Disloyalty of directors & officers

By Dan Neff On Oct 25, 2022

Directors of corporations who acquire any personal or monetary interest in conflict with their duty as directors shall be liable jointly and severally for all resulting damages. Moreover, a director or officer shall not attempt to or actually acquire any interest adverse to the corporation in respect of any matter reposed in them in confidence, otherwise they shall be liable to the corporation and account for the profits which could have accrued to the corporation.

When a director, by virtue of his office, acquires a business opportunity that should belong to the corporation, thereby obtaining profits which prejudice the corporation, the director must account for and refund to the corporation all such profits, unless the act has been ratified by a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock.

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

The foregoing provisions are contained in the Revised Corporation Code (RCC) and referred to as the doctrine of corporate opportunity.

As it is now broadly understood, the doctrine of corporate opportunity governs the legal responsibility of directors, officers, and controlling shareholders in a corporation who, under the duty of loyalty, must not take business opportunities for themselves, without first disclosing the opportunity to the board of directors of the corporation and giving the board the option to decline the opportunity on behalf of the corporation. If the procedure is violated and a corporate fiduciary takes the corporate opportunity anyway, the fiduciary violates its duty of loyalty and the corporation will be entitled to a constructive trust of all profits obtained from the wrongful transaction.

This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. (Gokongwei Jr. vs. San Miguel Corporation, et al., G.R. No. L-45911 April 11, 1979)

While this doctrine is not a new concept as Sections 30 and 33 of the present RCC were already contained in the old Corporation Code or Batas Pambansa Blg. 68, which became law more than 40 years ago, it is significant to note that prior to December 2021, Philippine law and jurisprudence had not set actual parameters and guidelines to guide the courts as to what factors should be considered in determining the liability of erring directors and the award of damages.

On Dec 7, 2021, the Supreme Court did just that when it decided the case of Total Office Products and Services (TOPROS) Inc. vs. John Charles Chang Jr. et al. It set the guidelines for courts to be able to determine in concrete and quantifiable terms, the liability and accountability of erring directors and officers under Secs. 31 and 34 of the Corporation Code (now Secs. 30 and 33 of the RCC), giving force and effect to the doctrine of corporate opportunity (G.R. No. 200070 – 71, December 7, 2021).

In the TOPROS case, the Supreme Court explained that a claim for damages under Section 34 of the Corporation Code (now Sec. 33, RCC) arises when a corporate officer or director takes a business opportunity for his own and, has set the following guidelines to determine whether such opportunity taken by a director, trustee or officer violates his fiduciary duty to the corporation:

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

(b) The opportunity is within the corporation’s line of business

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

The TOPROS case began in 1982 when John Charles Chang Jr. was designated by TOPROS’ owners, spouses Ramon and Yaona Ang Ty, to manage TOPROS as the sole distributor of Minolta plain paper copiers in the Philippines. While TOPROS grew into a multi-million enterprise, the Tys eventually discovered that Chang, while still a TOPROS director and officer, incorporated TOPGOLD Philippines Inc. (TOPGOLD), Golden Exim Trading and Commercial Corp (Golden Exim), and Identic International Corp. (Identic) to siphon assets, funds, goodwill, equipment, and resources of TOPROS. Chang also obtained opportunities properly belonging to TOPROS and awarded these to his own corporations, to TOPROS’ prejudice. Chang was subsequently ousted as TOPROS director and officer and a case for damages was filed by TOPROS against Chang, TOPGOLD, Golden Exim, and Identic.

For his defense, Chang argued that he shouldered the burden of running the entire business. He claimed that the rest of the board of directors and stockholders did not help in the business and, at great risk to himself, he was asked to act as surety in his personal capacity for the loans of the corporation. He also claimed that he talked to Ramon Ty and expressed his intention of leaving TOPROS but that Ramon asked him to remain with TOPROS and even encouraged him to organize and establish his own corporations. 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 with the full knowledge of the Ty Family, including the fact that Ramon Ty’s son was an incorporator and stockholder of Identic, one of Chang’s companies.

Notwithstanding the defenses of Chang, the Supreme Court ruled in favor of TOPROS and declared that even if Chang had risked his own funds in running TOPROS and may have even paid off its obligations, this does not absolve him of his duties as director and officer of TOPROS. Moreover, despite the knowledge, tolerance, or even acquiescence of the Ty family to the establishment of Chang’s own corporations, the same is not the compliance required under Section 34 (now Sec. 33, RCC) of the Corporation Code to absolve a director of disloyalty.

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

While the ruling of the Supreme Court was in favor of TOPROS, it sent the case back to the trial court for the reception of additional evidence as while the there was a finding that Chang did breach his obligations as a director of TOPROS, there is a need to determine his exact liability and re-evaluate the evidence where the trial court will be guided by the guidelines set by the Supreme Court.

On the part of TOPROS, as the claimant, it shall bear the burden of proving the specific business opportunities that gave rise to its claim of damages under Section 34 of the Corporation Code. In turn, Chang may present evidence to support his claim that: (a) the corporation was already heavily in debt and that TOPROS’ patriarch, Ramon Ty, was no longer interested in corporate rehabilitation, so much so that he was already allowing TOPROS to go bankrupt, and (b) that the corporation had already closed down prior to Chang’s taking of certain corporate opportunities, among others.

With the Decision of the Supreme Court in TOPROS, life has finally been given to the statutory provisions meant to curb disloyal acts and punish erring corporate directors and officers.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and a founding partner of the Tiongco Siao Bello & Associates Law Offices, a professor at the MLQU School of Law, and an arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)