? MR. ABELLO. Well, in that case, it is not a profit that accrues to you, as an individual person who happens to be a director of both corporations. It is a profit that accrues to the entire corporation, in which case, you do not come within the purview of Section 34 of the proposed Code . MR. SOLLER. In that example, Mr. Speaker, let us assume that both San Miguel and Consolidated Foods are in no financial capacity to undertake the project. If I should undertake it in my own personal capacity, would I, then be disloyal? MR. ABELLO. No . In that case you would not be disloyal because it is a business opportunity which, because of the lack of capacity of either or of both corporations, should not belong to them . Section 34 applies only where a business opportunity belongs to the corporation and the director takes advantage of that business opportunity for his own good and for his own profit." (Proceedings of the Batasan Pambansa on the proposed Corporation Code, Dec. 11, 1979; Emphasis sup.) Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner