Disloyalty of directors and officers

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Company directors who acquire a personal or pecuniary interest in conflict with their duty as directors are jointly and severally liable for all resulting damages. Further, a director or officer shall not attempt to acquire or actually acquire an interest adverse to the company in respect of any matter entrusted to him in confidence, otherwise he shall be liable to the company and accountable for profits that could have accrued to the company. .

When a director, by virtue of his office, acquires a business opportunity which should belong to the company, thereby obtaining profits which cause damage to the company, the director must account for and reimburse the company for all such profits, unless the deed has been ratified by a vote of shareholders owning or representing at least two-thirds of the outstanding share capital.

Significantly, it does not matter that the director risked his own funds in the business. (Secs. 30 and 33 of the Revised Company Code, Republic Act No. 11232)

The foregoing provisions are contained in the Revised Companies Code (RCC) and referred to as the Business Opportunity Doctrine.

As now widely understood, the doctrine of corporate opportunity governs the legal liability of directors, officers and controlling shareholders of a corporation who, under the duty of loyalty, must not seize business opportunities for themselves, without first disclosing the opportunity to the company’s board of directors and giving the board the ability to decline the opportunity on behalf of the company. If the process is breached and a trustee of the company anyway takes advantage of the company’s opportunity, the trustee breaches its duty of loyalty and the company will be entitled to a constructive trust of all profits from the transaction. illicit.

This doctrine is fundamentally based on the inequity, in particular circumstances, of an officer or director who takes advantage of an opportunity for his personal gain when the interest of the company rightly calls for his protection. (Gokongwei Jr. v. San Miguel Corporation, et al., GR No. L-45911 April 11, 1979)

Although this doctrine is not a new concept, Articles 30 and 33 of the current RCC were already in the old Companies Code or Batas Pambansa Blg. 68, which became law over 40 years ago, it is important to note that prior to December 2021, Philippine law and case law had not set out actual parameters and guidelines to guide courts as to the factors to be taken into account in determining responsibility for an error. directors and the award of damages.

On December 7, 2021, the Supreme Court did just that when it ruled on Total Office Products and Services (TOPROS) Inc. v. John Charles Chang Jr. et al. It established the guidelines for courts to determine in concrete and quantifiable terms, the liability and liability of directors and officers at fault under secs. 31 and 34 of the Company Code (now art. 30 and 33 of the RCC), giving force and effect to the doctrine of business opportunity (GR n° 200070 – 71, December 7, 2021).

In the TOPROS case, the Supreme Court explained that a claim for damages under Article 34 of the Companies Code (now Article 33, RCC) arises when an officer or director seizes an opportunity business for itself and has established the following guidelines for determining whether such an opportunity taken by a director, trustee or officer violates his fiduciary duty to the company:

(a) The company is financially able to exploit the opportunity

(b) The opportunity is within the company’s industry

(c) The company has an interest or expectation in the opportunity

(d) By taking the opportunity for his own, the director, trustee or officer will be placed in a position inconsistent with his duties to the company.

The TOPROS business began in 1982 when John Charles Chang Jr. was appointed by the owners of TOPROS, spouses Ramon and Yaona Ang Ty, to manage TOPROS as the exclusive distributor of Minolta plain paper copiers in the Philippines. As TOPROS grew into a multi-million business, the Tys eventually discovered that Chang, while still a director and officer of TOPROS, had incorporated TOPGOLD Philippines Inc. (TOPGOLD), Golden Exim Trading and Commercial Corp (Golden Exim ) and Identic International Corp. (Identical) to siphon assets, funds, goodwill, equipment and resources from TOPROS. Chang also obtained opportunities properly owned by TOPROS and assigned them to his own companies, to the detriment of TOPROS. Chang was subsequently ousted as a director and officer of TOPROS and a claim for damages was filed by TOPROS against Chang, TOPGOLD, Golden Exim and Identic.

In his defense, Chang argued that he bore the burden of running the entire company. He claimed that the rest of the board and shareholders had not helped in the business and, at his own risk, he was asked to stand as personal surety for the company’s loans. He also claimed that he spoke to Ramon Ty and expressed his intention to leave TOPROS, but Ramon asked him to stay with TOPROS and even encouraged him to organize and start his own companies. He then formed Identic, Golden Exim and TOPGOLD with the full knowledge, consent and approval of the Ty family.

Chang also presented other evidence to show that the incorporation of Golden Exim and Identic was done with the full knowledge of the Ty family, including that Ramon Ty’s son was a founder and shareholder of ‘Identic, one of Chang’s companies.

Notwithstanding Chang’s defences, the Supreme Court ruled in favor of TOPROS and said that while Chang had risked his own funds in running TOPROS and may even have paid his obligations, that does not absolve him of his duties. director and officer of TOPROS. Moreover, despite the Ty family’s knowledge, tolerance, or even acquiescence in the establishment of Chang’s own companies, the same is not true of the compliance required under Section 34 (now the article 33, RCC) of the Companies Code to absolve a director of disloyalty.

What the law requires is that when a director acquires for himself a business opportunity that should belong to the corporation, he must account to the corporation for all profits by reimbursing them, unless his act has been ratified by a vote of the shareholders owning or representing at least two-thirds of the outstanding share capital.

While the Supreme Court’s decision was in favor of TOPROS, it sent the case back to the trial court for the receipt of additional evidence, because if it was found that Chang had breached his obligations under as administrator of TOPROS, there is a need to determine his exact liability and reassess the evidence where the trial court will be guided by the guidelines established by the Supreme Court.

On the part of TOPROS, as plaintiff, it will be incumbent to prove the specific business opportunities that gave rise to its claim for damages under Article 34 of the Companies Code. In turn, Chang can present evidence to support his claim that: (a) the company was already heavily in debt and TOPROS patriarch Ramon Ty was no longer interested in rehabilitating the company , so much so that he was already clearing TOPROS for bankruptcy, and (b) the company had already shut down before Chang seized some corporate opportunities, among others.

With the judgment of the Supreme Court in the case TOPROS, one finally gave life to the statutory provisions intended to repress the disloyal acts and to punish the administrators and managers of companies at fault.

(The author, Atty. John Philip C. Siao, is a practicing attorney and founding partner of the law firms Tiongco Siao Bello & Associates, a professor at MLQU Law School, and an arbitrator for the Industry Arbitration Commission of the construction of the Philippines. He can be contacted at [email protected]. The opinions expressed in this article belong solely to the author.)

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