Duty of loyalty by the corporate directors

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This article was originally published on July 28, 2017 and has been updated to reflect recent legal developments.

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

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AT A GLANCE:

A person cannot serve two masters without detriment to one of them. It is from this basic human frailty that the doctrine of corporate opportunity was recognized and laws were put in place to deter corporate officers from using their position of trust and confidence to further private interests. (TOPROS, Inc. v. Chang, Jr., G.R No. 200070-71, December 7, 2021)

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In Strategic Alliance Development Corp. v. Radstock Securities Limited (G.R. No. 178158, December 4, 2009), the Supreme Court identified the three-fold duty of members of the board of directors: duty of obedience, duty of diligence, and duty of loyalty. This means that directors: (1) shall direct the affairs of the corporation only in accordance with the purposes for which it was organized; (2) shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.

 

The duty of loyalty in particular prohibits corporate directors, trustees, and officers from acquiring or attempting to acquire any personal or pecuniary interest—or any other interest for that matter—in conflict with or adverse to their duty as corporate fiduciaries.

 

What are the consequences of a director’s disloyalty?

 

Section 33 of the Revised Corporation Code (RCC) provides that 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.

 

What is the doctrine of corporate opportunity?

 

The doctrine of corporate opportunity arises out of the fundamental obligation of a fiduciary not to allow a conflict of their duty with their own interests. The doctrine limits the ability of those who owe a fiduciary duty to a corporation to take advantage of business opportunities that might otherwise be available to them in the absence of the fiduciary relationship. According to a branch of common law, these business opportunities refer to those that either already belongs to the company or even for which it has been negotiating.

 

As it is now broadly understood, the doctrine of corporate opportunity governs the legal responsibility of directors, officers and controlling shareholders in a corporation, under the duty of loyalty, not to take such 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. 

 

It is well to recall that the doctrine of corporate opportunity is not based on theoretical abstractions, but on human experience that a person cannot serve two hostile masters without detriment to one of them. Where a director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. An officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. It is also established that corporate officers are not permitted to use their position of trust and confidence to further their private interests. Where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. (Total Office Products and Services, Inc. v. Chang, Jr., G.R. No. 200070-71, December 7, 2021)

 

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