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DRAFT RULES ON THE DISQUALIFICATION AND REMOVAL OF DIRECTORS AND OFFICERS (Philippines)

NO&T Asia Legal Review

Author
Patricia O. Ko
Publisher
Nagashima Ohno & Tsunematsu
Journal /
Book
NO&T Asia Legal Review No.43 (January, 2022)
Reference
Practice Areas
*Please note that this newsletter is for informational purposes only and does not constitute legal advice. In addition, it is based on information as of its date of publication and does not reflect information after such date. In particular, please also note that preliminary reports in this newsletter may differ from current interpretations and practice depending on the nature of the report.

On 17 December 2021, the Philippine Securities and Exchange Commission (“SEC”) released, for public comments, a draft memorandum circular on the disqualification of directors, trustees or officers of a corporation, and on the procedure to be observed for their removal (the “Draft Rules”).

Grounds for disqualification

The Draft Rules enumerate the grounds for disqualification, which are principally based on Section 26 of the Revised Corporation Code (the “RCC”).

A director, trustee or officer of a corporation may be disqualified if within five (5) years prior to his/her election or appointment or if within his/her tenure, the director, trustee or officer was:

  • 1.) Convicted by final judgment: (i) of an offense punishable by imprisonment for a period exceeding six (6) years, (ii) for violating the RCC, or (iii) for violating the Securities Regulation Code.
  • 2.) Found administratively liable, by final judgement, for any offense involving fraudulent acts punishable under the RCC, Securities Regulation Code and other laws, rules or regulations enforced or implemented by the SEC;
  • 3.) Convicted or found administratively liable by a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to the above; or
  • 4.) Found administratively liable, by final judgement, for refusal to allow the inspection and/or reproduction of corporate records.

It should be noted that Section 26 of the RCC originally provided that a director, trustee or officer may be disqualified if “found administratively liable for any offense involving fraudulent acts” in general, without qualifying or defining the term “fraudulent acts”. However, the Draft Rules seem to limit the offenses involving fraudulent acts to those which are punishable under the RCC, Securities Regulation Code and other laws, rules or regulations enforced or implemented by the SEC only.

Further, paragraph 4 above appears to be a new ground for disqualification added through the Draft Rules. In any case, the addition of such ground may find basis on Section 26 of the RCC, which provided that the enumeration therein is without prejudice to other disqualifications, which the SEC or the Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings.

Procedure for removal of directors, trustees or officers

Section 27 of the RCC generally provides that a director or trustee may be removed from office, with or without cause, by a vote of the shareholders representing at least two-thirds (2/3) of the outstanding capital stock. In addition, a director or trustee who was elected despite disqualification or whose disqualification was discovered subsequent to his/her election may also be removed upon action initiated by the SEC or upon verified complaint, after due notice and hearing.

The Draft Rules supplement the above provisions which only covered the general procedure for the removal of disqualified directors or trustees, but not for a disqualified officer.

a) Independent administrative action for removal

The Draft Rules detail the requirements to initiate an independent administrative action for the removal of a disqualified director, trustee or officer, and identifies the department within the SEC with power and jurisdiction to hear and decide such cases.

Based on the Draft Rules, an independent administrative action may be instituted either through (a) a formal charge initiated by the SEC after determining there is sufficient ground to warrant such action, or (b) upon verified complaint filed by any real party in interest. To ensure that the complaint is not intended to harass and that the factual allegations have evidentiary support, an affidavit from the complainant to such effect is among the documents required to support the complaint filed.

After examination of the verified complaint, the SEC may outright dismiss the complaint for non-compliance with the Draft Rules, for lack of jurisdiction, for pendency of a complaint involving the same issues or subject matter before another court or agency, or for insufficiency of evidence to establish prima facie the truth of the factual allegations. Where the SEC issues a formal charge or will take cognizance of a verified complaint, it will proceed to issue summons, and require the filing of a verified answer by the respondent director, trustee or officer. The hearing officer may conduct a clarificatory hearing to ascertain facts or issues necessary to resolve the proceedings, or require further submission of pertinent documents.

A withdrawal of a verified complaint will not automatically result in the dismissal of the independent administrative action, and the SEC may take the place of the complainant as if it filed a formal charge, if the SEC finds that the continuation of the proceedings is warranted.

Decisions of the SEC on such independent administrative action may be subject to a motion reconsideration and appeal in accordance with 2016 SEC Rules of Procedure.

b) Removal as an administrative sanction

Where the SEC determines in administrative proceedings that the grounds for disqualification of a director, trustee or officer are present and established by substantial evidence, the SEC may remove such director, trustee or officer as an administrative sanction in such proceedings. Instead of a formal charge, the SEC will issue a show cause order and require the respondent director, trustee or officer to submit a verified response on why he/she should not be disqualified, removed or administratively sanctioned. Similarly, decisions of the SEC imposing removal as an administrative sanction may be subject to a motion reconsideration and appeal.

Other Administrative Sanctions

Although an administrative action for the removal of a disqualified director may be initiated by the SEC or any real party in interest, members of board of directors or trustees should be mindful that they may also be held accountable for their failure to act. In particular, the RCC provides that the removal of a disqualified director shall be without prejudice to other sanctions that the SEC may impose on the board of directors or trustees who, with knowledge of the disqualification, failed to remove such director or trustee.

As such, where an individual is disqualified to be a director, trustee or officer of a corporation, the Draft Rules provide that in addition to removal, the SEC may issue a permanent cease and desist order, and/or impose a fine ranging from Php10,000 to Php400,000 for each violation of the SEC’s order or any provision of the RCC on the disqualification and removal of directors, trustees or officer, depending on the extent of participation, nature, effects, frequency and seriousness of the violation.

Conclusion

The Draft Rules is another measure through which the SEC aims to promote good corporate governance in privately held companies and ensure that elected directors and officers of a corporation have a record of integrity. Holding other directors accountable for their inaction in the instance above underscores the responsibility of directors in monitoring compliance with the RCC and the fiduciary duty which they owe to the corporation and its shareholders.

This newsletter is given as general information for reference purposes only and therefore does not constitute our firm’s legal advice. Any opinion stated in this newsletter is a personal view of the author(s) and not our firm’s official view. For any specific matter or legal issue, please do not rely on this newsletter but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.

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