Mr. Manuel R. De Jesus

March 21, 1990 Mr. Manuel R. De Jesus 11 Los Tamaraos Drive Sunset Village, Tambo Paraaque, Metro Manila S i r : This refers to your letter inquiring whether an external auditor and a legal counsel can be appointed by a majority vote of the stockholders at a stockholders' meeting held for the said purpose under the following circumstances: a) There is no express provision in your corporate by-laws as to who can appoint the external auditor and the legal counsel; b) Quorum at the board meeting can not be constituted to decide on any action because of the failure of a majority of the Board Directors to attend board meetings due to circumstances beyond their control. Almost universally, the management is vested by a general statute or charter provision on the board of directors or trustees. In such case, the powers so vested on the directors must be exercised by them, and cannot be exercised by the stockholders. (5 Fletcher, Cyc. Corp., 1976 rev. vol., sec. 2097, at 401). The pertinent provision of the Corporation Code provides thus: "SECTION 23. The Board of Directors or trustees . 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)" The management of the affairs of corporations organized under the Corporation Code is therefore vested in the board of directors. The appointment of an external auditor and a legal counsel is a corporate function pertaining to the management of the corporation. As such the authority to employ them is vested in the board. There are, however, numerous exceptions to the old conventional rule that a corporation cannot act except by authority of the board of directors in a meeting, duly convened in accordance with the statutes or by-laws at which directors may consult and counsel each other. (Ballantine on Corporations, 125) There are some support for the view that "The shareholders may waive the necessity for a meeting of the board of directors, and without such meeting may authorize acts to be done by agents of the corporation or ratify acts already done and bind the corporation. The shareholders are the residuary owners, and the rule requiring directors' meetings to authorize acts is for their benefit." (Merchants' and Farmers' Bank v. Harris Lumber Co.,103 Ark. 283, 146 S.W. 508, Ann, Cas. 1914 B713; and others, cited in Ballantine, Supra.,at 125-126).Likewise, "Where the shareholders, by acquiescence, invest the executive officers of the company with powers of the directors as the usual method of doing business, the board being inactive ,the acts of such officers will bind the corporation according to some courts, although not authorized by any vote of either stockholders or directors." (Barkin Const. Co. v. Goodmen, 221 NY 156, 116 N.E. 770, and others, cited in Ballantine at 126). Hence, under exceptional situations ,stockholders agreement, though it provides for the exercise of management ordinarily delegated to the Board, is valid and enforceable where no creditors, minority stockholders or other persons of the public are affected. However, mere lack of quorum in the board alone where the body is not inactive, would not justify stockholders' action .( SEC letter dated December 15, 1987 addressed to Mr. Jose C. Fuentes ). The answer to your query, therefore, depends on the circumstances surrounding the case. If there are other extraordinary conditions present justifying the act of the stockholders, your query may be answered affirmatively. LibLex Should the board be inactive or there is no existing board of directors, your attention is invited to the provisions of Section 50 of the Corporation Code which prescribes the manner of calling for a special stockholders' meeting to enable the corporation to install a new board of directors which will manage the affairs of the corporation. Please be advised accordingly. Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner