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Corporation Law Jurisprudence · Podcast Episode 7 · 16:02
Self-Dealing Director: Kumontrata sa Sariling Kompanya, Bawal Ba?
When may a director make a contract with his own corporation?
A cement company had not even begun making white cement when it signed a five-year dealership, at a fixed price, with one of its own directors. Atty. Jeric Dave Gallardo and Sweet Zel Grace Porras walk through three Supreme Court decisions on directors who deal with their own corporations, and why only one of the deals was upheld.
Three cases, two answers
Same question. Different facts. Different results.
The rule
A corporation’s contract with its own director, trustee or officer is not void from the start, but it is voidable at the corporation’s option unless the law’s conditions are met.
Under Sec. 31 of the Revised Corporation Code (formerly Sec. 32, B.P. Blg. 68), the contract is voidable at the corporation’s option unless all the conditions are present: the director’s presence was not needed for the quorum, his vote was not needed to approve it, it is fair and reasonable, a material contract of a corporation vested with public interest got the required board approval, and an officer’s contract was previously authorized by the board. If one of the first three is missing in a director’s contract, stockholders representing at least two-thirds of the outstanding capital stock may ratify it in a meeting called for the purpose, with full disclosure, if the contract is fair and reasonable.
Recap
- A director’s contract with his own corporation is not automatically void. It is voidable, at the option of the corporation.
- It is not voidable when all the conditions of Sec. 31 are present, including these three: his presence was not needed for the quorum, his vote was not needed, and the contract is fair and reasonable.
- If one of those first three is missing in a director’s contract, stockholders representing two-thirds of the outstanding capital stock may ratify it, with full disclosure, if the contract is still fair and reasonable.
Bar tip
Start with Sec. 31 of the Revised Corporation Code, and remember that it now also covers the spouses and relatives of directors, trustees and officers within the fourth civil degree. Cite Prime White Cement vs. IAC for an unfair contract, Balinghasay vs. Castillo for the quorum and the vote, and Mead vs. McCullough for a valid transaction.
The law
Revised Corporation Code (R.A. No. 11232, February 20, 2019)
“A contract of the corporation with one (1) or more of its directors, trustees, officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of such corporation, unless all the following conditions are present: (a) The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; (b) The vote of such director or trustee was not necessary for the approval of the contract; (c) The contract is fair and reasonable under the circumstances; (d) In case of corporations vested with public interest, material contracts are approved by at least two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors voting to approve the material contract; and (e) In case of an officer, the contract has been previously authorized by the board of directors.”Sec. 31, first paragraph (formerly Sec. 32, B.P. Blg. 68)
“Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting and the contract is fair and reasonable under the circumstances.”Sec. 31, second paragraph (ratification)
Chapters
- 0:00Cold open: a director who was also his company’s dealer
- 1:32What is a self-dealing director? Sec. 31 of the Revised Corporation Code
- 3:57Case 1: Prime White Cement vs. IAC (not valid)
- 7:24Case 2: Balinghasay vs. Castillo (not valid)
- 10:35Case 3: Mead vs. McCullough (valid)
- 13:21Why did the answers differ? Three questions
- 14:34Recap 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
What if a director takes, not a contract, but a business opportunity that belongs to the corporation? Is that allowed?
All 7 episodes of Corporation Law Jurisprudence →
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