Chapter VIII Duties of Directors and Controlling Stockholders

The law makes directors fiduciaries of the corporation

Directors are expected to serve the corporation with reasonable diligence and skill and with
utmost loyalty
Obligation of directors to act within their corporate powers
Cannot act alone where SHs have the power of final approval
Personal liability would still arise if due diligence has not been observed or there is
disloyalty
Three-fold duties of directors, trustees, and officers:
o Duty of obedience
o Duty of diligence
o Duty of loyalty
Governed by 31, 32, 33, 34
Duties and obligations of directors, trustees, and officers have their bases in common law,
derived from the nature and relationship created in the corporate setting and the fiduciary
nature of the positions held by such persons
Attempt of the Corpo Code to codify the nature od duties and obligations to cover most of
such situations, but cannot be considered as to exclude other forms of violations of such
duties
GR: members of the board and corporate officers who purport to act for and in behalf of the
corporation, keep within the lawful scope of their authority in so acting, and act in GF, do
not become liable for the consequences of their acts
o These acts would be attributable to the corporation alone and no personal liability is
incurred by such officers and board members (Benguet Electric v NLRC)
o Although a director may have been voted into office by a block of SHs, it is the
directors duty to vote according to his own independent judgment and his own
conscience as to what is in the best interets of the corporation. (SMC v Kahn)

Corporate principle recognizing corporate power and competence to be lodged

primarily with the board of directors
A resolution or transaction pursued within the corporate powers and business
operations of the corporation, and passed in GF by the board is valid and binding, and
generally courts have no authority to review the same or substitute their own judgment
Business judgment rule has two (2) applications:
(1) resolutions and transactions entered into by the board within the powers of the
corporation cannot be reversed by the courts
(2) GR: directors and officers acting within such business judgment cannot be
personally liable for the consequences of such acts
Exceptions:
i. When the director willfully and knowingly vote for patently
unlawful acts of the corporation
ii. When he is guilty of gross negligence or BF
iii. When he acquires any personal or pecuniary interest in
conflict with his duty as such directors
business judgment rule is not only a substantial rule of law, but also a rule on evidence
once entered into by the board in the exercise of its judgment, it will be presumed to be
valid

Duty of Diligence

Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire
any personal or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (n)

Business Judgment Rule

31: Directors or trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence or BF in the
directing the affairs of the corporation shall be solidarily liable for all damages
o available to SHs, the corporation, and to creditors
o mere assent would make director liable
o
it is not enough that he abstains from voting; he should cast a negative vote
o but mere ownership of majority of shares or mere holding of officership position
does not make one personally liable (Board of Liquidators v Kalaw)
Directors are expected to manage the corporation with reasonable diligence, care and
prudence
o Can be held liable for willful dishonesty and negligence
o Should keep themselves sufficiently informed about the general condition of their
business and to some extent the manner in which its is conducted; if due to their
fault or negligence, the corporate assets are wasted or lost, each of them may be
held responsible for any loss proximately caused by the wrongful acts or
omissions.
o But they cannot be held liable for mistakes or errors in the exercise of their
business judgment, provided the act in GF and with due care and prudence (Barnes
v Andrews infra)
o Degree of care and diligence:

that which is usually required of men prompted by self-interest in the

exercise of their own affairs

that which is demanded by the particular circumstances

already granted 62.5% participation to their planters, and in accordance with Para 9 of the
resolution, it had become obligated to grant similar concessions to them.

nature of business
director of a bank is held to a higher degree of diligence than an
ordinary commercial transaction (Litwin v Allen)
remedy of SHs: where directors have become grossly negligent or fraudulently
mismanaged the corporation, they can be removed by the SHs in accordance with Sec 28, +
damages

H: When a resolution is passed in GF by the board, it is valid and binding, and whether or
not it will cause losses or decrease the profits of the central, the court has no authority to
review them. Questions of policy or management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to substitute its
judgment for that of the board; the board is the business manager of the corporation and so
long as it acts in GF its orders are not reviewable by the courts

Otis & Co. v Pennsylvania Railroad Co. F: Otis & Co is a SH in and among the wholly-owned
subsidiaries of the Pennsylvania Railroad Co (PRR), which included Pennsylvania Ohio 7
Detroit Railroads (POD). One of its subsidiaries had an outstanding bond issuance of $28.4M.
The parent then negotiated with a third party, Kuhn, Loeb and Co, to refinance the bonds. The
directors of POD approved a resolution authorizing the sale of the new Series D bonds at a best
obtainable price. Bonds were then sold to Kuhn and Loeb. Another buyer was willing to
purchase the bonds at a better price but the directors declined. The Interstate Commerce
Commission found that the corporation was not able to get the best price for the sale and that
other options were not explored, that negotiations were only with one investment house and
were at arms-length dealing, and that it was possible to have greater savings.
I: W/N the directors are liable for failing to exercise ordinary care and judgment in the issuance
and sale of $28M in bonds, which resulted in alleged losses suffered by the corporation.
H: Business judgment rule: courts will not interfere in matters of business judgment, in which it
is presumed that judgmentreasonable diligencehas in fact been exercised. A director cannot
close his eyes to what is going on about him in the conduct of business judgment. Courts have
given directors wide latitude in the management of the affairs of the corporation provided that
the judgment is unbiased, honest and reasonably exercised. Negligence must be determined as of
the time of transaction. Mistakes or errors in the exercise of honest business judgment do not
subject the officers and directors to liability for negligence in the discharge of their appointed
duties. Directors are entrusted with the management of the affairs of the corporation. If in the
course of management they arrive at a decision for which there is a reasonable basis, and they
acted in GF as the result of their independent judgment, and uninfluenced by any other
consideration than what they honestly felt was in the best interests of the corporation. In the
present case, the SC found that the officers and directors of the corporations acted honestly in
GF and sought to exercise their best judgment for the best interests of their corporation. No
fraud was present, but only a faint suggestion of BF. The directors had the right to negotiate
privately with Kuhn and Loeb. In contracting with the latter, the directors were not contracting
with another firm in which they were interested, nor did the directorship or officership positions
interlock. There is no contention that fraud existed and fraudulent acts will not be presumed.

Litwin v Allen et al. H: The officers are liable for the transaction because the entire
arrangement was so improvident, risky, and unusual and contrary to fundamental concepts of
prudent banking practice. A bank director when appointed takes oath that he will diligently
and honestly administer the affairs of the bank or trust company. Honesty alone would not
suffice; there must be more than honestythere must be diligence, and that means care and
prudence as well. What sound reason is there for a bank, desiring to make an investment, to
buy securities under an arrangement whereby any appreciation will insure to the benefit of
the seller and any loss will be borne by the bank. There is here more than a question of
business judgment. The directors plainly failed to bestow the care which the situation
demanded.
A director, however, is not liable for loss or damage other than what was proximately caused
by his own acts or omissions in breach of his duty. The directors in this case are liable only
for the loss attributable to the improper transaction itself, and not after the option on the
improper transaction had expired.
Walker v Man et al. F/H: Corporation was engaged in real estate and advanced a loan to a
third person taking as security his PN. The loan was not authorized by the board and was not
for the benefit of the corporation nor was it in aid of its business. No effort was done to
collect on the loan, which became due and demandable. The corporation went bankrupt, and
the receiver sues the directors to collect on the amount due the insolvent corporation and for
damages. Court held that the director was negligent.
Steinberg v Velasco. F: The board of the corporation authorized the purchase of 330 shares
of capital stock of the corporation and the declaration of dividends at a time when the
corporation was indebted and in such a bad financial condition. The directors relied on the
face value on the books of its A/R, which had little or no value. Furthermore it appears that
two of the directors were permitted to resign so that they could sell their stock to the
corporation. The corporation became insolvent, and the receiver Steinberg sues the directors.

Montelibano et al v. Bacolod-Murcia Milling Co Inc. Montelibano et al are sugar planters

adhered to the Milling Companys sugar central mill under identical contracts. The contracts
would be in force for 30 years and provide that the resulting product should be divided in the
ratio of 45% for the mill and 55% for the planters. It was proposed to execute the milling
contracts, increasing the planters shares to 60% of the manufactured sugar and molasses and
extending the period from 30 to 45 years. The Board of the Milling company then adopted a
resolution granting further concessions to the planters over and above the amended contract. 17
years later, Montelibano sues the Milling company, contending that the 3 sugar centrals with a
total annual production exceeding 1/3 of the production of all sugar millis in Negros, had

H: The corporation did not have a bona fide surplus with which dividends could be declared
and paid out. The directors did not act in GF and were grossly ignorant of their duties.
Directors were held personally liable for causing the corporation to purchase their own
shares and declaring dividends, which because of such failure to take into consideration of
worthless receivables, worked to the detriment of the creditors. The directors did not act
with diligence in taking the word of their chairman and not making an informed decision

based on the facts then available to them and on not relying on other documents available to
them.

the records of the bank, and matched it with the correct statements which were relied upon
by the cashier.

Creditors have the right to assume that so long as there are outstanding debts and liabilities, the
board will not use the corporate assets to purchase its own stock, and that it will not declare
dividends to SHs when the corporation is insolvent

H: Under the circumstances of this case, the directors did not neglect their duty in accepting
the statement of the cashier and failing to inspect the depositors ledger. They should not be
held answerable for taking the cashiers statement to be as correct as the statement of assets
always was. The statement of assets were always correct. A committee was appointed to
examine the operations of the bank. The bank itself was in sound financial condition. Their
confidence seemed warranted by the semi-annual examinations by the government examiner
and they were encouraged in their belief that all was well by the president. They were not
bound by virtue of the office gratuitously assumed by them to call in the passbooks and
compare them with the ledger, and until the event showed the possibility they hardly could
have seen that their failure to look at the ledger opened a way to fraud.

Barnes v Andrews. F: Corporation manufactures starters for Ford motor vehicles and airplanes.
Director Andrews, the largest SH, who was induced by the President to become director, held
only 2 board meetings. During his term, the company business was mismanaged. Barnes was
then appointed receiver after the corporation had gone under, and was found that the company
had no funds. He alleged that Andrews failed to give adequate attention to the affairs of the
company, which had been conducted incompetently and without regard to the wastage in
salaries. Work had languished from incompetence and extravagance and quarrels between the
factory manager and the other personnel affected production.

The position of the president, however, is different. Practically he was the master of the
situation. He was at the bank daily for hours, had the ledger in his hands at time. He had
hints and warnings of the unexplained shortages and rapid decline in deposits. He knew the
errant employee had been living at a fast pace and had been dabbling in stocks. He had been
put on his guard, and had they been heeded by the President, it would have led to an
examination of the ledgers and would have prevented future thefts. In accepting the
presidency Dresser must be taken to have contemplated responsibility for losses to the bank.

H: First liability must rest upon the directors general inattention to his duties. He cannot be
charged with neglect in attending director meetings, since there had been only 2. But his liability
must depend upon his failure in general to keep advised of the conduct of the corporate affairs.
While directors are collectively managers of the company, they are not expected to interfere
individually in the actual conduct of its affairs. To do so would disturb the authority of the
officers and destroy their individual responsibility, without which no proper discipline is
possible. Having accepted a post of confidence, Andrews was charged with an active duty to
learn whether the company was moving to production, and why it was not, and to consider what
could be done to avoid the conflicts among personnel or correct their incompetence, which was
slowly bleeding the business to death. He must go further to show that he should have been
more active, as the cause of action against him by the receiver rests upon a tort of omission as
though it had rested on a positive act on his part.

Duty of Obedience

When a business fails from general mismanagement or business incapacity, could the blame be
placed upon a single director and could he have saved the company if he had tried? A director
could have least fulfilled his duties to the company and to the SHs to have made the company
prosper, or at least to show that he had done his duty enough to have broken the fall of the
company. This Andrews failed to do. x

Board is bound to observe the duty of obediencethey will direct the affairs of the
corporation only in accordance with the purposes for which its was organized
26: Directors and officers to be elected shall perform the duties enjoined on them by
law and by the BLs of the corporation.

Duty of Loyalty; Fiduciary Duties; Conflict of Interests

True, Andrews was not well-suited by experience for the job he had undertaken. Directors are
not specialists, but they must have good sense, and must have acquainted themselves with the
corporate affairs, but they need not have any technical talent. They are the general advisers of
the business, and if they faithfully give such ability as they have, it would not be lawful to hold
them liable. Must a director guarantee that his judgment is good? Can SHs call him to account
for deficiencies which their votes assured him did not disqualify him for office?

Bates v Dresser. F: Bank employee was able to embezzle cash from the branch operations for a
considerable period of time, unbeknown to the bank officers, who relied to heavily and trusted
the employee. He was able to swindle money by concealing his withdrawals through entries in

Under 31: Directors or trustees who acquire any personal or pecuniary interest in
conflict with their duty as directors shall be liable solidarily for all damages resulting
therefrom
o When a director attempts to acquire or acquires any interest adverse to the
corporation, equity imposes a liability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation
director is a fiduciary of the corporation
in case of conflict of interest, he cannot sacrifice the interests of the corporation without
incurring liability for his disloyal act
Code sets up standards but ultimately must be decided on the merits of each case
1.

the self-dealing director

a director who enters into a contract with the corporation of which he is a SH or member
since he participates in the decision as to whether or not the contract is to be accepted, he
will be exposed to the temptation of putting his interest above those of the corporation and
could exert influence to obtain board approval of his contract with the corporation
but not all dealings of the director with his own corporation when itll be beneficial or have
the best interest in its welfare
the rule thus absolutely disqualifying a fiduciary from dealing with his cestui que trust has
not been strictly applied to directors

the affairs of the corporation, even to benefit themselves, with immunity. This and other
provisions which authorized the election of non-SHs as directors, completely disassociate
the SHs from the government and management of the business in which they have invested.
Mead v EC McCullough. H: While a corporation remains solvent, there is no reason why a
director or officer, by authority of a majority of the SHs or board may not deal with the
corporation, loan it money or buy property from it. So long as a purely private corporation
remains solvent, its director are agents or trustees for the SHs. They owe no duties or
obligations to others. But the moment such a corporation becomes insolvent, its directors are
trustees of all the creditors, whether they are members of the corporation or not, and must
manage its property and assets with strict regard to their interest. A director or officer may in
GF and for an adequate consideration purchase from a majority of the directors or SHs the
property even of an insolvent corporation, and a sale thus made to him is valid and binding
upon the minority.

sec 35: A contract of the corporation with one or more of its directors or trustees or officers is
voidable at the option of such corporation, unless all the following conditions are present that:
(a) the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum
(b) the vote of such director or trustee was not necessary for the approval of the contract
(c) the contract is fair and reasonable under the circumstances
(d) the contract with the officer has been previously authorized by the board

Where a director in a corporation accepts a position in which his duties are incompatible
with those as such director it is presumed that he has abandoned his office as director of the
corporation.

where any of the first two (2) conditions is absent, in the case of a contract with a director
or trustee, such contract may be ratified by a vote of 2/3 OCS
but full disclosure of the adverse interest must be made
not all conditions must be present
also applies to corporate officers
contract of a self-dealing director is VOIDABLE at the option of the corporation, w/n there
has been damages
self-dealing contract is presumed unfair until the self-dealing director proves otherwise
to validate the contract of a self-dealing director:
o ratification by the SHs thru a vote of at least 2/3 OCS (including the shares of the
self-dealing director)

although he may not have voted, if the other members of the board are under
his dominating influence, he will still be considered a self-dealing director
covered by the provision (Globe Woolen Co v Utica Gas & Electric)

even when the director resigns in order to consummate the contract, but after
he has laid the foundation for the successful completion of the same, he can
still be held liable to account for the profits he may have reaped (Steinberg v
Velasco)
o full disclosure of the adverse interest
o contract must be fair and reasonable

2.

Fixing compensation of directors and officers

Typical situation of self-dealing

Takes various forms: per diems, salaries and profit-sharing arrangements like bonuses,
stock options plans, pension plans, etc
GR: directors are NOT entitled to compensation for performing services ordinarily
attached to their office; they are presumed to serve without pay
Exception: unless the AOI or BLs expressly provide or a contract is made in advance
(Lingayen gulf v Baltazar infra)
Only the SHs and NOT the directors themselves may fix the amount of compensation
o A SHs resolution to grant such compensation can only refer to future and NOT to
PAST services (Barretto v La Previsora infra)
Principles also applicable to non-stock corporations
but NOT applicable to an officer who is not a director
also not applicable to directors who render service outside his usual duties

Sec 30
Sec 87

Palting v San Jose Petroleum Inc. F: Case involves provisions in the by-laws of a corporation
seeking to have its securities registered and distributed in the Philippines.
H: Considering the questioned provision that no contract or transaction between the company
and any other association or corporation shall be affected except in case of fraud, by the fact that
any of the directors or officers of the company may be interested in or are directors or officers of
such other associations or corporation, the impact of these provisions upon the traditional
fiduciary relationship between the directors and SHs of a corporation is too obvious to escape
notice. The directors and officers of the corporation can do anything, short of actual fraud, with

Directors can receive compensation other than per diems only if the by-laws fix the
same or in the absence thereof, approval of majority of SHs
Sec 30 allows directors to fix the amount of their own per diems; technically is selfdealing but allowed by express provision of law
o But the per diems must be REASONABLE
o Total amount of compensationincluding per diemsmust not exceed 10% of
the corporations net income before taxes

As to corporate officers and employees not directors: may consist not only of salaries but
also bonuses, stock options, and other profit-sharing schemes
As to the president: Code is silent, but SC held that he is expected to serve without salary,
and that the per diems paid were sufficient compensation for services (Lingayen Gulf v
Baltazar)
SEC: stock option plans of widely-held corporations
o must be subject to full disclosure before they can publicly sell their securities
o must be approved by SHs representing 2/3 of SUBSCRIBED capital stock
o amount set aside must not be more than 20% of the subscribed capital stock

The validity of a stock option plan depends directly upon the existence of consideration to
the corporation. Sufficient consideration to the corporation may be inter alia, the retention of
the services of an employee, or the gaining of services of a new employee, provided there is
a reasonable relationship between the value of the services rendered and the value of options
granted. In this case, the stock option plan is deficient because it is not reasonably calculated
to insure that the corporation will receive the contemplated benefits. No rule of thumb can
be devised to test the sufficiency of the condition which are urged as insurance that the
corporation will receive the contemplated benefit. The most that can be said is that in each
case there must be some element which, within reason, can be expected to lead to the desired
end. The plan and options issued do not of themselves insure that benefit of retaining the
services of the employee to whom the option is granted will inure to the corporation. They
are too insecure in nature to be regarded as a condition of the stock option plan designed to
insure that the corporation will receive the contemplated benefit.

Govt of PI vs. El Hogar Filipino. (supra)

Barretto v La Previsora Filipina. F: Suit by the resigned directors of a building and loan
association to recover 1% of the profits to each complainant in accordance with an amendment
to the by-laws, which stipulate that they are entitled to a lifetime annuity from the profits of the
corporation.

3.

H: The amended by-laws does create any obligation to pay to the persons name therein such a
life gratuity or pension out of the profits. A by-law of this nature must be clearly regarded as
beyond the lawful powers of a mutual building and loan association and is thus ultra vires. As it
were, the by-law cannot be held to establish a contractual relation between the parties.

The authority conferred upon corporations in the code refers to providing compensation for
future services of directors, officers, and employees after the adoption of the by-law and cannot
in any sense be held to authorize the giving of continuous compensation to particular directors
after their employment has terminated for past services rendered gratuitously by the them to the
corporation. To permit the transaction would be to create an obligation unknown to the law, and
to countenance a misapplication of funds of the building and loan association to the prejudice of
SHs.

Using inside information

Directors and corporate officers are insiders having access to confidential information
relating to the business of the corporation
Fiduciary position prohibits them from using any information to benefit themselves or
any competitor corporation
Liability of guilty and disloyal director can be based on Sec 31
RSA (now SRC) contains express provisions regarding use of inside information

Sec 36 RSA
Sec 30 RSA
Sec 53 RSA
Strong v Repide. F: Erica Strong is the owner of 800 shares of the Phil Sugar Estates Devt
Company, which owned of the value of friar lands in the Philippines. Repide is director
and majority SH. The government made an offer to purchase the lands owned by the
corporation and from the other owners. The offer was rejected by Repide, without consulting
the other SHs, and held out for a better deal. He was aware that the value of the lands and
the shares would be of no value if the sale were not consummated, since the company had
not paid dividends, was living on credit, and could not even paid taxes. The land was the
only valuable asset of the corporation. Repide than took steps to purchase 800 shares of
stock owner by Strong. He employed Kaufmann, who then employed Sloan the broker, to
purchase the stock for him. Negotiations ensued. Strong through Jones agreed to sell
Strongs shares to Repide. He thus obtained the 800 shares for 1/10th the amount they were
worth by the eventual sale of the lands two months after he bought the shares. The probable
value of the shares was unknown to anyone except Repide, while the agent of Strong had no
idea that it was Repide who wanted to purchase the shares.

Contracts between a corporation and third persons must be made by or under authority of its
board and not by the SHs. The action of the SHs is only advisory and is not binding on the
corporation.
Kerbs v California Eastern Airways. F: The stock option plan of the company provides that
250,000 shares of the corporations unissued stock be subject to options to purchase at $1/share,
exercisable at any time within a period of 5 years. The profit sharing plan provides that when
quarterly earning exceeded $30,000 before taxes, 10% shall be distributed among the name
officers and executive personnel. If a loss is incurred, cumulative deficiency plus operating
losses shall be carried forward to succeeding quarterly periods. Both plans were adopted at a
board meeting, but only the stock options plan was ratified by the SH.
H: The SH ratification cures any voidable defect in the action of the board on the stock options
plan. Ratification by SHs of voidable acts of directors is effective for all purposes unless the
action of the directors constituted a gift of corporate assets to themselves or was ultra vires,
illegal, or fraudulent.

I: W/n it was the duty of Repide, in GF, to disclose to the agent of Strong the facts which
would affect the value of the stock he purchased from the latter.

H: In this case, Repide was the chief negotiator for the sale of the lands, acting for all the other
SHs. Only he knew the state-of-play in the proposed sale. He owned of the shares of the
corporation. Under these circumstances, and before the negotiations for the sale were completed,
he employs agents to purchase shares of his company from another SH and conceals his own
identity and knowledge of the state of the negotiations on the sale of the lands and their probable
effect on the value of the shares to be purchased. A director may be accountable directly to the
SH where the special facts surrounding the transaction give rise to the obligation to disclose his
identity or the inside information he possesses. This is known as the special facts doctrine.

Sec 34: Where a director acquires for himself a business opportunity which should belong to
the corporation, thereby obtaining profits which should belong to the corporate corporation,
he must account to the latter for all such profits by refunding the same, unless his act has
been ratified by vote of the SHs owning 2/3 OCS
Applicable only to directors and NOT to officers
Allows ratification of a transaction by vote of 2/3 OCS

Taylor v Wright et al. F: Mrs Wright and Allen Wright, majority SH and both director
respectively, employed an agent to purchase from Emma Taylor 3750 shares in the corporation
to which they are directors in. Said shares were pledged as security for a loan by Taylor which
the Wrights knew. The Wrights also knew that the company was operating at a loss, and they
knew the true value of the shares (which was not traded in the exchange). They also concealed
their identity and purpose in purchasing the stock from Taylor.

Sec 31: Directors or trustees who acquire any personal or pecuniary interest in conflict with
their duty as directors shall be liable solidarily for all damages resulting therefrom
Applicable to directors, trustees, and officers
Does NOT allow ratification of a self-dealing transaction

I: W/n the directors and officers of a corporation owe any duty to all SHs in relation to
transactions whereby officers and directors buy for themselves shares of stock from the SHs

H: Three (3) rules are recognized as applying to the case.

The Majority ruledirectors and officers owe no fiduciary duty at all to SHs, but may deal
with them at arms length. A director is a fiduciary with respect to the corporation as an
entity, and not to the SHs as individuals. In dealings with or for the corporation, the director
is exercising a corporate function, and is subject to the usual fiduciary duty to disclose all
material facts; but that in personal dealings with SHs he is not exercising a corporate
function, and is free to deal with them at arms length. It is based on the theory that the
corporationthe collective SHsis a separate and distinct legal entity, an artificial
personality, to whom the director owes his duty.
The Minority Rulerecognizes the directors obligation to the SHs individually as well as
collectively, and refuses to permit him to profit at the latters expense by the use of
information obtained as a result of his official position and duties. Such a duty exists
because the SHs have placed the directors in a strategic position where they can make it
appear the shares are much less valuable than they really are.
The Special Facts rulean exception to the Majority rule; where special circumstances are
present which make it inequitable for the director to withhold information from the SH, the
duty to disclose arises, and concealment is fraud.

If the transaction is one which the corporation has the right to appropriate, then the
director has a positive duty not to seize it for himself
Should he do so, he must account for all profits he obtains, even if he used personal
funds
Ratification by SHs representing 2/3 OCS cures the transaction
Sec 34 covers only directors and not officers
but an officer may still be held liable under Sec 31, para 2
o officer is a full time corporate agent and is paid a salary for his services, and thus
there would be stronger reasons to make an officer liable
o director not an officer spends only a part of is business time and efforts for the
corporation, for which he is not entitled to compensation unless expressly granted
when is a corporate opportunity belonging to the corporation?

Singer et al v Carlisle. F: Singer et al are SHs of the United Corporation which owns all
capital stock of its subsidiary, NY United Corp, both of which are engaged in the business of
underwriting securities. Carlisle et al are directors of the two corporations. Other defendants
are investment houses JP Morgan, Drexel & Co, and Morgan Stanley. United Corp acquired
substantial voting stock of various holding and operating companies/utilities, which were all
publicly listed and obtained their funds through the public sale of their securities. JP Morgan
et al were able to obtain large profits from the underwriting of such securities to the
exclusion of United and NY United. Plaintiff Singer charge that the defendant bankers and
investment houses and the directors of the two corporations fraudulently caused the latter
corporations to use their influence and control over the subsidiaries in order to induce them
to award the underwriting business to the defendant bankers. Having eliminated United Corp
and NY United as their competitors for the underwriting business of the subsidiaries, the
defendants allegedly proceeded to utilize their control and influence to obtain the business
for themselves. Singer et al also claimed that the directors of the corporation, as fiduciaries,
eliminated their cestui as a competitor in the underwriting profits.

Assuming the Special Facts rule to be applicable, there is no doubt that the Wrights owed Taylor
a duty and violated that duty to her damage. The stock was not sold or traded in any exchange.
They concealed their position as directors, and had full knowledge of the real value of the stock,
but kept that knowledge to themselves. They had full control over the corporation. Under such
circumstances the findings that the Wrights are guilty of fraud within the meaning of the Special
Facts rule are supported by the evidence.
4.

Significant aspect of fiduciary obligation is the duty to refrain from usurping a business
opportunity rightly belonging to the corporation

Seizing corporate opportunity

H: United and NY United were also engaged in underwriting as do the defendant banks. It was
the duty of their directors and officers to make every effort consonant with good, honest
judgment to obtain for those corporations as much of the underwriting business as possible, and
to make this business as profitable as possible. This does not mean, however, that the directors
and controlling SHs of United and NY United were required to do anything detrimental to the
affairs of other corporations of which they were officers and directors, and to the affairs of
United and NY United. One in control of a majority of the stock and of the board of a
corporation occupies a fiduciary relation towards the minority, and is charged with the duty of
exercising a high degree of GF, care, and diligence for the protection of the same. Every act in
its own interest to the detriment of the minority interests becomes a breach of duty and of trust,
and entitled them to plenary relied. So strict is the rule of undivided loyalty to the beneficiary
that the mere fact that a trustee has an interest inconsistent with the interest of his cestui, casts
upon him that burden of justification. Where this duty exists, the duty of the trustee is to manage
the property and affairs of the corporation with an eye single to the advantage of the corporation
itself. It is not proper for the fiduciary to take those opportunities unto itself, while at the same
time it stayed the processes of its subsidiary directed towards the same business ends. It is not
only a case of a fiduciary seizing business opportunities of the cestui. The trustee at the same
time kept its dominant hand over the cestui, suppressing any attempt by the cestui to go out and
compete with the trustee.

Acoustic and were forbidden to take position where personal interest would conflict with the
interest of their principal.
H: The theory of the suit is that a fiduciary may make no profit for himself out of a violation
of duty of the cestui, even though he risked his own funds in the venture, and that any one
who assists in the fiduciarys dereliction is likewise liable to account for the profit so made.
It is clear that there is no contract between Acoustic and Reynolds because the offer did not
run to Acoustic but to the Biddle group as individuals. The management contract, once
entered into, would enable access to the patents, stock ownership in De Forest as a going
concern after receivership was lifted, and were all concededly legitimate corporate purposes.
Thus the proposed purchase is not ultra vires.
The facts of the present case militate strongly against the directors since in this case, they
absolutely bound Acoustic by contract to make payments to Reynolds and exposing it to risk
of a suit for damages for nonperformance, without committing themselves to it to relieve it
of this obligation if necessary when time for payment arrives. Directors of a solvent
corporation are forbidden to take over for their own profit a corporate contract on the plea of
the corporations financial inability to perform. If the directors are uncertain whether the
corporation can make the necessary outlays, they need not embark upon the venture. If they
do, they cannot substitute themselves for the corporation any place along the line and divert
possible benefits into their own pockets.

Where a fiduciary is engaged in a business in competition with his corporation, he cannot

actively use his position and power over his corporation so as to prevent the corporation from
seeking certain businesses in competition with himself. It is charged that the directors here not
only failed and refused any attempt to obtain certain business for their own corporation, but that
they affirmatively prevent the corporation from competing with them for that business. This they
may not do. Directorship in two competing corporation does not in and of itself constitute a
wrong. It is only when a business opportunity arises which places the director in a position of
serving two masters, and when dominated by one, he neglects his duty to the other, that a wrong
has been done.

Litwin v Allen et al. F: JP Morgan, in disposing of 1,250,000 shares of CS of Alleghany

corporation, offered 500,000 to Guaranty Corporation to be sold on a commission at
$24/share. Before the public offering, Morgan also offered the other 750,000 to friends at
$20. Among those receiving the shares were some directors of Guaranty Corp, who received
40,000 shares. The market opened at a premium and the directors were able to dispose of
their stock at a substantial profit.
H: A director of a corporation is in a position of fiduciary. He will not be permitted to
improperly profit at the expense of the corporation. Undivided loyalty will ever be insisted
upon. Personal gain will be denied to a director when it comes because he has taken a
position adverse to or in conflict with the best interests of the corporation. The fiduciary
relationship imposes a duty to act in accordance with the highest standard. There is thus no
basis for holding that in acquiring stock through JP Morgan at $20, any of the defendants
were guilty of a breach of fiduciary duty. The CS purchased did not represent in any case a
business opportunity for the Guaranty Corporation. Having fulfilled their duty to the
corporation in accordance to their best judgment, the directors were not precluded from a
transaction for their own account and risk.

Irving Trust Co v Deutsch et al. F: Irving is the trustee of the insolvent company Sonora
Acoustic. Acoustic desired the patents of the De Forest company and wanted gain at least
minority stake to have a voice in the management of its patents and products, which goes to
Acoustics corporate purpose. Reynolds & Co, receiver of the insolvent De Forest, offered to
give Acoustic 1/3 participation in the purchase of 600,000 shares of De Forest stock. It also
stipulated that Acoustics nominees should hold 4 of 9 seats in the board and that it should have
the right to enter into a contract to handle the managing and selling of De Forest products. This
offer was presented to the board of Acoustic and a resolution was passed authorizing its
president, Deutsch, to obtain sufficient funds to enable Acoustic to carry out its obligations in
case it accepts the offer. No funds were obtained but Biddle and Deutsch et al, agreed to put up
the money and accept the certificates of De Forest stock issued when date of payment came
under the offer. Reynolds agreed and issued the certificates. The deal was consummated on the
purchase of De Forest stock. It was then traded in the exchange and Biddle, Deutsch et al were
able to reap huge profits in selling their shares. Acoustic declares bankruptcy and sues the
Biddle group, three of whom were directors of De Forest, appropriated to themselves Acoustics
right under its contract, when as fiduciaries they were obligated to preserve those rights for

In order to constitute a corporate opportunity that was deprived by the directors, it was
necessary to prove the ff:
The shares purchase were in contemplation of equity offered to the cestui
That the cestui had some legitimate right or expectancy in these shares

The question to ask is, have the directors profited at the expense of their corporation; have they
gained because of disloyalty to its interest and welfare? In this case, the opportunity was a
routine piece of business wholly lacking in the unique and special quality which distinguished
other corporate opportunity cases. The interest of the directors in the stock was purely
speculative, and they even incurred a definite risk which at the time was totally eliminated from
the cestuis position in the same stock. In other words, the profit of the cestui was assured; that
of the directors were still at hazard.
5.

extensions to the plant, the electric company had pledged that for 10 years there will be
saving of $600/month, $300 for each mill, $7200/year. As a result of that pledge it has
supplied the plaintiff with electric current for practically nothing, and even owes it some
money thereafter. Mr Maynard knew the unfairness of the contract, and he cannot have
failed to know that he held a one-sided contract which left the defendant at his mercy. Thus
his refusal to vote does not nullify, as of course an influence and predominance exerted
without a vote. A constant duty rests on a trustee to seek no harsh advantage to the detriment
of his trust, but rather to protect and renounce he gains what is unfair.

Interlocking directors
Close corporation

One who occupies a positioning two (2) corporations dealing with each other
Sometimes presented definite advantages to the corporation

SHs of a close corporation can choose to manage the corporation themselves, instead of
having a board, and thus the law
treats
as directors
with allit the
Jack:
notthem
limited
to the board;
alsopowers,
has toduties, and
liabilities attached thereto
be assumed by the SHs who own the
majority; all boils down to control!
Sec 97 (1-3)

Sec 33: GR: A contract between two or more corporations having interlocking directors shall not
be invalidated on that ground alone
Exceptions:
o Cases of fraud
o if the contract is not fair and reasonable under the circumstances
o if merely nominal interest, interlocking director shall still be subject to the same
ratificatory vote required in cases of dealings of directors, trustees, and officers
interests exceeding 20% of OCS is considered substantial

Sec 100 (5)

The burden is on the corporation which seeks to uphold the contract to prove the fairness or
unfairness of the transaction
Interlocking director may actually be a self-dealing director where his interest in one
corporation is merely nominal, but his interest in the other corporation is greater than 20%
of its OCS:

100: SHs can be made personally liable for corporate torts

o in other corporations: liable only if there is negligence in his duties
o SHs are solidarily liable with the corporation

Duty of controlling interest

Globe Woolen Co v Utica Gas & Electric. F: Globe Woolen needed electric power to run its
mills. Its president and majority SH, Maynard, was able to get a contract with the electric
company Utica Gas which was ratified by the executive committee of Globes board. Maynard
was a nominal SH in the electric company also, and did not vote in the meeting. Globe desires to
enforce the contract.

H: Contracts are voidable at the instance of Utica Gas. Globe argues that by refusing to vote,
Maynard shifted responsibility to his associates, and may reap a profit from their errors. One
does not divest oneself so readily of ones duties as trustee. The refusal to vote, has indeed this
importance: it gives to the transaction the form and presumption of propriety, and requires one
who would invalidate it to prove beneath the surface. The trustee or director holds a duty of
constant and unqualified fidelity. He cannot rid himself of the duty to warn and to denounce, if
there is improvidence or oppression, either apparent on the surface, or lurking beneath it.

A SH who is able to control a corporation by owning a majority of voting shares or

otherwise, owes a duty as well of GF to the corporation and to the minority
Majority SH is subject to the duty of GF when he acts by voting at a SH meeting
persons enjoying management control hold it in behalf of the SHs, and not as their
personal property
GR: controlling SH may dispose of his stock at any time and at any price
o But they cannot abuse by transferring office to persons who re known as intending
to raid the corporate treasury or improperly benefit or enrich themselves
(Insuranshares Corp case)

Insuranshares Corporation v Northern Fiscal Corp. F: The Management group

(composed of Philadelphia banks) transferred control over the Insuranshares Corporation, an
investment trust specializing in shares of small life insurance companies, to the Boston
Group, none of whom ever had any interest of any in it. With the control went plenary power
under the by-laws to sell or transfer all the securities in the companys portfolio. Such
acquisition of control was the first step of a grand scheme, planned by the Boston Group
with the connivance of brokers, to strip the corporation of its valuable assets, leaving a mere
shell to the remaining SHs.

There was an influence in this case which was exerted by Mr Maynard the president of Globe
Woolen. From beginning to end he dealt with a subordinate, who was alert to serve at his
pleasure. The unfairness in the contract is startling and the consequences could be disastrous. No
matter how large the business, or how great the increase in prices of labor or fuel, or there be

H: This case involves more than just a question of liability in the sale of corporate stock: it is the
sale of control by a minoritybut controllinginterest.
Those who control a corporation either by the majority or minority stock ownership owe some
duty to the corporation in respect of the transfer of the control to outsiders. Owners of control in
a corporation are under a duty not to transfer ownership to outsiders if the circumstances
surrounding the proposed transfer are such as to awaken suspicion and put a prudent man on his
guard. In this case the evidence shows that the Boston group were acquiring control over the
corporation by improper means and for an improper purpose.
Jack: a systematic, orchestrated move to transfer
mgt/control to an irresponsible group; duty to inform
SHs applied to situations where there is a clear-cut
No express duty in Corpo Code; based on contract law
majority
GR: directors cannot be personally liable to corporate creditors for general inefficient
management of a solvent corporation
o Remedy of creditors is against the corporation itself
Exception: when corporation is insolvent, the directors will be DEEMED trustees of the
creditors and should manage its assets with strict regard to the creditors interest (Mead v
McCullough)
Upon insolvency of the corporation, the board is duty bound to hold the assets of the
corporation primarily first for the payment of liabilities
31: should they willfully and knowingly assent to patently unlawful acts of the corporation
or are guilty of gross negligence or BF in directing the affairs of the corporation, they
become solidarily liable with for damages to the corporation + damages to third persons
including creditors
65: director who fails to object in writing to the issuance of stock for less than par or issued
Fiduciary obligation:
value is solidarily liable with the guilty SH to the corporation as well as to its creditors for
Commences at the time director assumes office
the difference
Remission can be action, inaction, gross negligence
Liability not the SHs but to the corporation
One word: fiduciary
Trust imposed by SH collectively
Directors collectively mandated to make full use of corporate
property
Fiduciary obligation owed to corporation, not the SH
2 types of responsibilities:
As a Board, collectively
As a director, individually
Degree of responsibility is greater as an individual director
31: repository of duties of directors collectively and individually
distinguish if director is an interlocking director
directors transaction with corporation can prove to be beneficial
prohibition against self-dealing is not absolute
threshold: fraud
burden of proof: corporation
fixing compensation
directors sit on board, can do anything and everything with the
corporate assets
9
success or downfall is borne by directors
board can only recommend compensation! Subj to SH approval
Determination:
did they discharge their duties mandated by the statute?

Duty to creditors