10/26/21, 5:43 AM G.R. No.

151969, September 04, 2009

614 Phil. 390

SECOND DIVISION
G.R. No. 151969, September 04, 2009

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY

GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO
SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, IN
THEIR CAPACITIES AS MEMBERS OF THE BOARD OF DIRECTORS
OF VALLE VERDE COUNTRY CLUB, INC., AND JOSE RAMIREZ,
PETITIONERS, VS. VICTOR AFRICA, RESPONDENT.

DECISION

BRION, J.:

In this petition for review on certiorari,[1] the parties raise a legal question on corporate
governance: Can the members of a corporation's board of directors elect another director to fill
in a vacancy caused by the resignation of a hold-over director?

THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders' Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal),
Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico,
and Ray Gamboa.[2] In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite
quorum for the holding of the stockholders' meeting could not be obtained. Consequently, the
above-named directors continued to serve in the VVCC Board in a hold-over capacity.

On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In
a meeting held on October 6, 1998, the remaining directors, still constituting a quorum of
VVCC's nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy created by the
resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC
Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining
members of the VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez
as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the
Regional Trial Court (RTC), respectively. The SEC case questioning the validity of Roxas'
appointment was docketed as SEC Case No. 01-99-6177. The RTC case questioning the validity
of Ramirez' appointment was docketed as Civil Case No. 68726.
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In his nullification complaint[3] before the RTC, Africa alleged that the election of Roxas was
contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines
(Corporation Code). These provisions read:

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected and
qualified.

xxxx

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in
the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office. xxx. [Emphasis
supplied.]

Africa claimed that a year after Makalintal's election as member of the VVCC Board in 1996,
his [Makalintal's] term - as well as those of the other members of the VVCC Board - should be
considered to have already expired. Thus, according to Africa, the resulting vacancy should
have been filled by the stockholders in a regular or special meeting called for that purpose, and
not by the remaining members of the VVCC Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority to fill in vacancies in
the board of directors, Section 29 requires, among others, that there should be an unexpired term
during which the successor-member shall serve. Since Makalintal's term had already expired
with the lapse of the one-year term provided in Section 23, there is no more "unexpired term"
during which Ramirez could serve.

Through a partial decision[4] promulgated on January 23, 2002, the RTC ruled in favor of Africa
and declared the election of Ramirez, as Makalintal's replacement, to the VVCC Board as null
and void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as
member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its
intent to appeal from the SEC's ruling, no petition was actually filed with the Court of Appeals;
thus, the appellate court considered the case closed and terminated and the SEC's ruling final
and executory.[5]

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THE PETITION

VVCC now appeals to the Court to assail the RTC's January 23, 2002 partial decision for being
contrary to law and jurisprudence. VVCC made a direct resort to the Court via a petition for
review on certiorari, claiming that the sole issue in the present case involves a purely legal
question.

As framed by VVCC, the issue for resolution is whether the remaining directors of the
corporation's Board, still constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the
resignation of a hold-over director is expressly granted to the remaining members of the
corporation's board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board
of directors caused by the expiration of a member's term shall be filled by the corporation's
stockholders. Correlating Section 29 with Section 23 of the same law, VVCC alleges that a
member's term shall be for one year and until his successor is elected and qualified;
otherwise stated, a member's term expires only when his successor to the Board is elected and
qualified. Thus, "until such time as [a successor is] elected or qualified in an annual election
where a quorum is present," VVCC contends that "the term of [a member] of the board of
directors has yet not expired."

As the vacancy in this case was caused by Makalintal's resignation, not by the expiration of his
term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.

In support of its arguments, VVCC cites the Court's ruling in the 1927 El Hogar[6] case which
states:

Owing to the failure of a quorum at most of the general meetings since the
respondent has been in existence, it has been the practice of the directors to fill
in vacancies in the directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in Article 71 of the By-Laws, which
reads as follows:

Art. 71. The directors shall elect from among the shareholders members
to fill the vacancies that may occur in the board of directors until the
election at the general meeting.

xxxx

Upon failure of a quorum at any annual meeting the directorate naturally holds over
and continues to function until another directorate is chosen and qualified. Unless
the law or the charter of a corporation expressly provides that an office shall become
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vacant at the expiration of the term of office for which the officer was elected, the
general rule is to allow the officer to hold over until his successor is duly qualified.
Mere failure of a corporation to elect officers does not terminate the terms of
existing officers nor dissolve the corporation. The doctrine above stated finds
expression in article 66 of the by-laws of the respondent which declares in so many
words that directors shall hold office "for the term of one year or until their
successors shall have been elected and taken possession of their offices." xxx.

It results that the practice of the directorate of filling vacancies by the action of
the directors themselves is valid. Nor can any exception be taken to the personality
of the individuals chosen by the directors to fill vacancies in the body. [Emphasis
supplied.]

Africa, in opposing VVCC's contentions, raises the same arguments that he did before the trial
court.

THE COURT'S RULING

We are not persuaded by VVCC's arguments and, thus, find its petition unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining directors of a
corporation's Board, still constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director. The resolution of this legal issue is
significantly hinged on the determination of what constitutes a director's term of office.

The holdover period is not part

of the term of office of a member

of the board of directors

The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have
defined "term" as the time during which the officer may claim to hold the office as of right,
and fixes the interval after which the several incumbents shall succeed one another.[7] The term
of office is not affected by the holdover.[8] The term is fixed by statute and it does not change
simply because the office may have become vacant, nor because the incumbent holds over in
office beyond the end of the term due to the fact that a successor has not been elected and has
failed to qualify.

Term is distinguished from tenure in that an officer's "tenure" represents the term during
which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover,
longer) than the term for reasons within or beyond the power of the incumbent.

Based on the above discussion, when Section 23[9] of the Corporation Code declares that "the
board of directors...shall hold office for one (1) year until their successors are elected and
qualified," we construe the provision to mean that the term of the members of the board of
directors shall be only for one year; their term expires one year after election to the office. The
holdover period - that time from the lapse of one year from a member's election to the Board
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and until his successor's election and qualification - is not part of the director's original term of
office, nor is it a new term; the holdover period, however, constitutes part of his tenure.
Corollary, when an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the incumbent is
holding the succeeding term.[10]

After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintal's term of office is deemed to have already expired. That he continued to serve in the
VVCC Board in a holdover capacity cannot be considered as extending his term. To be precise,
Makalintal's term of office began in 1996 and expired in 1997, but, by virtue of the holdover
doctrine in Section 23 of the Corporation Code, he continued to hold office until his resignation
on November 10, 1998. This holdover period, however, is not to be considered as part of his
term, which, as declared, had already expired.

With the expiration of Makalintal's term of office, a vacancy resulted which, by the terms of
Section 29[11] of the Corporation Code, must be filled by the stockholders of VVCC in a regular
or special meeting called for the purpose. To assume - as VVCC does - that the vacancy is
caused by Makalintal's resignation in 1998, not by the expiration of his term in 1997, is both
illogical and unreasonable. His resignation as a holdover director did not change the nature of
the vacancy; the vacancy due to the expiration of Makalintal's term had been created long before
his resignation.

The powers of the corporation's

board of directors emanate
from its stockholders

VVCC's construction of Section 29 of the Corporation Code on the authority to fill up vacancies
in the board of directors, in relation to Section 23 thereof, effectively weakens the stockholders'
power to participate in the corporate governance by electing their representatives to the board of
directors. The board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to themselves the powers of the
corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that
the board should exercise not only care and diligence, but utmost good faith in the management
of corporate affairs.[12]

The underlying policy of the Corporation Code is that the business and affairs of a corporation
must be governed by a board of directors whose members have stood for election, and who have
actually been elected by the stockholders, on an annual basis. Only in that way can the directors'
continued accountability to shareholders, and the legitimacy of their decisions that bind the
corporation's stockholders, be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over properties that they do not
own.[13]

This theory of delegated power of the board of directors similarly explains why, under Section
29 of the Corporation Code, in cases where the vacancy in the corporation's board of directors is
caused not by the expiration of a member's term, the successor "so elected to fill in a vacancy
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shall be elected only for the unexpired term of the his predecessor in office." The law has
authorized the remaining members of the board to fill in a vacancy only in specified instances,
so as not to retard or impair the corporation's operations; yet, in recognition of the stockholders'
right to elect the members of the board, it limited the period during which the successor shall
serve only to the "unexpired term of his predecessor in office."

While the Court in El Hogar approved of the practice of the directors to fill vacancies in the
directorate, we point out that this ruling was made before the present Corporation Code was
enacted[14] and before its Section 29 limited the instances when the remaining directors can fill
in vacancies in the board, i.e., when the remaining directors still constitute a quorum and when
the vacancy is caused for reasons other than by removal by the stockholders or by expiration of
the term.

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy
occurring within the director's term of office. When a vacancy is created by the expiration of a
term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it
shall be the corporation's stockholders who shall possess the authority to fill in a vacancy
caused by the expiration of a member's term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board elected
Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintal's
one-year term had already expired. Pursuant to law, the authority to fill in the vacancy caused
by Makalintal's leaving lies with the VVCC's stockholders, not the remaining members of its
board of directors.

WHEREFORE, we DENY the petitioners' petition for review on certiorari, and AFFIRM the
partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23,
2002, in Civil Case No. 68726. Costs against the petitioners.

SO ORDERED.

Quisumbing, (Chairperson), Carpio-Morales, Del Castillo, and Abad, JJ., concur.

[1] Filed under Rule 45 of the Rules of Court; rollo, pp. 11-23.

[2] Also co-petitioners of VVCC in the present petition.

[3]Africa's complaint before the RTC was denominated as "Nullification of the `Election' of a
`New Regular/Hold-Over (?) Director' and Damages"; rollo, pp. 31-46.

[4] Id., pp. 28-30.

[5] CA Resolution dated August 27, 2003; id., p. 124.

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[6] Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).

[7]See Topacio Nueno v. Angeles, 76 Phil. 12, 21-22 (1946); Alba v. Evangelista, 100 Phil. 683,
694 (1957); Paredes v. Abad, 155 Phil. 494 (1974); Aparri v. Court of Appeals, No. L-30057,
January 31, 1984, 127 SCRA 231.

[8] Gaminde v. Commission on Audit, G.R. No. 140335, December 13, 2000, 347 SCRA 655.

[9] The full text of which reads:

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected and qualified.

Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of
the directors or trustees of all corporations organized under this Code must be
residents of the Philippines.

[10] Words & Phrases, Vol. 19, p. 576.

[11] The full text of which reads:

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in
the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called
for that purpose. A director or trustee so elected to fill a vacancy shall be elected
only or the unexpired term of his predecessor in office.

A directorship or trusteeship to be filled by reason of an increase in the number of

directors or trustees shall be filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the purpose, or in the same
meeting authorizing the increase of directors or trustees if so stated in the notice of
the meeting.

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[12] Legarda v. La Previsora Filipina, 66 Phil. 173 (1938), citing Angeles v. Santos, 64 Phil. 697
(1937).

[13]Comac Partners, L.P., et al., v. Ghaznavi, et al., Del. Ch., 793 A.2d 372 (2001), citing
Bentas v. Haseotes, Del. Ch., 769 A.2d 70, 76 (2000) and Blasius Indus., Inc. v. Atlas Corp.,
Del. Ch., 564 A.2d 651, 659 (1988).

[14] The Corporation Code or Batas Pambansa Blg. 68 was enacted on May 1, 1980.

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