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Disqualification of Directors of PHCs

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Cesar L. Villanueva

MAP Insights

Disqualification of Directors of PHCs

The Revised CG Code adheres closely to the additional rules of disqualifications for directors of publicly held companies (PHCs) as those found in the Original CG Code, thus:

E) Disqualification of Directors

1. Permanent Disqualification. — The following shall be grounds for the permanent disqualification of a director:

(i) Any person convicted by final judgment or order by a competent judicial or administrative body of any crime that:

(a) involves the purchase or sale of securities, as defined in the Securities Regulation Code;

(b) arises out of the person’s conduct as an underwriter, broker, dealer, investment adviser, principal, distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker; or




(c) arises out of his fiduciary relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any of them;

(ii) Any person who, by reason of misconduct, after hearing, is permanently enjoined by a final judgment or order of the Commission or any court or administrative body of competent jurisdiction from:

(a) acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker;

(b) acting as director or officer of a bank, quasi-bank, trust company, investment house, or investment company;

(c) engaging in or continuing any conduct or practice in any of the capacities mentioned in sub-paragraphs (a) and (b) above, or willfully violating the laws that govern securities and banking activities.

The disqualification shall also apply if such person is currently the subject of an order of the Commission or any court or administrative body denying, revoking or suspending any registration, license or permit issued to him under the Corporation Code, Securities Regulation Code (SRC) or any other law administered by the Commission or Bangko Sentral ng Pilipinas (BSP), or under any rule or regulation issued by the Commission or BSP, or has otherwise been restrained to engage in any activity involving securities and banking; or such person is currently the subject of an effective order of a self-regulatory organization suspending or expelling him from membership, participation or association with a member or participant of the organization;

(iii) Any person convicted by final judgment or order by a court or competent administrative body of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false affirmation, perjury or other fraudulent acts;

(iv) Any person who has been adjudged by final judgment or order of the Commission, court, or competent administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of any provision of the Corporation Code, Securities Regulation Code or any other law administered by the Commission or BSP, or any of its rule, regulation or order;

(v) Any person earlier elected as independent director who becomes an officer, employee or consultant of the same corporation;

(vi) Any person judicially declared as insolvent;

(vii) Any person found guilty by final judgment or order of a foreign court or equivalent financial regulatory authority of acts, violations or misconduct similar to any of the acts, violations or misconduct enumerated in sub-paragraphs (i) to (v) above;

(viii) Conviction by final judgment of an offense punishable by imprisonment for more than six (6) years, or a violation of the Corporation Code committed within five (5) years prior to the date of his election or appointment.

2. Temporary Disqualification. — The Board may provide for the temporary disqualification of a director for any of the following reasons:

(i) Refusal to comply with the disclosure requirements of the Securities Regulation Code and its Implementing Rules and Regulations. The disqualification shall be in effect as long as the refusal persists;

(ii) Absence in more than fifty (50) percent of all regular and special meetings of the Board during his incumbency, or any twelve (12) month period during the said incumbency, unless the absence is due to illness, death in the immediate family or serious accident. The disqualification shall apply for purposes of the succeeding election;

(iii) Dismissal or termination for cause as director of any corporation covered by this Code. The disqualification shall be in effect until he has cleared himself from any involvement in the cause that gave rise to his dismissal or termination;

(iv) If the beneficial equity ownership of an independent director in the corporation or its subsidiaries and affiliates exceeds two percent of its subscribed capital stock. The disqualification shall be lifted if the limit is later complied with;

(v) If any of the judgments or orders cited in the grounds for permanent disqualification has not yet become final.

A temporarily disqualified director shall, within sixty (60) business days from such disqualification, take the appropriate action to remedy or correct the disqualification. If he fails or refuses to do so for unjustified reasons, the disqualification shall become permanent.

The system of “temporary disqualification” and “permanent disqualifications” for members of the Board of Directors in PHCs is similar to those enumerated under the BSP CG Circulars and the IC CG Code, with one essential difference: The section on temporary disqualification under the Revised SEC Code actually grants discretion to the Boards of Directors of PHCs to “provide for the temporary disqualification of a director for the following reasons,” which is a grant of disciplining power to the Board. It is doubtful whether Boards of PHCs can be legally granted any power of actual discipline over their members.

A close reading of the BSP CG Circulars would show that the power to impose either permanent or temporary disqualification on bank directors and officers is vested with the BSP, as the government agency granted by law with the power of control and supervision of banking institutions; and there is no attempt at all to grant such power and discipline to the Boards of Directors of banking institutions. Thus, under Section 4 of BSP Circular No. 296, s. 2001, the election or appointment of directors and officers of banks/quasi-banks shall be subject to confirmation by either the Monetary Board or a committee, depending on the level to be appointed. Section 5(c) thereof provides expressly that directors and officers elected or appointed without possessing the qualifications mandated shall not be confirmed by the confirming authority; and directors and officers possessing any of the disqualifications shall be subject to formal disqualification procedures provided under Section 5(d) of said circular.

Some of the grounds given under the Revised CG Code that grant to the Board the choice to effect temporary disqualification of a director should operate to disqualify a member from even being nominated or elected into the Board in the first place, such as the nondisclosure of business interests as required under the SRC. In addition, it seems unlawful to grant the Board a choice whether or not to temporarily disqualify an independent director “who becomes an officer or employee of the same corporation,” because under the SRC, such director immediately becomes disqualified to continue to sit as an independent director, and there is no power on the part of the Board to retain him.

If any of the grounds exist by which a director is subject to temporary disqualification, and yet the Board does not exercise its SEC Code-given power to suspend him, is the Board then deemed to have been remiss and thereby incurs collective and individual personal liabilities?

What is important to consider at this point is the fact that the SEC’s listing of disqualifications, whether absolute or temporary, is a legitimate exercise of quasi-legislative power and binding within the PHCs sector. We will come back to this crucial point later.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.

 

Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, the Founding Partner of the Villanueva Gabionza & Dy Law Offices, and the former Chair of the Governance Commission for GOCCs (GCG).

cvillanueva@vgslaw.com

map@map.org.ph

http://map.org.ph