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Corporation Law Jurisprudence · Podcast Episode 8 · 15:30
Sariling Negosyo Habang Director, Pwede Ba? Corporate Opportunity
May a director take for himself a business opportunity that should belong to the corporation?
While still an officer and director of an office-equipment company, its President and General Manager set up three companies in the same line of business. Asked in court why he gave an investment opportunity to one of his own companies and not to the company he ran, he answered: “Of course, I have to have my own living.” Atty. Jeric Dave Gallardo and Sweet Zel Grace Porras walk through three Supreme Court decisions on the corporate opportunity doctrine, and why they ended three different ways: one sent back to the trial court, one dismissed because the man who sued was not a member, and one in which the Court held that violating Secs. 31 and 34 of the old Corporation Code was not a crime.
Three cases, three answers
Same question. Different facts. Different results.
The rule
A director who, because of the position, acquires a business opportunity that should belong to the corporation, and profits from it to the corporation’s prejudice, must account for and refund those profits to the corporation.
Under Sec. 33 of the Revised Corporation Code (formerly Sec. 34, B.P. Blg. 68), this is so even if the director risked his own funds in the venture, unless the act is ratified by a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock. In TOPROS vs. Chang, applying the same rule under old Sec. 34, the Supreme Court held that circumstances suggesting the corporation’s knowledge, tolerance or even acquiescence do not amount to that compliance.
Recap
- A director who, because of the position, acquires a business opportunity that should belong to the corporation, and profits from it to the corporation’s prejudice, must account for and refund the profits, even if he used his own money, unless stockholders owning or representing at least two-thirds of the outstanding capital stock ratify the act.
- The question is whether the director took an opportunity that should belong to the corporation. The claimant must prove a concrete corporate opportunity, and the corporation’s knowledge or tolerance is not ratification (TOPROS vs. Chang).
- Who sues, and for what, also matters. A derivative suit needs a stockholder or member at the time of the act complained of (R.N. Symaco Trading vs. Santos). Under the old Corporation Code, violating Secs. 31 and 34 carried civil, not criminal, liability (Ient vs. Tullett Prebon); under the Revised Corporation Code, the Supreme Court has not yet directly decided whether violating Sec. 33 is a crime.
Bar tip
For a corporate opportunity question, start with Sec. 33 of the Revised Corporation Code, then apply the four parameters in TOPROS vs. Chang: the claimant must show that the corporation is financially able to exploit the opportunity, that the opportunity is within its line of business, that the corporation has an interest or expectancy in it, and that taking it places the director in a position contrary to his duties to the corporation. Remember that mere knowledge or tolerance is not ratification; Sec. 33 requires a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock.
The law
Revised Corporation Code (R.A. No. 11232, February 20, 2019)
“Where a director, by virtue of such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director must account for and refund to the latter all such profits, unless the act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked one’s own funds in the venture.”Sec. 33, Disloyalty of a Director (formerly Sec. 34, B.P. Blg. 68)
Chapters
- 0:00Cold open: a President who set up three companies in the same line of business
- 1:43The law: Sec. 33 of the Revised Corporation Code (corporate opportunity)
- 3:17Case 1: TOPROS vs. Chang (doctrine applies; remanded)
- 6:41Case 2: R.N. Symaco Trading vs. Santos (dismissed: no standing)
- 9:51Case 3: Ient vs. Tullett Prebon (not a crime under the old Code)
- 13:05Why did the answers differ? Three questions
- 14:01Recap and bar tip
Cases cited
Each card opens the full text of the decision, or our case digest where we have written one.
Next episode
Can directors give themselves a salary or a bonus?
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