Onboarding the board of directors: Qualifications and vacancies

All powers of a corporation, including the conduct of affairs and the control of properties, are exercised through its board of directors. Thus, it is only proper that the persons composing the board are elected based on the highest standards. The qualifications of directors are primarily governed by the Revised Corporation Code (RCC), as supplemented by special laws and provisions of the corporate by-laws.

To be elected as a director, one must be of legal age and an owner of at least one share of the corporation. Moreover, one should not possess any of the traits or meet any of the conditions for disqualification enumerated in the RCC. A person is disqualified from being elected as a director if, within five years prior to the election, he was convicted by final judgment by a local or foreign court: (a) of an offense punishable by imprisonment for a period exceeding six years; (b) violation of the RCC; or (c) violation of the Securities Regulation Code. Also, he cannot be elected as a director if he was found by a local or foreign authority to be administratively liable for any offense involving fraudulent acts within the same five-year period prior to his election.

Aside from the above conditions, the corporate by-laws can provide additional qualifications, such as educational background, related industry/business experience, or impose prohibitions, such as disqualifying a director of a competitor corporation from board representation in the corporation.

Additional qualifications, such as nationality, may apply for specific industries, e.g., those engaged in partly nationalized activities. In a recent ruling, the Securities and Exchange Commission (SEC) clarified that while the RCC does not impose restrictions on the nationality of the members of the board, the provisions of the corporation’s constitution and by-laws, applicable special laws, and relevant rules and regulations of the regulatory agencies may do so.

For instance, in the case of corporations engaged in the operation of a public utility, which the Constitution limits to corporations owned 60% by Filipino citizens, board seats of foreign shareholders are to be in proportion to their allowed share in the capital. All executive and management positions must be held by Filipinos. The Anti-Dummy Law provides penal sanctions for violations of this limitation. Applying this, foreign stockholders in a public utility corporation may only occupy a maximum of 40% of the membership of the board.

Once qualified and elected, the directors are to serve a term of one year. They may or may not fully complete their term of office for various reasons. Once vacancy in the board occurs, either due to expiration of the term or other reasons, it should be filled up in a timely manner, subject to applicable procedural rules, to enable the board to continue discharging its duties and functions.

A recent ruling issued by the SEC serves as a useful guide in filling up board vacancies. The essential factor to consider in determining the procedure and period to observe is the cause of the vacancy.

Upon the expiration of the term of the directors, the stockholders must elect a new set of board members. The election is usually held during the annual stockholders’ meeting, either on a date fixed in the by-laws, or on another date, which ideally should not be later than the expiration of the board’s term.

If the stockholders remove a director from office for a justifiable reason, during a special meeting held for that purpose, they may elect a replacement in the same meeting. However, for the electoral process to be valid, the agenda and notice of the meeting must include the replacement election.

As a general rule, the right to elect a director rests on the stockholders. However, as an exception, the law allows the remaining directors to fill the vacancy. For reasons other than the expiration of term and removal, such as the resignation of a director, the remaining directors if still constituting a quorum may elect the replacement “so as not to retard or impair the corporation’s operations” (G.R. No. 151969, Sept. 4, 2009). The replacement director can only serve the unexpired portion of the predecessor’s term. The election by the remaining directors or stockholders, as the case may be, must be held no later than 45 days from the time the vacancy arose.

Business continuity is of paramount concern especially during this pandemic. Thus, compliance with the above requirements is imperative to avoid issues on qualifications and elections, and to allow the board to focus on discharge of its duties.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Aimee Rose Dg. Dela Cruz is a director with the Tax Services Group of Isla Lipana & Co., the Philippine member firm of the PwC network.

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