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Corporation Law Jurisprudence · Podcast Episode 6 · 15:21
Business Judgment Rule: Nalugi, Pwede Bang Idemanda ang Directors?
When are directors personally liable for a decision that lost the company money?
Four typhoons turned a government corporation’s copra contracts into heavy losses, and its board approved the contracts anyway. Atty. Jeric Dave Gallardo and Sweet Zel Grace Porras walk through three Supreme Court decisions on the business judgment rule, and why the directors were held liable in only one of them.
Three cases, two answers
Same question. Different facts. Different results.
The rule
Courts do not second-guess a board’s business decision made in good faith, even when it loses money.
Under Sec. 30 of the Revised Corporation Code, directors become personally liable, jointly and severally, when they willfully and knowingly assent to patently unlawful acts, are guilty of gross negligence or bad faith in directing the corporation’s affairs, or acquire a personal or pecuniary interest in conflict with their duty.
Recap
- Under the business judgment rule, courts do not interfere with a board’s good-faith business decisions, even when the company loses money.
- Sec. 30 of the Revised Corporation Code sets the limits: patently unlawful acts, gross negligence or bad faith, and conflict of interest. The liability is joint and several.
- The corporation, an injured party such as an investor, or a stockholder through a derivative suit may bring the claim against the directors.
Bar tip
When asked whether directors are liable for a corporate loss, start with the business judgment rule, then Sec. 30 of the Revised Corporation Code. Remember Carag vs. NLRC: “Bad faith is never presumed.” Cite Board of Liquidators vs. Heirs of Kalaw for honest losses, Virata vs. Ng Wee for gross negligence, and Filipinas Port Services vs. Go for the derivative suit.
The law
Revised Corporation Code (R.A. No. 11232, February 20, 2019)
“Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.”Sec. 30, first paragraph (formerly Sec. 31, B.P. Blg. 68)
Chapters
- 0:00Cold open: four typhoons, and the board approved the contracts anyway
- 1:23What is the business judgment rule? Sec. 30 of the Revised Corporation Code
- 3:34Case 1: Board of Liquidators vs. Heirs of Kalaw (not liable)
- 6:14Case 2: Virata vs. Ng Wee (the Wincorp directors liable)
- 9:32Case 3: Filipinas Port Services vs. Go (derivative suit)
- 12:39Why did the answers differ? Three questions
- 13:49Recap and bar tip
Cases cited
Full text on LawPhil. Where we have written a case digest, the card opens it.
Next episode
What if a director makes a contract with his own corporation? Is that allowed?
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