Law Reviewer

Answer Key: Title III: Board of Directors and Officers (Sec 21, 23-34)

Review the questions and correct answers for this section.

Question 1: A corporation is incorporated on Jan 1, 2020. It never adopts by-laws, elects officers, or starts its business. What is its legal status on Jan 2, 2025?

It is in good standing.

It is placed on delinquent status by the SEC.

Its certificate of incorporation is deemed revoked automatically.

It must hold an emergency election.

Explanation:

Under Scenario A, if a corporation fails to formally organize AND commence business within 5 years from incorporation, its charter is "deemed revoked" by operation of law on the day after the 5-year period expires.

Question 2: XYZ Corp. started its business in 2015 but ceased all operations in 2019. In 2024, the SEC discovers this. What is the first step the SEC must take?

Automatically revoke the corporation's charter.

Give the corporation a 2-year period to resume operations.

Issue a notice and conduct a hearing before taking any action.

Fine the directors for negligence.

Explanation:

Under Scenario B (continuous inoperation), the process is not automatic. The SEC must provide due process, which begins with issuing a notice and holding a hearing for the corporation.

Question 3: Following the previous question, after the hearing, the SEC places XYZ Corp. on delinquent status in 2024. What happens if the corporation fails to resume operations by 2026?

It gets another 2-year extension.

The SEC will cause the revocation of its charter.

It automatically returns to good standing.

The directors are held personally liable for corporate debts.

Explanation:

Once declared delinquent, the corporation has a two-year remedial period. Failure to resume operations within this period gives the SEC the authority to revoke its charter.

Question 4: What is the key difference between being "deemed revoked" and being placed on "delinquent status"?

There is no difference; the terms are the same.

"Deemed revoked" is a warning, while "delinquent" is a final penalty.

"Deemed revoked" is automatic and requires no SEC hearing, while "delinquent status" requires due process from the SEC.

"Deemed revoked" applies to old corporations, while "delinquent" applies to new ones.

Explanation:

This is the core distinction. "Deemed revoked" is an automatic legal consequence for never starting. "Delinquent status" is a formal declaration made by the SEC after a hearing for a corporation that started but then stopped.

Question 5: "Formal Organization" of a corporation primarily refers to:

Renting an office space and starting marketing campaigns.

The adoption of by-laws and the election of the first board and officers.

Achieving profitability within the first year.

Filing the Articles of Incorporation with the SEC.

Explanation:

Formal organization refers to the internal structuring of the corporation after receiving its charter, which is necessary before it can properly commence its external business activities.

Question 6: A company is incorporated on March 1, 2021. It elects its board and officers but never enters into any business contract or activity. As of March 2, 2026, what is its status?

It is on delinquent status.

Its charter is deemed revoked.

It is in good standing because it formally organized.

It is considered a partnership.

Explanation:

Section 21 requires the corporation to BOTH formally organize AND commence business. Since it failed to commence its business within five years, its charter is deemed revoked.

Question 7: A corporation that has been placed on delinquent status is given how long to resume its operations?

90 days

1 year

2 years

5 years

Explanation:

The law provides a two-year remedial period for a delinquent corporation to correct its non-operation and comply with SEC requirements to have its delinquent status lifted.

Question 8: Which of the following actions constitutes "commencement of business"?

The incorporators holding their first informal meeting.

Drafting the business plan.

Entering into a contract for the lease of its main office.

Reserving the corporate name with the SEC.

Explanation:

Commencement of business involves taking the initial steps to carry out the company's primary purpose, which includes activities like leasing property, acquiring equipment, or starting production.

Question 9: The "use it or lose it" principle in Section 21 applies to the corporation's:

Net income.

Brand name and logo.

Corporate charter (Certificate of Incorporation).

Physical assets.

Explanation:

The principle is that the privilege to exist as a corporation, granted by the state through the charter, must be used. If it is not, the state can take it back.

Question 10: If a corporation on delinquent status successfully resumes business within the two-year period, what happens?

It must re-incorporate.

The SEC will issue an order lifting the delinquent status.

It gets a new Certificate of Incorporation.

It is automatically dissolved and must wind up its affairs.

Explanation:

Upon successful compliance and resumption of operations, the SEC will issue an order that returns the corporation to good standing.

Question 11: Scenario: A corporation is formed on June 1, 2020. It organizes on July 1, 2020, and begins business on August 1, 2020. It stops all operations on September 1, 2021. What is the earliest date the SEC can initiate proceedings to declare it delinquent?

September 2, 2024

September 2, 2025

September 2, 2026

June 2, 2025

Explanation:

Continuous inoperation is counted from the date it ceased operations. The five-year period starts on September 1, 2021, and ends on September 1, 2026. The SEC can take action after this period.

Question 12: The automatic revocation rule under Scenario A applies if the corporation fails to:

Formally organize OR commence business.

Formally organize AND commence business.

Generate a profit within five years.

Hire at least ten employees within five years.

Explanation:

The law requires both conditions to be met. Failure in either (or both) within the five-year period triggers the automatic revocation. A company that organizes but does not commence business is still subject to revocation.

Question 13: The process for placing a corporation on delinquent status requires due process, which means:

The corporation is presumed guilty until proven innocent.

The SEC can act without any warning.

The SEC must provide the corporation with notice and an opportunity to be heard.

The decision must be approved by the President of the Philippines.

Explanation:

Due process is a fundamental legal principle requiring that the government (in this case, the SEC) must respect all legal rights that are owed to a person or entity, including the right to be notified of the charges and to present a defense in a hearing.

Question 14: What is the primary difference in the final outcome between a corporation whose charter is "deemed revoked" and one that is declared "delinquent" and fails to resume operations?

The "deemed revoked" corporation can re-apply immediately, while the delinquent one cannot.

There is no practical difference; both are dissolved.

The "deemed revoked" charter expires automatically by law, while the delinquent corporation is formally revoked by an SEC order.

The "deemed revoked" corporation's directors are fined, while the delinquent one's are not.

Explanation:

This highlights the key procedural difference. "Deemed revoked" is a self-executing legal outcome. The revocation of a delinquent corporation is a deliberate, final administrative act by the SEC after the two-year remedial period expires.

Question 15: What is the quorum requirement for a valid election of directors in a stock corporation?

Presence of a majority of the board of directors.

Presence of the owners of the majority of the outstanding capital stock.

Presence of at least 20% of all stockholders.

Presence of a majority of all members.

Explanation:

For a stock corporation, an election can only proceed if stockholders representing a majority of the outstanding capital stock are present in person, by proxy, or by remote communication.

Question 16: In a non-stock corporation electing 7 trustees, how many votes can a single member cast for one candidate?

As many votes as shares they own.

Seven votes.

Only one vote.

It depends on the by-laws.

Explanation:

In a non-stock corporation, a member has as many votes as there are trustees to be elected, but they are prohibited from casting more than one vote for a single candidate.

Question 17: A stockholder owns 200 shares in a corporation electing 5 directors. How many total votes can this stockholder cast?

200 votes

5 votes

1,000 votes

100 votes

Explanation:

The total number of votes is calculated by multiplying the number of shares owned by the number of directors to be elected (200 shares x 5 directors = 1,000 votes).

Question 18: Using the scenario from the previous question (200 shares, 5 directors, 1,000 total votes), what is "straight voting"?

Giving all 1,000 votes to a single candidate.

Giving 200 votes each to 5 different candidates.

Giving 500 votes to one candidate and 500 to another.

Voting for only one candidate.

Explanation:

In straight voting, a stockholder votes a number of shares for each of the 5 candidates. They cannot give any candidate more votes than the number of shares they own (200).

Question 19: Which voting method is designed to give minority stockholders the best chance to elect a representative to the board?

Straight Voting

Proxy Voting

Cumulative Voting

Voting by Ballot

Explanation:

Cumulative voting allows stockholders to concentrate all their votes on a single candidate, giving a minority bloc of shareholders the ability to pool their votes and elect one director.

Question 20: Ben holds 100 shares and the corporation is electing 8 directors. He wants to use cumulative voting to give all his votes to Candidate Z. How many votes will Candidate Z receive from Ben?

100 votes

8 votes

800 votes

1,600 votes

Explanation:

Ben has a total of 800 votes (100 shares x 8 directors). Cumulative voting allows him to "cumulate" or give all 800 of these votes to a single candidate.

Question 21: Under what condition must an election for directors be conducted by ballot?

It is always mandatory.

Only if the by-laws require it.

If any voting stockholder or member requests it.

Only if there are more candidates than open positions.

Explanation:

The law states that the election must be by ballot if it is requested. If no request is made, other voting methods like a show of hands might be permissible.

Question 22: Which of the following corporations is required to have at least 20% of its board composed of independent directors?

A small family-owned restaurant.

Any corporation with more than 100 employees.

A publicly listed company on the stock exchange.

A non-stock, non-profit foundation.

Explanation:

The requirement for independent directors applies to corporations vested with public interest, which explicitly includes publicly listed companies, banks, and quasi-banks.

Question 23: What is "delinquent stock"?

Shares owned by a director who has been disciplined.

Shares that have not yet been issued by the corporation.

Shares for which a stockholder has failed to pay a due subscription amount.

Shares that did not receive any dividends.

Explanation:

Delinquent stock refers to subscribed shares where the stockholder has failed to meet a payment deadline (a "call") for the subscription price.

Question 24: What is the legal consequence of a stock being declared delinquent in relation to an election?

The shares are automatically forfeited.

The shares cannot be voted.

The shares have double the voting power.

The stockholder can still vote but cannot be a candidate.

Explanation:

Section 23 explicitly states that "No delinquent stock shall be voted." This is a penalty for failing to pay the subscription.

Question 25: In a stock corporation, how is the winner of a board seat determined?

The candidate must get a majority of all votes cast.

The candidates with the highest number of votes are declared elected.

The board appoints the winners from the nominees.

The outgoing directors choose their successors.

Explanation:

The election is a plurality vote. The nominees who receive the most votes, regardless of whether it is a majority, fill the available director seats.

Question 26: When can the right to vote in an election be exclusively granted to holders of founders' shares?

Never, all stockholders must have the right to vote.

For a period not exceeding five years from the date of incorporation.

For the entire life of the corporation.

Only in non-stock corporations.

Explanation:

The law provides a limited exception for founders' shares, allowing them exclusive voting rights for a maximum of five years as a special privilege for organizing the corporation.

Question 27: An election for directors requires owners of 10,000 shares to be present for a quorum. If stockholders representing 8,000 shares are present in person and another 3,000 shares are represented by proxy, is there a quorum?

No, because not enough people are physically present.

No, proxy votes do not count for quorum.

Yes, because a total of 11,000 shares are represented.

It depends on whether remote communication is allowed.

Explanation:

Quorum is determined by the number of shares represented, whether in person, by proxy, or via remote communication. Since 11,000 shares are represented, which is more than the required 10,000, a quorum is present.

Question 28: Carla owns 50 shares in a non-stock corporation that is electing 10 trustees. Which of the following is a valid way for her to vote?

Give 50 votes to 10 different candidates.

Give 10 votes to one candidate.

Give 1 vote each to 10 different candidates.

Non-stock corporations do not have voting rights.

Explanation:

Carla's ownership of "shares" is irrelevant as it is a non-stock corporation. As a member, she has one vote for each trustee to be elected (10 total votes) but cannot cast more than one vote for any single candidate.

Question 29: What is the primary role of an independent director?

To represent the interests of the corporation's management.

To provide independent judgment and oversight, free from management influence.

To act as a tie-breaker in board votes.

To manage the day-to-day operations of the company.

Explanation:

An independent director is defined by their independence from management and any conflicting relationships, allowing them to provide objective oversight, which is crucial for corporate governance, especially in publicly interested companies.

Question 30: Maria owns 300 shares and wants to elect 3 directors (A, B, C) out of a total of 9 director seats. How can she distribute her votes using cumulative voting?

She cannot vote for only 3 candidates.

Give 300 votes each to A, B, and C.

Give 900 votes each to A, B, and C.

Distribute her 2,700 total votes among A, B, and C in any way she wishes.

Explanation:

Maria has 2,700 total votes (300 shares x 9 directors). Cumulative voting (distributed) allows her to spread these total votes among any number of candidates as she sees fit, for example, 900 votes for A, 900 for B, and 900 for C.

Question 31: If a scheduled election fails to happen because a quorum was not met, what is the immediate next step?

The current board of directors serves for another full term.

The corporation is dissolved.

The meeting may be adjourned, and a new election must be scheduled as per Section 25.

The SEC will appoint the new directors.

Explanation:

Section 23 references Section 25 for the procedure on failure of election, which involves adjourning the meeting and scheduling a new one, with specific rules to ensure the election eventually takes place.

Question 32: How are independent directors chosen?

They are appointed by the SEC.

They are appointed by the current board of directors.

They are elected by the stockholders, just like regular directors.

They are nominated by the CEO and confirmed by the board.

Explanation:

Although they have special qualifications of independence, the law requires that independent directors must be elected by the vote of the stockholders in the same manner as regular directors.

Question 33: Who elects the corporate officers of a corporation?

The stockholders during the annual meeting.

The outgoing officers.

The newly elected Board of Directors.

The incorporators.

Explanation:

Section 24 is clear that immediately after their election, the directors must formally organize and elect the corporate officers.

Question 34: Which of the following is an absolute requirement for a person to be elected as the President of a corporation?

They must be a Filipino citizen.

They must be a resident of the Philippines.

They must also be a director of the corporation.

They cannot hold any other corporate office.

Explanation:

The law mandates that the President must be chosen from among the directors, meaning they must also be a director.

Question 35: Which two officer positions are absolutely prohibited from being held by the same person at the same time?

President and Treasurer

Secretary and Treasurer

President and Secretary

President and Vice-President

Explanation:

The law creates an absolute prohibition against one person concurrently holding the positions of President and Secretary.

Question 36: Under what condition can one person serve as both the President and the Treasurer?

If the stockholders unanimously approve.

This is never allowed.

If the corporation has less than 10 employees.

Only if the corporate by-laws expressly permit it.

Explanation:

The general rule prohibits the President from also being the Treasurer. However, the law provides an exception if the by-laws specifically authorize this arrangement.

Question 37: What are the citizenship and residency requirements for a Corporate Secretary?

Must be a Filipino citizen and a resident.

Can be a foreigner but must be a resident.

Must be a Filipino citizen but residency is not required.

There are no citizenship or residency requirements.

Explanation:

The law is specific that the Secretary must be a Filipino citizen and a resident of the Philippines.

Question 38: A corporation has 11 directors as fixed in its AOI. What is the minimum number of directors that must be present at a board meeting to constitute a quorum?

Explanation:

A quorum is a majority of the number of directors fixed in the AOI. A majority of 11 is 6 (50% of 11 = 5.5, rounded up).

Question 39: Using the previous scenario (11 directors total), 7 directors attend a meeting. What is the minimum number of "yes" votes needed to validly elect the corporate officers?

Explanation:

With 7 directors present, a quorum exists. A valid corporate act requires a majority vote of those present. A majority of 7 is 4 (50% of 7 = 3.5, rounded up).

Question 40: Which officer is only mandatory for a corporation "vested with public interest"?

The President

The Treasurer

The Corporate Secretary

The Compliance Officer

Explanation:

Section 24 requires a Compliance Officer only if the corporation is vested with public interest, such as a publicly-listed company.

Question 41: What is the key difference between a "corporate officer" and a "corporate employee"?

Officers are paid more than employees.

Officers are elected by the Board and their position is created by law or by-laws, while employees are hired by management.

Officers must be stockholders, while employees do not need to be.

There is no legal distinction.

Explanation:

The source of the position (law/by-laws vs. management action) and the method of appointment (election vs. hiring) are the core legal distinctions between an officer and an employee.

Question 42: A corporation has 15 directors. Only 7 show up for a board meeting. They proceed to elect a new President. Is this election valid?

Yes, because a majority of those present voted.

No, because a quorum was not met.

Yes, if the 7 directors who attended voted unanimously.

It depends on what the by-laws say.

Explanation:

A quorum for a 15-member board is 8 (majority). Since only 7 directors attended, no valid meeting could take place, and any action taken, including an election, is void.

Question 43: Can a foreign national be elected as the Treasurer of a Philippine corporation?

No, the Treasurer must be a Filipino citizen.

Yes, as long as they are a resident of the Philippines.

Yes, but only if they also serve as a director.

No, all corporate officers must be Filipino citizens.

Explanation:

The law does not specify a citizenship requirement for the Treasurer, but it does mandate that they must be a resident of the Philippines.

Question 44: The Board of Directors has 9 members. 5 members are present at a meeting. They vote to appoint a new Secretary. The vote is 3 in favor and 2 against. Is the appointment valid?

No, because the vote was not unanimous.

No, because the motion did not get the support of a majority of the entire board.

Yes, because there was a quorum and the motion was approved by a majority of those present.

No, because the Secretary must be elected by the stockholders.

Explanation:

A quorum for a 9-member board is 5. Since 5 are present, quorum is met. The required vote is a majority of those present, which is 3 (majority of 5). Since the motion got 3 "yes" votes, it is valid.

Question 45: The position of "Chief Technology Officer" is not mentioned in the Corporation Code or the by-laws. The CEO hires a person for this role. What is this person's legal status?

A de facto corporate officer.

A corporate employee.

A corporate officer by estoppel.

The Compliance Officer.

Explanation:

Since the position was not created by the by-laws or law and the person was not elected by the Board, they are considered a corporate employee, not a corporate officer.

Question 46: The by-laws of a corporation are silent on the matter. Can the board validly elect the same person to be both President and Treasurer?

Yes, this is always allowed.

Yes, if the stockholders approve.

No, because the by-laws do not expressly allow it.

Yes, if the SEC gives special permission.

Explanation:

The default rule is that the President cannot be the Treasurer. This can only be overcome if the by-laws contain an express provision allowing it. Silence in the by-laws means the general prohibition applies.

Question 47: Which corporate officer MUST be a stockholder?

The Secretary

The Treasurer

The President

The Compliance Officer

Explanation:

The President must be a director, and a director (in a stock corporation) must own at least one share of stock. Therefore, the President must be a stockholder.

Question 48: A corporation holds its annual election on March 15. What is the deadline for the Corporate Secretary to report the names of the newly elected directors and officers to the SEC?

Within 7 days after the election.

Within 30 days after the election.

Within 60 days after the election.

Before the end of the fiscal year.

Explanation:

Section 25 requires that the report of a successful election, containing the names, nationalities, shareholdings, and addresses of the new board and officers, must be submitted within thirty (30) days.

Question 49: A corporation was scheduled to have its election on April 10, but it failed to happen due to a lack of quorum. What must the Corporate Secretary report to the SEC?

The names of the stockholders who were absent.

A request for the SEC to appoint new directors.

The reason for the non-holding and a new election date.

A copy of the minutes from the failed meeting.

Explanation:

In case of a non-held election, the report must state the reasons for the failure and specify the new date for the election.

Question 50: Following the previous question, if the original election was April 10, what is the latest possible date for the new election?

May 10 (30 days later)

June 9 (60 days later)

July 9 (90 days later)

The next calendar year.

Explanation:

The law mandates that the new election date must be no later than sixty (60) days from the originally scheduled date.

Question 51: The Treasurer of a corporation resigns, and the Corporate Secretary learns about it on July 1. What is the deadline for the Secretary to notify the SEC of this cessation?

July 8

July 15

July 31

No notification is required.

Explanation:

The report for the cessation of a director, trustee, or officer must be submitted to the SEC within seven (7) days from knowledge thereof.

Question 52: What is the primary purpose of the reporting requirements under Section 25?

To help the SEC collect more fees.

To ensure the public knows who has the legal authority to act on behalf of the corporation.

To track the performance and attendance of corporate directors.

To create a mailing list for government announcements.

Explanation:

The core objective is public transparency. The report, known as the General Information Sheet (GIS), allows third parties like banks and suppliers to verify the identities of the authorized representatives of a corporation.

Question 53: If a corporation unjustifiably fails to hold an election, what can the SEC do upon the application of a stockholder?

Immediately dissolve the corporation.

Fine every stockholder for non-participation.

Summarily order that an election be held and set the time, place, and presiding officer.

Appoint a temporary management committee to run the company.

Explanation:

The SEC is empowered to intervene directly to protect stockholder rights by ordering an election and specifying the conditions under which it will be held.

Question 54: What is the special quorum rule for an election ordered by the SEC?

The quorum is automatically 100% of all stockholders.

The quorum is two-thirds of the outstanding capital stock.

The shares of stock or membership represented at that specific meeting shall constitute a quorum.

The by-laws' original quorum requirement is strictly followed.

Explanation:

This special rule prevents a controlling group from blocking an election by staying away. Whoever shows up for the SEC-ordered meeting constitutes a quorum, ensuring the election proceeds.

Question 55: In the provided case law example, why did the court rule against P, Inc. in its lawsuit against C Bank?

Because the bank was not at fault.

Because the lawsuit was filed in the wrong court.

Because P, Inc. failed to report its new set of elected officers to the SEC.

Because the checks were fraudulent.

Explanation:

The court ruled that since P, Inc. did not comply with the mandatory reporting requirement, it could not prove that the officers who initiated the lawsuit had the legal authority to act on its behalf, as the public record (the last GIS) showed a different set of officers.

Question 56: Which document is commonly known as the report filed under Section 25 to declare the current officers and directors?

Articles of Incorporation (AOI)

Corporate By-Laws

General Information Sheet (GIS)

Annual Financial Statement

Explanation:

The General Information Sheet (GIS) is the official public document that contains the information required by Section 25, such as the names and details of the current directors, trustees, and officers.

Question 57: A corporation's scheduled election is on June 1. They fail to hold it. The secretary files the report of non-holding on June 20. In the report, what is the latest possible new election date they can propose?

July 1

July 20

July 31

August 30

Explanation:

The new date must not be later than 60 days from the original scheduled date. 60 days from June 1 is July 31.

Question 58: Who can initiate the process for the SEC to intervene in a non-held election?

Only the majority stockholders.

Only the CEO of the corporation.

Any stockholder, member, director, or trustee.

Only the SEC itself, without any application.

Explanation:

The law empowers any stockholder, member, director, or trustee to file an application with the SEC to compel an election, ensuring that even minority stakeholders have a remedy.

Question 59: What specific information must be included in the report of a successful election?

Only the names of the new directors.

The names, nationalities, shareholdings, and residence addresses of the new directors, trustees, and officers.

The minutes of the election meeting.

The campaign promises of the winning candidates.

Explanation:

Section 25 explicitly requires a comprehensive set of details for each newly elected official to ensure full transparency in the public record.

Question 60: The consequence of failing to report a change in officers is that:

The new officers are personally liable for all corporate debts.

The corporation may be unable to prove the authority of its new officers in legal or commercial transactions.

The corporation's charter is automatically revoked.

The old officers are forced to return to their positions.

Explanation:

As seen in the case law example, third parties and courts rely on the public record (the GIS). If the record is not updated, the corporation cannot enforce the authority of its actual, unreported officers.

Question 61: When the SEC summarily orders an election, it means the order is issued:

After a long and full-blown trial.

With the consent of all stockholders.

Quickly and without undue delay, after verifying the basic facts.

After publishing the order in a newspaper.

Explanation:

"Summarily" in this context means the SEC can act swiftly to resolve the issue without a protracted formal hearing, once it has verified that the failure to hold an election was unjustified.

Question 62: What is the core principle of the disqualification rule under Section 26?

A person convicted of any crime is permanently barred from being a director.

A person is disqualified if, within five years prior to their election, they have been found liable for certain offenses.

Disqualification only applies to officers of publicly-listed companies.

A person is disqualified for life if they are found administratively liable by the SEC.

Explanation:

The central rule is the five-year "lookback period" from the date of final judgment or finding of liability. The disqualification is temporary, not permanent.

Question 63: Which of the following is NOT a ground for disqualification under Section 26?

Conviction by final judgment for an offense punishable by imprisonment for more than six years.

Being found liable in an administrative case for any offense involving fraudulent acts.

Conviction by final judgment for violating the Securities Regulation Code.

Being declared bankrupt in a personal capacity.

Explanation:

While personal bankruptcy might be a disqualification under a company's by-laws or other regulations, it is not one of the specific grounds listed in Section 26.

Question 64: An individual was convicted for violating the Revised Corporation Code. The final judgment was issued on March 1, 2020. They want to run for director in an election scheduled for April 1, 2025. Are they qualified?

Yes, because the crime was not punishable by more than 6 years of imprisonment.

No, because they were convicted of violating the Corporation Code.

Yes, because more than five years have passed since the final judgment.

No, because disqualification for violating the Corporation Code is permanent.

Explanation:

The five-year lookback period starts from the final judgment on March 1, 2020, and ends on March 1, 2025. Since the election is on April 1, 2025, the five-year disqualification period has lapsed.

Question 65: What does "convicted by final judgment" mean?

The person has been arrested and charged with a crime.

A lower court has found the person guilty, but the case is still on appeal.

The person has been found guilty, and all appeals have been exhausted or the time to appeal has expired.

The person has entered into a plea bargain with the prosecution.

Explanation:

A "final judgment" is a conviction that is executory and can no longer be appealed, making the finding of guilt conclusive.

Question 66: A person was found liable for securities fraud by the U.S. Securities and Exchange Commission two years ago. Can they be elected as a director of a Philippine corporation?

Yes, because the finding was by a foreign authority and does not apply in the Philippines.

Yes, if the fraud did not involve a Philippine company.

No, because they were found liable by a foreign regulatory body for a fraudulent act within the five-year period.

No, unless they get a clearance from the Philippine SEC.

Explanation:

Section 26 explicitly includes findings of liability by foreign courts or equivalent regulatory bodies for fraudulent acts as a ground for disqualification.

Question 67: Which type of offense, when found in an administrative proceeding, leads to disqualification under Section 26?

Any offense, regardless of its nature.

Only offenses related to tax evasion.

Any offense involving fraudulent acts.

Only offenses punishable by more than six years of imprisonment.

Explanation:

For administrative cases, the law specifically targets offenses that involve fraud, deceit, or dishonesty, as these directly relate to a person's fitness to hold a position of trust.

Question 68: A candidate for director was convicted of a serious crime with a penalty of 10 years imprisonment. The final judgment was on June 1, 2022. The election is on July 1, 2026. Is the person disqualified?

No, because the crime was not related to corporate matters.

Yes, because the five-year disqualification period (until June 1, 2027) has not yet ended.

No, because the disqualification only lasts for one year.

Yes, because a penalty of over 6 years results in permanent disqualification.

Explanation:

The crime is punishable by more than 6 years, and the election falls within the five-year lookback period from the final judgment, so the person is disqualified.

Question 69: Can a corporation's own by-laws set higher standards for its directors than what is listed in Section 26?

No, Section 26 provides the exclusive list of disqualifications.

Yes, but only for non-stock corporations.

No, this would be an unfair restriction on potential candidates.

Yes, Section 26 provides the minimum standard, and a corporation can add its own qualifications or disqualifications.

Explanation:

The law explicitly states that the grounds in Section 26 are without prejudice to other qualifications or disqualifications imposed by other agencies or the corporation's own by-laws.

Question 70: A person was found administratively liable by the SEC for submitting falsified financial statements on May 15, 2021. For an election on May 10, 2026, are they disqualified?

Yes, because the five-year period has not lapsed.

No, because administrative liability does not count.

No, because the five-year lookback period has already ended.

Yes, because any finding of fraud by the SEC leads to permanent disqualification.

Explanation:

The five-year period runs from May 15, 2021, to May 15, 2026. The election on May 10, 2026, falls within this five-year window, so the person is disqualified.

Question 71: Which government body has the primary authority to disqualify a person from being a director of a bank based on its own "fit and proper" rules?

The Department of Trade and Industry (DTI)

The Bureau of Internal Revenue (BIR)

The Bangko Sentral ng Pilipinas (BSP)

The local City Council.

Explanation:

The BSP is the primary regulator for banks and imposes its own stringent qualification and disqualification rules for bank directors and officers, in addition to the rules in the Corporation Code.

Question 72: The disqualification for an offense punishable by more than six years of imprisonment applies if the person was:

Convicted by final judgment.

Only charged with the offense.

Acquitted of the offense.

Granted probation for the offense.

Explanation:

The rule is strict and requires a conviction by final judgment. A mere charge or an acquittal does not trigger disqualification under this specific provision.

Question 73: A person was convicted of insider trading under the Securities Regulation Code on January 1, 2023. When will they become eligible to be a director again?

January 2, 2028

January 1, 2026

They are permanently disqualified.

As soon as they pay the fine.

Explanation:

The five-year disqualification period starts from the date of the final judgment (Jan 1, 2023). It ends five years later (Jan 1, 2028). The person becomes eligible again on the day after the five-year period ends, which is January 2, 2028.

Question 74: Who has the exclusive power to remove a director from the board of a stock corporation?

The President of the corporation.

The Board of Directors by a majority vote.

The stockholders representing at least two-thirds (2/3) of the outstanding capital stock.

The Securities and Exchange Commission (SEC).

Explanation:

Section 27 is clear that the power to remove a director or trustee rests exclusively with the stockholders (for stock corporations) or members (for non-stock corporations).

Question 75: The Board of Directors of XYZ Corp. is unhappy with the performance of Director A. What action can the Board take against Director A?

Remove Director A from the board by a majority vote.

Remove Director A from their position as Vice-President for Marketing.

Suspend Director A indefinitely.

The Board has no power to remove a fellow director.

Explanation:

The Board cannot remove a person as a director, but it can remove them from an officer position (like VP) that the board itself appointed them to.

Question 76: In a non-stock corporation, what is the required vote to remove a trustee?

A majority of all members.

A majority vote of the Board of Trustees.

A vote of at least two-thirds (2/3) of the members entitled to vote.

Unanimous vote of all members present.

Explanation:

For non-stock corporations, the removal of a trustee requires a vote of at least two-thirds of the members who have voting rights.

Question 77: A director was elected by a minority bloc of stockholders through cumulative voting. The majority stockholders want to remove this director because they disagree with his views. Can they do this?

Yes, by a 2/3 vote at any meeting.

Yes, if they can prove he is incompetent.

No, removal without cause cannot be used to deprive the minority of their elected representative.

No, a director elected by the minority cannot be removed under any circumstances.

Explanation:

This is the crucial exception to the "removal without cause" rule. To protect minority rights, a director elected via cumulative voting can only be removed for a valid cause.

Question 78: Which of the following is NOT a mandatory requirement for the valid removal of a director?

The removal must happen at a regular or special meeting.

The director being removed must be given a chance to defend themselves.

A vote of at least 2/3 of the outstanding capital stock is required.

There must be prior notice to stockholders that removal will be on the agenda.

Explanation:

While providing a chance to be heard is good practice, especially for removal with cause, the law's four explicit requisites are the proper meeting, the 2/3 vote, prior notice, and proper call. The right to a defense is not explicitly listed as a mandatory requisite for all removal proceedings.

Question 79: The Corporate Secretary refuses to call a special meeting for the removal of a director despite a written demand from stockholders holding 60% of the shares. What is the stockholders' remedy?

They must wait for the next regular annual meeting.

They can file a complaint against the secretary with the SEC.

The stockholders who made the demand can call the meeting themselves.

The President must fire the secretary immediately.

Explanation:

The law provides a self-help remedy. If the secretary refuses to act on a proper demand, the stockholders who made the demand are empowered to call the meeting directly by sending the notice to all other stockholders.

Question 80: The general rule is that a director can be removed with or without cause. What is the primary reason for this rule?

To make it easy to fire underperforming directors.

To affirm the principle that directors serve at the pleasure of the stockholders who own the corporation.

To give the majority stockholders absolute power.

To streamline corporate governance.

Explanation:

The rule reinforces the idea of corporate control. Since the directors are agents of the stockholders (the principals), the principals have the right to remove their agents based simply on a loss of confidence, without needing to prove a legal "cause."

Question 81: When can the SEC order the removal of a director?

Whenever the director is not performing their duties well.

If the director is found to have violated a company policy.

If the director was elected despite being disqualified under Section 26.

The SEC has no power to remove a director.

Explanation:

The SEC's power to remove a director is very specific and limited. It can only act to remove a director who should not have been elected in the first place due to a legal disqualification (e.g., a prior criminal conviction).

Question 82: At a regular stockholders' meeting, an angry stockholder makes a surprise motion to remove a director. The motion gets a 70% vote in favor. Is the removal valid?

Yes, because it received more than the required 2/3 vote.

Yes, because it was at a regular meeting.

No, because there was no prior notice that removal would be on the agenda.

No, because the director was not given a chance to resign first.

Explanation:

Prior notice is a mandatory requisite for removal. This prevents ambushes and ensures stockholders are aware of such a significant action and can attend the meeting to vote on it.

Question 83: A director, who is also the company's CEO, is removed as a director by a 2/3 vote of the stockholders. What happens to their position as CEO?

They automatically remain as CEO.

They are also automatically removed as CEO because the President/CEO must be a director.

The board must take a separate vote to remove them as CEO.

They can continue as CEO for a transition period of 30 days.

Explanation:

Since being a director is a requirement for being the President (or CEO), removal as a director automatically disqualifies them from continuing to serve as President/CEO.

Question 84: What is the required vote to remove a director who was elected by the majority stockholders for "just cause," such as proven fraud?

A majority of the outstanding capital stock.

A majority of the board of directors.

At least two-thirds (2/3) of the outstanding capital stock.

Unanimous vote of the stockholders.

Explanation:

The required vote for removal is always 2/3 of the outstanding capital stock (or members), regardless of whether the removal is with or without cause.

Question 85: The protection against removal without cause for a minority-elected director is directly linked to which other corporate law principle?

The principle of limited liability.

The right of appraisal.

The right to cumulative voting.

The doctrine of piercing the corporate veil.

Explanation:

This protection exists to make the right to cumulative voting effective. Without it, the majority could simply nullify the minority's choice, rendering cumulative voting useless.

Question 86: A special stockholders' meeting is called for the purpose of removing a director. The call for the meeting was made on the written demand of stockholders owning 40% of the shares. Is the call for the meeting valid?

Yes, because any stockholder can demand a meeting.

No, the demand must come from stockholders holding a majority of the shares.

Yes, if the president also agrees to the meeting.

No, only the secretary can call a special meeting.

Explanation:

For stockholders to properly call a special meeting themselves, their written demand must be made by those holding or representing a majority of the outstanding capital stock or a majority of the members.

Question 87: The Board of Directors discovers that Director B has been secretly competing with the corporation. Can the Board remove Director B?

Yes, by a unanimous vote of the remaining directors.

Yes, because competing with the corporation is a just cause for removal.

No, the Board can file a lawsuit for damages, but only the stockholders can remove Director B from the board.

No, only the SEC can remove a director for misconduct.

Explanation:

Even with a clear "just cause," the power to remove a director rests solely with the stockholders/members. The board's remedy is to address the breach of loyalty through other means, but not removal from the board itself.

Question 88: The 2/3 vote requirement for removal of a director is based on:

The number of stockholders present at the meeting.

The total number of directors on the board.

The total outstanding capital stock of the corporation.

The total number of shares that voted in the last election.

Explanation:

The 2/3 vote is calculated based on the total outstanding capital stock (or total members), not just those present or voting at the meeting. This makes removal a significant corporate action that requires a supermajority of all owners.

Question 89: Who has the exclusive power to fill a board vacancy created by a vote of the stockholders to remove a director?

The Board of Directors by a majority vote.

The President of the corporation.

The stockholders or members.

The SEC.

Explanation:

The rule is strict: if the stockholders create the vacancy by removal, only they can fill it.

Question 90: A corporation has 9 directors. Two directors resign. Can the remaining 7 directors fill the two vacancies?

No, vacancies can only be filled by stockholders.

Yes, because the remaining directors still constitute a quorum.

No, because more than one director resigned.

Yes, but only if they vote unanimously.

Explanation:

A quorum for a 9-member board is 5. Since 7 directors remain (which is more than 5) and the cause was resignation, the remaining directors have the authority to fill the vacancies.

Question 91: Director X was elected for a term ending Dec 31, 2024. He passed away on March 1, 2024. The board validly elects Director Y as his replacement. Director Y's term will end on:

March 1, 2025 (a full one-year term).

December 31, 2024 (the unexpired term of the predecessor).

The date of the next annual stockholders' meeting.

The board decides the length of the term.

Explanation:

A replacement director only serves for the unexpired portion of the predecessor's term to maintain the original election cycle.

Question 92: A corporation has a board of 15 directors. A plane crash results in the death of 8 directors. Who can fill the 8 vacancies?

The 7 remaining directors.

The President of the corporation.

The stockholders in a special meeting.

The corporate officers.

Explanation:

A quorum for a 15-member board is 8. Since only 7 directors remain, they do not constitute a quorum and have no power to fill the vacancies. The authority reverts to the stockholders.

Question 93: Which of the following situations requires the stockholders to fill the board vacancy?

A director resigns due to health reasons.

A director is disqualified for having a conflict of interest.

The stockholders vote to increase the number of directors from 7 to 9.

A director goes on an extended leave of absence.

Explanation:

When new directorships are created by increasing the number of seats on the board, those new positions must be filled by an election by the stockholders.

Question 94: What is the primary condition for the remaining directors to be able to fill a vacancy themselves?

They must vote unanimously.

The vacancy must be caused by death or resignation only.

The remaining directors must still constitute a quorum.

They must get prior approval from the SEC.

Explanation:

The board loses its power to fill vacancies if so many members have left that the remaining ones no longer form a majority of the total board seats.

Question 95: A corporation is facing an urgent crisis that requires immediate board action, but a recent string of resignations has left the board without a quorum. What is the board's remedy under Section 28?

They can do nothing until the stockholders hold an election.

They can create an "emergency board" by appointing officers to temporarily fill vacancies, by unanimous vote.

They can proceed to vote, and the action will be ratified later.

They can ask the SEC to appoint temporary directors.

Explanation:

The "emergency board" provision is a specific exception allowing the remaining directors to act to prevent grave and irreparable loss, but it requires a unanimous vote to appoint officers as temporary directors.

Question 96: After creating an emergency board, what is the corporation's reporting duty to the SEC?

Notify the SEC within 3 days.

Notify the SEC within 30 days.

Notify the SEC within 7 days.

No notification is required for temporary appointments.

Explanation:

The law requires very prompt notification to the SEC (within 3 days) regarding the creation of an emergency board due to the extraordinary nature of this measure.

Question 97: The power of a director appointed to an emergency board is:

Equal to a regular director for a full term.

Limited to voting only on the specific emergency action required.

Limited to attending meetings but not voting.

Valid until the end of the fiscal year.

Explanation:

An emergency director's authority is not general; it is strictly confined to the necessary action to address the emergency and prevent loss.

Question 98: A board has 7 directors. 3 resign. The remaining 4 directors meet to fill the vacancies. Is their action valid?

Yes, because 4 is a majority of the remaining directors.

No, because the number of vacancies is too high.

Yes, because the remaining 4 directors constitute a quorum (majority of 7 is 4).

No, because any vacancy must be filled by stockholders.

Explanation:

A quorum of a 7-member board is 4. Since 4 directors remain and the cause was resignation, they have the authority to fill the vacancies.

Question 99: A director's term expires at the annual meeting on April 15, but no new director is elected. Who fills this "vacancy"?

The board of directors appoints a replacement.

The stockholders must elect a replacement in a subsequent meeting.

The director holds over until a successor is elected.

The seat remains vacant until the next year.

Explanation:

A vacancy created by the expiration of a term must be filled by the stockholders through an election, not by the board.

Question 100: The term "unexpired term" means the replacement director serves:

For a full new term of one year.

Only for the remaining time left in the predecessor's term.

Until they decide to resign.

For a period determined by a vote of the board.

Explanation:

This rule ensures that the original election cycle is maintained, and the replacement director's term ends when the original director's term would have ended.

Question 101: In which scenario can the board of directors NOT fill a vacancy?

A director passes away.

A director is removed by a 2/3 vote of the stockholders.

A director resigns for personal reasons.

A director is disqualified by the SEC for a prior conviction.

Explanation:

The power to fill a vacancy mirrors the power that created it. If the stockholders removed the director, only they have the power to elect the replacement.

Question 102: A corporation's by-laws state that a quorum is 2/3 of the board. The board has 12 directors. If 5 directors resign, can the remaining 7 fill the vacancies?

Yes, because 7 is a majority of 12.

No, because the by-laws require a quorum of 8 (2/3 of 12), and only 7 remain.

Yes, because the cause was resignation.

No, because the by-laws cannot specify a quorum.

Explanation:

The by-laws can set a higher quorum. Here, the required quorum is 8. Since only 7 directors remain, they cannot hold a valid meeting to fill the vacancies, and the power falls to the stockholders.

Question 103: An emergency board director is appointed on Monday to approve an emergency loan. The loan is approved on Tuesday. What is the status of the emergency director on Wednesday?

They are now a regular director.

Their term continues until a replacement is elected by the stockholders.

Their term as an emergency director ceases as the emergency has been addressed.

They must be formally ratified by the stockholders.

Explanation:

The appointment to an emergency board is strictly temporary and purpose-driven. Once the emergency action is complete, their authority and term automatically cease.

Question 104: What is the general rule regarding the compensation of directors for their work as directors?

They are entitled to a reasonable salary determined by the President.

They are not entitled to any compensation.

They are automatically given 1% of the company's net income.

Their compensation is determined by the SEC.

Explanation:

The foundational principle of Section 29 is that directors serve for the prestige and responsibility, and their work as directors is presumed to be gratuitous (free).

Question 105: What is the one form of payment a director is entitled to receive without needing special authorization?

A monthly salary.

Stock options.

A reasonable per diem for attending meetings.

A performance bonus.

Explanation:

The law explicitly allows for the granting of reasonable per diems, which are small allowances for attending board meetings, as an exception to the general rule of no compensation.

Question 106: Which of the following is a valid way for directors to receive compensation beyond per diems?

The President unilaterally grants them a bonus.

The Board of Directors votes to give themselves a salary increase.

The corporate by-laws explicitly provide for director compensation.

The corporate treasurer approves the compensation.

Explanation:

One of the two legal exceptions to the "no compensation" rule is for the compensation to be authorized in the corporation's by-laws.

Question 107: Besides the by-laws, what is the other method to authorize director compensation?

A vote by the stockholders representing a majority of the outstanding capital stock.

A vote by the stockholders representing at least two-thirds of the outstanding capital stock.

A unanimous vote of the Board of Directors.

Approval from a certified public accountant.

Explanation:

The second legal exception allows compensation to be granted by a vote of the stockholders holding a majority of the outstanding capital stock.

Question 108: A director also serves as the corporation's full-time CEO. Can this person receive a monthly salary for their CEO duties?

No, because they are a director, they are only entitled to per diems.

Yes, but their CEO salary is subject to the 10% cap.

Yes, their salary as an officer is separate from their role as a director and is not governed by the limitations in Section 29.

No, unless the by-laws specifically state that a director can also be a CEO.

Explanation:

The "as such" clause is key. The prohibition on compensation applies to their work as a director (attending meetings, oversight), not to their substantial, day-to-day work as an executive officer.

Question 109: The total yearly compensation for all directors, in their capacity as directors, shall not exceed what percentage of the corporation's net income before tax?

10%

15%

20%

Explanation:

Section 29 sets an absolute cap: the total compensation for all directors as such cannot exceed ten percent (10%) of the net income before income tax.

Question 110: The 10% cap on director compensation is based on the net income before tax from which year?

The current year.

The upcoming year.

The preceding year.

An average of the last three years.

Explanation:

The calculation is based on the preceding year's net income, ensuring that the corporation is granting compensation based on profits it has already earned.

Question 111: A corporation had a net income before tax of ₱20,000,000 in 2022. In 2023, the stockholders voted to grant compensation to the board. What is the maximum total amount the entire board can receive for their director duties in 2023?

₱1,000,000

₱2,000,000

₱3,000,000

There is no limit.

Explanation:

The maximum compensation is 10% of the preceding year's net income before tax (10% of ₱20,000,000 = ₱2,000,000).

Question 112: Following the previous question, if the board has 5 directors, does the ₱2,000,000 cap apply to each director individually?

Yes, each director can receive up to ₱2,000,000.

No, the ₱2,000,000 is the total combined compensation for all 5 directors.

Yes, but only if they are also officers.

No, the cap is ₱500,000 per director.

Explanation:

The 10% cap applies to the "total yearly compensation of directors," meaning it is the maximum amount for the entire board combined, not for each individual director.

Question 113: What is the rule regarding a director voting on their own compensation?

They are allowed to vote on their own compensation.

They can vote only if their vote is the tie-breaker.

They shall not participate in the determination of their own per diems or compensation.

They can vote, but their vote counts as half.

Explanation:

To prevent self-dealing and conflicts of interest, the law explicitly prohibits directors from participating in the decision-making process for their own pay.

Question 114: The 10% cap on director compensation applies to which of the following payments?

The salary of a director who is also the full-time CFO.

The reimbursement of travel expenses for attending a board meeting.

The annual bonus given to all senior executives, including a director who is also the COO.

The fees granted to directors by a stockholder vote for their service on the board.

Explanation:

The cap specifically targets compensation given to directors "as such directors." It does not apply to salaries for officer roles or to legitimate expense reimbursements.

Question 115: A corporation suffered a net loss last year. Can the stockholders vote to grant compensation to the directors this year?

Yes, they can grant any amount they want.

No, because there is no net income to base the 10% cap on.

Yes, but only if the directors agree to a lower amount.

No, unless the SEC provides an exemption.

Explanation:

Since the total compensation cannot exceed 10% of the preceding year's net income, and the net income was zero or negative, the maximum allowable compensation is zero.

Question 116: A non-stock, non-profit foundation wants to provide a monthly stipend to its trustees. How can this be validly authorized?

The President of the foundation can approve it.

It is not allowed under any circumstances.

By a vote of a majority of the members of the foundation.

The Board of Trustees can vote to approve it for themselves.

Explanation:

The same rules apply to non-stock corporations. Compensation for trustees must be authorized either in the by-laws or by a vote of a majority of the members.

Question 117: The phrase "as such directors" in Section 29 is crucial because it:

Proves that all directors are equal.

Limits the application of the compensation rules only to the duties of being a director.

Requires all directors to be licensed professionals.

Applies only to directors of stock corporations.

Explanation:

This phrase carves out a distinction between a director's role (oversight, policy-making) and an officer's role (day-to-day management), clarifying that the strict compensation rules apply only to the former.

Question 118: A corporation's by-laws are silent on director compensation. At the annual meeting, stockholders representing 45% of the outstanding capital stock vote to approve a bonus for the directors. Is the bonus validly granted?

Yes, because it was approved at an annual meeting.

No, because the by-laws must authorize it first.

No, because it failed to get the required vote of a majority of the outstanding capital stock.

Yes, because 45% is a significant number.

Explanation:

When compensation is authorized by the stockholders, it requires a vote from the holders of a majority (more than 50%) of the outstanding capital stock. 45% is insufficient.

Question 119: A publicly listed company fails to disclose the compensation of its directors in its annual report. What is a potential consequence?

The directors must return their compensation.

The company may face penalties from the SEC for violating reporting requirements.

The compensation is automatically voided.

There is no consequence, as this is only a recommendation.

Explanation:

For corporations vested with public interest, the disclosure of director compensation is a mandatory reporting requirement. Failure to comply can lead to sanctions from the SEC.

Question 120: What is the "Business Judgment Rule"?

A rule that requires all business decisions to be approved by a judge.

A rule that protects directors from personal liability for honest mistakes in business judgment made in good faith.

A rule that holds directors personally liable for any business loss.

A rule that allows directors to ignore the by-laws if they believe it is good for the business.

Explanation:

The Business Judgment Rule is a legal presumption that directors act in the best interest of the corporation, shielding them from liability for decisions that turn out poorly, as long as they were made with due care and in good faith.

Question 121: Which of the following is NOT one of the three-fold duties of a director?

Duty of Obedience

Duty of Diligence

Duty of Loyalty

Duty of Profitability

Explanation:

While directors are expected to strive for profitability, their core legal duties are Obedience (to the law), Diligence (to be careful), and Loyalty (to the corporation's interests).

Question 122: A board of directors knowingly approves a contract with a company engaged in illegal logging. This is a direct breach of which duty?

Duty of Diligence

Duty of Loyalty

Duty of Obedience

Duty of Care

Explanation:

The Duty of Obedience requires directors to act within the bounds of the law. Knowingly assenting to a patently unlawful act is a clear violation of this duty.

Question 123: What does "solidary liability" (jointly and severally liable) mean for a group of directors found liable under Section 30?

Each director is only liable for their proportional share of the damages.

The corporation must pay the damages first before the directors are held liable.

A creditor can demand the full amount of the damages from any one of the liable directors.

The directors are liable as a group, but not individually.

Explanation:

Solidary liability means any one of the liable parties can be held responsible for the entire debt, giving the claimant the flexibility to collect from whomever is most capable of paying.

Question 124: A director fails to attend any board meetings for a full year and does not read any financial reports. During this time, the CFO embezzles a large sum of money. The director's liability would most likely arise from:

Conflict of Interest

Gross Negligence

Approving a patently unlawful act

The Business Judgment Rule

Explanation:

This is a classic example of breaching the Duty of Diligence. The want of even slight care and the complete failure to perform oversight duties constitutes gross negligence.

Question 125: The Doctrine of Corporate Opportunity is a specific application of which core duty?

Duty of Obedience

Duty of Diligence

Duty of Loyalty

Duty of Disclosure

Explanation:

The Doctrine of Corporate Opportunity prevents a director from taking a business opportunity for themselves that rightfully belongs to the corporation, which is a direct violation of their duty to be loyal to the corporation's interests above their own.

Question 126: Director A learns that his corporation needs a new warehouse. He secretly buys a suitable warehouse and then sells it to the corporation at a 50% markup. What is he liable for?

He is not liable, as this is a good business deal.

He must return the 50% profit to the corporation.

He can be removed from the board by the other directors.

He is only liable if the corporation suffers a loss.

Explanation:

This is a clear conflict of interest. Under the Duty of Loyalty, he cannot use his position for personal gain. He is liable to account for and return the secret profit he made.

Question 127: Which of the following scenarios is most likely to be protected by the Business Judgment Rule?

The board approves a merger without doing any research on the other company.

The board approves launching a new product line after extensive market research, but the product fails and loses money.

The board approves a contract that is clearly illegal.

The board gives a massive, unearned bonus to a director's family member.

Explanation:

This is an error in business judgment made in good faith and with due diligence (extensive research). The rule protects directors from liability for decisions that simply turn out to be wrong.

Question 128: What is the difference between "bad faith" and "gross negligence"?

There is no difference.

Bad faith implies a conscious intent to do wrong, while gross negligence is a reckless disregard for duties.

Gross negligence is a criminal offense, while bad faith is a civil one.

Bad faith applies to officers, while gross negligence applies to directors.

Explanation:

Bad faith involves a state of mind—a dishonest purpose. Gross negligence involves a failure to act—a lack of even slight care, which may not necessarily involve a dishonest intent.

Question 129: A director is outvoted 7-1 on a proposal to enter an illegal contract. Is the dissenting director personally liable?

Yes, all directors are automatically liable for the board's actions.

Yes, because they are part of the board.

No, because they did not vote for or assent to the patently unlawful act.

It depends on whether they resigned after the vote.

Explanation:

Liability under Section 30 is imposed on directors who "willfully and knowingly vote for or assent to" the wrongful act. A director who votes against it is not liable.

Question 130: What must a complainant do to hold a director personally liable under Section 30?

Simply show that the corporation lost money.

File a complaint directly with the media.

Allege and prove that the director breached their duty by committing one of the specific grounds for liability (e.g., gross negligence, bad faith).

Prove that the director was not qualified for the position.

Explanation:

The burden of proof is on the person claiming damages. They must overcome the Business Judgment Rule by clearly alleging and convincingly proving that the director's actions fall under the specific grounds for personal liability in Section 30.

Question 131: The board of a failing tech company decides to invest its remaining cash in a high-risk cryptocurrency, hoping for a quick recovery. The investment fails, and the company goes bankrupt. The directors are likely:

Personally liable for gross negligence.

Personally liable for a conflict of interest.

Protected by the Business Judgment Rule if the decision, though risky, was made in good faith.

Criminally liable for fraud.

Explanation:

Courts are reluctant to second-guess business decisions, even risky ones. As long as the board made an informed decision (not recklessly) and did not act in bad faith or with a conflict of interest, the Business Judgment Rule should protect them.

Question 132: The board approves a plan to sell a corporate asset for ₱1M when its true market value is ₱10M. This is a clear example of:

A breach of the Duty of Obedience.

A potential breach of the Duty of Diligence (gross negligence) or Loyalty (bad faith), making the directors liable.

A simple error in judgment.

A valid corporate action.

Explanation:

Selling an asset for 10% of its value is so unreasonable that it cannot be seen as an honest mistake. It points to either a complete failure to exercise care (gross negligence) or a dishonest motive to harm the corporation (bad faith).

Question 133: A director of a real estate company learns that the company is looking for land in a specific area. The director tells their spouse, who then buys the land and offers it to the corporation at a higher price. Who is liable?

Only the spouse, as they made the profit.

The director, for breaching the Duty of Loyalty under the Doctrine of Corporate Opportunity.

No one, as the spouse is a separate individual.

The corporation, for not acting fast enough.

Explanation:

A director cannot use an intermediary to circumvent their duty of loyalty. The opportunity belonged to the corporation, and the director is liable for the profits gained from this breach.

Question 134: When are corporate officers, who are not directors, held liable under Section 30?

They are never personally liable.

They are liable under the same standards as directors (for approving unlawful acts, gross negligence, bad faith, or conflict of interest).

They are only liable if they are also stockholders.

They are only liable for criminal acts.

Explanation:

Section 30 explicitly applies to directors, trustees, AND officers. An officer who participates in or assents to the wrongful acts described can be held personally and solidarily liable alongside the directors.

Question 135: What is the default legal status of a contract between a corporation and one of its own directors?

Valid

Void

Voidable

Unenforceable

Explanation:

The general rule is that a self-dealing contract is voidable at the option of the corporation because of the potential for the director to prioritize their own interests.

Question 136: To be considered valid from the start, a self-dealing contract with a director requires all of the following conditions EXCEPT:

The director's presence was not needed for a quorum at the meeting.

The contract is fair and reasonable.

The director disclosed the conflict of interest to the board.

The director's vote was not necessary for the contract's approval.

Explanation:

While disclosure is crucial for ratification, the four essential conditions for initial validity are quorum, vote, fairness, and special rules for public interest corporations. Disclosure is part of the ratification process, not the initial validity test.

Question 137: A board has 9 directors. A contract with Director A is on the agenda. For the contract to be valid, what is the minimum number of other directors that must be present to form a quorum without Director A?

Explanation:

A quorum for a 9-member board is 5. Since Director A's presence cannot be counted for quorum in this case, at least 5 other directors must be present.

Question 138: Using the previous scenario (9 directors, 5 other directors present), what is the minimum number of "yes" votes from the other directors required to approve the contract with Director A?

All 5 must vote yes.

Explanation:

With 5 other directors present (a valid quorum), the contract needs approval from a majority of them. The majority of 5 is 3.

Question 139: A self-dealing contract was approved where the director's vote was necessary to pass it. What is the status of this contract?

Valid, because the board approved it.

Void, because the director's vote was needed.

Voidable, but it can be ratified by the stockholders.

Unenforceable until the SEC approves it.

Explanation:

When the director's vote is necessary, the contract is voidable. However, it can be "cured" or validated through ratification by the stockholders.

Question 140: What is the required vote for stockholders to ratify a voidable self-dealing contract?

A majority of the outstanding capital stock.

At least two-thirds (2/3) of the outstanding capital stock.

A majority of the stockholders present at the meeting.

Unanimous consent of all stockholders.

Explanation:

Ratification of a self-dealing contract requires a higher threshold: a 2/3 vote of the outstanding capital stock or members.

Question 141: Can an unfair and unreasonable self-dealing contract be ratified by the stockholders?

Yes, if the stockholders vote unanimously.

Yes, if the director makes full disclosure of their interest.

No, the contract must be fair and reasonable even for ratification.

Yes, a 2/3 vote of the stockholders can validate any contract.

Explanation:

Fairness and reasonableness are absolute requirements. The stockholders cannot ratify a contract that is detrimental to the corporation.

Question 142: A corporation enters into a contract with the first cousin of one of its directors. Does this fall under the self-dealing rules of Section 31?

No, the rule only applies to the director themselves.

No, because a cousin is not a close relative.

Yes, because a first cousin is a relative within the fourth civil degree.

Yes, but only if the director and the cousin live in the same house.

Explanation:

The self-dealing rules explicitly apply to spouses and relatives up to the fourth civil degree of consanguinity or affinity, which includes first cousins.

Question 143: A corporation's board has 11 directors. The company, which is publicly listed, wants to enter a material contract with Director B. What is the minimum vote required to approve this contract?

6 directors (a majority).

8 directors (2/3 of the board).

8 directors, including a majority of the independent directors.

The entire board must vote unanimously.

Explanation:

For corporations with public interest, a material self-dealing contract requires a supermajority: approval from at least 2/3 of the entire board (8 directors) AND a majority of the independent directors on that board.

Question 144: A contract is made between a corporation and its Treasurer, who is not a director. For this contract to be valid, what conditions must be met?

It must be ratified by a 2/3 vote of the stockholders.

The contract must be fair and reasonable, and it must have been previously authorized by the Board of Directors.

The Treasurer must resign before the contract is executed.

The contract only needs to be fair and reasonable.

Explanation:

The rule for officers who are not directors is simpler. It does not involve the complex quorum and voting requirements, but it still demands board authorization and that the contract be fair.

Question 145: A self-dealing contract is approved, but it later turns out to be grossly disadvantageous to the corporation. Who is liable for the damages?

The corporation, as it entered into the contract.

The stockholders who ratified the contract.

The self-dealing director who benefited from the unfair contract.

No one, as it was an approved contract.

Explanation:

If a self-dealing contract is found to be unfair and unreasonable, the director with the conflict of interest is liable for any damages the corporation suffers.

Question 146: The term "voidable" means that the contract is:

Automatically invalid from the beginning.

Valid until the party with the option to cancel chooses to do so.

Valid and can never be cancelled.

Invalid until a court approves it.

Explanation:

A voidable contract is not automatically void. It is a valid contract that contains a flaw, giving one party (in this case, the corporation) the legal right to affirm it or reject it.

Question 147: Director C is at a board meeting where a contract with her spouse's company is being discussed. All four conditions for validity are met (quorum without her, vote without her, fairness). Is her presence at the meeting a violation of Section 31?

Yes, she must leave the room during the discussion and vote.

Yes, her presence automatically invalidates the contract.

No, her presence is not prohibited, as long as her presence and vote are not necessary for approval.

No, but she must vote against the contract to be safe.

Explanation:

The law requires that her presence is not necessary for the quorum and her vote is not necessary for the approval. It does not prohibit her from being physically present during the meeting.

Question 148: Which of the following relatives of a director would NOT trigger the self-dealing rules?

Spouse

Father

Niece

Second Cousin

Explanation:

A second cousin is a relative in the sixth degree of consanguinity, which is beyond the fourth-degree limit set by Section 31.

Question 149: What is the most critical element required before stockholders can ratify a voidable self-dealing contract?

A sworn affidavit from the director.

The contract must be published in a newspaper.

Full disclosure of the director's adverse interest to the stockholders.

A favorable opinion from an independent auditor.

Explanation:

Stockholders cannot give valid consent if they are not fully aware of the conflict of interest. Full disclosure is the cornerstone of a valid ratification.

Question 150: What is the general rule for a contract between two corporations with an interlocking director?

The contract is automatically voidable.

The contract is valid, as long as it is not fraudulent and is fair and reasonable.

The contract is always valid, with no conditions.

The contract must be approved by the SEC.

Explanation:

The general rule under Section 32 is that an interlocking director contract is valid, provided it is fair and reasonable and not fraudulent. The mere existence of a common director is not, by itself, a ground for invalidity.

Question 151: Under Section 32, what stockholding percentage is considered a "substantial interest" for an interlocking director?

More than 10%

More than 20%

Exactly 20%

More than 50%

Explanation:

The law explicitly defines a substantial interest as stockholdings exceeding twenty percent (20%) of the outstanding capital stock.

Question 152: Director John holds 25% of the shares in Corp A and 5% in Corp B. A contract is made between Corp A and Corp B. Which rule applies?

The general rule of Section 32 applies to both corporations.

The stricter self-dealing rules of Section 31 apply to Corp A.

The stricter self-dealing rules of Section 31 apply to Corp B.

The contract is automatically void.

Explanation:

Because Director John has a substantial interest (>20%) in Corp A and a nominal interest (≤20%) in Corp B, the exception is triggered. The stricter self-dealing rules apply to Corp B, where his interest is nominal and the risk of a disadvantageous deal is higher.

Question 153: Following the previous question, what must be true for the contract between Corp A and Corp B to be valid?

Director John must resign from Corp B.

At Corp B's board meeting, Director John's presence was not needed for a quorum and his vote was not needed for approval.

The contract must be approved by the SEC.

The contract must be fair, but Director John's vote in Corp B is allowed.

Explanation:

Since the Section 31 rules apply to Corp B, the contract must satisfy the four conditions of a self-dealing contract from Corp B's perspective. This includes the interlocking director's presence and vote not being necessary for approval.

Question 154: Director Mary holds 30% of Corp X and 40% of Corp Y. A contract is signed between the two companies. What is the status of this contract, assuming it is fair and reasonable?

Voidable at the option of Corp X.

Voidable at the option of Corp Y.

Voidable at the option of both corporations.

Valid.

Explanation:

Since Director Mary has a substantial interest in BOTH corporations, the general rule of Section 32 applies. As long as the contract is fair, reasonable, and not fraudulent, it is valid.

Question 155: When the self-dealing rules of Section 31 are applied to an interlocking director contract, which corporation is being protected?

The corporation where the director has a substantial interest.

The corporation where the director has a nominal interest.

Both corporations equally.

Neither corporation; the rule protects the director.

Explanation:

The law applies the stricter rules to the corporation where the director has less at stake (nominal interest), as this is the company more likely to be disadvantaged in the deal.

Question 156: A contract is made between Corp Prime and Corp Second. Director Lee sits on both boards. He owns 15% of Prime and 10% of Second. Which rule governs the contract?

The self-dealing rules of Section 31 for Corp Prime.

The self-dealing rules of Section 31 for Corp Second.

The general rule of Section 32.

The contract is invalid because the director owns stock in both.

Explanation:

Since Director Lee's interest is nominal (≤20%) in BOTH corporations, the exception is not triggered. The general rule applies, and the contract is valid if it is fair, reasonable, and not fraudulent.

Question 157: The primary purpose of the exception in Section 32 (applying Section 31 rules) is to:

Encourage directors to serve on multiple boards.

Prevent any and all contracts between related companies.

Protect a corporation from being disadvantaged when a common director's loyalty is presumed to be elsewhere.

Simplify the process for approving interlocking contracts.

Explanation:

The exception recognizes that when a director has a much larger stake in one company, their loyalty may be skewed. It imposes stricter validation requirements on the company where the director has less interest, to protect it from an unfair deal.

Question 158: Director Anna owns 50% of Holding Corp and 1% of Operating Corp. A contract is made between them. At Operating Corp's board meeting, Anna's vote was necessary to approve the contract. What is the status of the contract?

Valid, because it was approved by Operating Corp's board.

Voidable, but can be ratified by a 2/3 vote of Operating Corp's stockholders.

Valid, because Anna only owns 1% of Operating Corp.

Void, and it cannot be ratified.

Explanation:

Anna has a substantial interest in Holding Corp and a nominal interest in Operating Corp. This triggers Section 31 rules for Operating Corp. Since her vote was necessary, the contract is voidable. It can be validated by a 2/3 vote of Operating Corp's stockholders, provided it is fair and she makes full disclosure.

Question 159: What happens if a contract between two corporations with an interlocking director is found to be fraudulent?

It remains valid if it was fair.

It is automatically invalid, regardless of the interlocking director's interest.

It can be ratified by the stockholders.

The interlocking director is automatically removed from both boards.

Explanation:

The general rule of Section 32 requires that the contract must not be fraudulent. If fraud is present, the contract is invalid on that basis alone.

Question 160: Director Cruz owns exactly 20% of Corp X and 25% of Corp Y. A contract is proposed between them. Which rule applies?

Section 31 rules apply to Corp X.

Section 31 rules apply to Corp Y.

Section 32 general rule applies.

The contract is prohibited.

Explanation:

A substantial interest is defined as exceeding 20%. Therefore, 20% is considered a nominal interest, while 25% is a substantial interest. The stricter self-dealing rules of Section 31 apply to Corp X, where Director Cruz has the nominal interest.

Question 161: Unlike a self-dealing contract, an interlocking director contract is generally presumed to be:

Void

Voidable

Valid

Unfair

Explanation:

A self-dealing contract (Sec 31) is presumed voidable due to the direct conflict of interest. An interlocking director contract (Sec 32) is presumed valid, as the director is expected to act fairly towards both companies, unless the unequal interest exception applies.

Question 162: Corp A and Corp B have a common director, Mr. Reyes, who owns 1% of each company. They enter into a contract that is later found to be unfair and unreasonable to Corp A. Is the contract valid?

Yes, because Mr. Reyes' interest is nominal in both.

No, because the general rule of Section 32 requires the contract to be fair and reasonable.

Yes, because interlocking director contracts are always valid.

No, because Mr. Reyes should have disclosed his interest.

Explanation:

Even when the general rule applies, fairness and reasonableness are still required. An unfair contract is not valid, regardless of the director's level of interest.

Question 163: A law firm partner sits on the board of a client company. The company signs a legal services contract with the law firm. This situation would most likely be analyzed under which sections?

Only Section 32, as the partner is an interlocking director.

Section 31, treating the director's interest in the law firm partnership as a substantial personal interest.

Only Section 29, regarding compensation.

Neither, as professional services are exempt.

Explanation:

While this looks like an interlocking director scenario, courts often treat a partner's interest in their own firm as a direct and substantial personal interest. This makes it more analogous to a self-dealing contract under Section 31 from the perspective of the client company.

Question 164: Director Smith holds 18% of Company 1 and 19% of Company 2. They enter into a contract. For this contract to be valid, what is the primary condition?

It must be ratified by the stockholders of both companies.

Director Smith must abstain from voting in both board meetings.

The contract must not be fraudulent and must be fair and reasonable.

Director Smith must sell some shares to fall below 15% in one company.

Explanation:

Since Director Smith's interest is nominal (≤20%) in both companies, the general rule of Section 32 applies. The contract is valid as long as it is fair, reasonable, and not tainted by fraud.

Question 165: What is the common name for the legal principle described in Section 33?

The Business Judgment Rule

The Doctrine of Corporate Opportunity

The Trust Fund Doctrine

The Rule of Solidary Liability

Explanation:

Section 33 codifies the Doctrine of Corporate Opportunity, which holds that directors cannot take business opportunities for themselves that should belong to the corporation.

Question 166: A director of a real estate company learns of a prime piece of land for development through a company meeting. What is the director's primary duty?

To purchase the land immediately for themselves.

To offer the opportunity to the corporation first.

To inform a competing real estate company about the land.

To wait and see if the corporation acts before doing anything.

Explanation:

The director's duty of loyalty requires them to present the opportunity to the corporation before they can even consider taking it for themselves.

Question 167: What is the main consequence if a director is found liable for disloyalty under Section 33?

They are automatically removed from the board.

They face criminal charges for theft.

They must account for and refund all profits they made to the corporation.

They must pay a fine to the SEC.

Explanation:

The law is clear that any profits derived from a usurped corporate opportunity rightfully belong to the corporation, and the disloyal director must return them.

Question 168: A director uses their own personal savings to fund a business opportunity that belonged to the corporation. What is the legal effect of this?

It is a valid defense, and they can keep the profits.

It is not a valid defense, and they are still liable to return the profits.

It reduces their liability by half.

It transforms the venture into a joint partnership with the corporation.

Explanation:

Section 33 explicitly states that liability applies "notwithstanding the fact that the director risked one's own funds in the venture." The breach is the theft of the opportunity, not how it was funded.

Question 169: A director takes a corporate opportunity and makes a huge profit. How can the director legally keep these profits?

By donating a portion of the profits to charity.

By getting a majority vote of the Board of Directors to approve the action after the fact.

By obtaining a ratification vote from stockholders representing at least two-thirds (2/3) of the outstanding capital stock.

It is impossible; the profits must always be returned.

Explanation:

The only "escape clause" provided by the law is for the director's act to be ratified by a supermajority (2/3) of the owners of the corporation.

Question 170: Which of the following is NOT a required element to prove a violation of the Doctrine of Corporate Opportunity?

The director seized the opportunity for themself.

The opportunity was discovered because of the director's position.

The director must have used corporate funds to acquire the opportunity.

The corporation was financially able to undertake the opportunity.

Explanation:

A director is liable even if they use their own personal funds. The use of corporate funds is not a necessary element for a violation to occur.

Question 171: The Doctrine of Corporate Opportunity is a specific application of which fundamental duty of a director?

Duty of Diligence

Duty of Obedience

Duty of Loyalty

Duty to Report

Explanation:

This doctrine is the classic example of the Duty of Loyalty, which requires a director to act in the best interests of the corporation, free from any self-dealing or personal conflicts.

Question 172: A director of a restaurant chain is offered a chance to invest in a new tech startup. The restaurant chain has no plans to invest in technology. Can the director invest personally?

No, all opportunities must be offered to the corporation first.

Yes, because the opportunity is not related to the corporation's line of business.

No, unless the director first gets approval from the SEC.

Yes, but they must give half of their profits to the corporation.

Explanation:

An opportunity only "belongs" to the corporation if it is in its line of business. A tech startup is unrelated to a restaurant chain, so there is no corporate opportunity to usurp.

Question 173: What is the required vote for stockholders to ratify a director's disloyal act under Section 33?

A majority of the board of directors.

A majority of the outstanding capital stock.

At least two-thirds (2/3) of the outstanding capital stock.

Unanimous vote of all stockholders.

Explanation:

The law requires a supermajority of the owners (2/3) to ratify such a serious breach of loyalty.

Question 174: A director of a mining company discovers a new, untapped gold deposit. The company is nearly bankrupt and cannot afford to develop it. The director resigns and develops the mine herself. Is she liable?

No, because she resigned before taking the opportunity.

Yes, because the opportunity belonged to the corporation, regardless of her resignation.

This is a grey area, but she is likely not liable because the corporation was financially unable to take the opportunity.

Yes, but she is only liable for 10% of the profits.

Explanation:

One of the key elements for an opportunity to "belong" to a corporation is its financial ability to undertake it. If the corporation is genuinely unable to pursue the venture, the director may be free to take it.

Question 175: If a director is held liable under Section 33, what exactly must they refund?

Only the initial investment they made.

The gross revenue from the new venture.

All profits derived from the opportunity.

A penalty amount determined by the court.

Explanation:

The law requires the director to account for and refund "all profits" they obtained, effectively transferring the financial benefit of the disloyal act to the corporation.

Question 176: The ratification by stockholders under Section 33 serves to:

Punish the director for their disloyalty.

Cleanse the director's breach of loyalty and allow them to keep the profits.

Inform the SEC of the director's actions.

Automatically remove the director from the board.

Explanation:

Ratification is an act of forgiveness by the corporation's owners. A valid 2/3 vote effectively waives the corporation's claim to the profits.

Question 177: A director of a clothing company takes an opportunity to buy a textile factory that the company was negotiating to buy. The stockholders later vote by a 70% majority to ratify the director's action. Is the ratification valid?

No, because a majority is 51%.

Yes, because 70% is more than the required two-thirds (66.67%).

No, ratification requires a unanimous vote.

Yes, but only if the director makes a full disclosure of the profits.

Explanation:

The threshold for ratification is a vote of at least two-thirds of the outstanding capital stock. Since 70% exceeds this requirement, the ratification is valid, assuming full disclosure was made.

Question 178: Why is "using one's own funds" not a defense against liability for corporate opportunity?

Because directors are not allowed to have personal funds.

Because the breach is the taking of the opportunity itself, not the method of financing it.

Because all funds of a director are presumed to belong to the corporation.

Because it complicates the accounting process.

Explanation:

The law focuses on the act of disloyalty—usurping an opportunity. The source of the funds used to exploit that opportunity is irrelevant to the initial breach of duty.

Question 179: If a director seizes a corporate opportunity, who can file a lawsuit to recover the profits on behalf of the corporation?

Only the SEC.

The corporation itself, through a board resolution, or a stockholder through a derivative suit.

Only a competing corporation.

Any employee of the corporation.

Explanation:

The claim belongs to the corporation. The lawsuit can be initiated by the corporation's new management, or if management refuses to act, a stockholder can file a "derivative suit" in the corporation's name to recover the profits.

Question 180: What is the most fundamental requirement for a corporation to create an Executive Committee?

The corporation must be at least one year old.

The Board must vote unanimously to create it.

The power to create it must be granted in the corporate by-laws.

The corporation must have more than 10 directors.

Explanation:

Unlike other committees, the creation of an Executive Committee is not an inherent power of the board. The authority must be explicitly provided for in the corporate by-laws.

Question 181: What is the minimum number of directors required to form an Executive Committee?

One

Two

Three

Five

Explanation:

Section 34 specifies that the Executive Committee must be composed of at least three (3) directors.

Question 182: An Executive Committee has 5 director-members. At a meeting, 4 members are present. How many "yes" votes are needed to approve a resolution?

2 (Majority of those present)

3 (Majority of all members)

4 (Unanimous vote of those present)

5 (Unanimous vote of all members)

Explanation:

The Executive Committee acts by a majority vote of all its members, which is a stricter rule. A majority of 5 is 3. It does not matter how many are present, as long as there are enough "yes" votes to meet the majority of the total membership.

Question 183: Which of the following actions can a validly created Executive Committee perform?

Approve the merger of the corporation with another company.

Approve the annual operational budget for the company.

Approve an amendment to the corporate by-laws.

Approve the declaration of cash dividends to stockholders.

Explanation:

Approving an operational budget is a management function that can be delegated. The other options (merger, amending by-laws, declaring cash dividends) are fundamental powers reserved for the full board or stockholders.

Question 184: Which of the following is NOT one of the powers prohibited to an Executive Committee?

Filling a vacancy on the Board of Directors.

Approving a contract with a major supplier.

Amending or repealing the by-laws.

Distributing cash dividends.

Explanation:

Approving contracts, even major ones, falls under the general powers of management that can be delegated to an Executive Committee. The other three are explicitly prohibited by Section 34.

Question 185: The Board of Directors creates an "Audit Committee" to review the company's financial statements and report its findings to the full board. This committee is an example of:

An Executive Committee.

A special committee with an advisory role.

An illegal delegation of power.

A committee that must be composed only of non-directors.

Explanation:

This is a typical "other special committee." It is created by the board to perform a specific task (review and advise) but does not have the final decision-making authority of an Executive Committee.

Question 186: A corporation's by-laws are silent about forming an Executive Committee. The Board, by a majority vote, creates one anyway to speed up decisions. Are the actions of this committee valid?

Yes, because the Board has the power to manage the corporation.

No, because the creation of an Executive Committee must be authorized in the by-laws.

Yes, but only if the stockholders ratify its creation later.

No, because it was not approved by a unanimous vote of the Board.

Explanation:

The power to form an Executive Committee is not inherent; it must be explicitly granted by the by-laws. Without this authorization, the committee is invalid, and so are its actions.

Question 187: A director resigns from the board, creating a vacancy. Can the Executive Committee appoint a replacement?

Yes, if the remaining directors on the committee vote unanimously.

Yes, if authorized by the by-laws.

No, this power is expressly reserved for the full Board of Directors or the stockholders.

No, only the President can appoint a replacement.

Explanation:

Section 34 explicitly lists "filling of vacancies in the board" as a non-delegable power. This authority stays with the full board (if there is a quorum) or the stockholders.

Question 188: What is the key difference in authority between an Executive Committee and other special committees?

The Executive Committee is temporary, while others are permanent.

The Executive Committee can act with the finality of the full board, while others are typically advisory.

The Executive Committee can only have 3 members.

The Executive Committee is chaired by the President.

Explanation:

The Executive Committee acts as a "mini-board," making binding decisions. Other committees usually study issues and make recommendations that the full board must then approve.

Question 189: A 7-member Executive Committee meets to approve an urgent project. Only 4 members attend. The vote is 3-1 in favor. Is the project approved?

Yes, because 3 is a majority of the 4 members present.

No, because the required vote is a majority of all members (4 votes), and it only got 3.

Yes, because a quorum was present.

No, because an urgent project requires a unanimous vote.

Explanation:

The voting rule for an Executive Committee is a majority of its total membership. For a 7-member committee, this means at least 4 "yes" votes are needed, regardless of how many attend the meeting. Three votes are insufficient.

Question 190: Which of the following actions is absolutely reserved for the full Board of Directors and can NEVER be delegated to an Executive Committee?

Hiring a new Vice President.

Approving the sale of a minor corporate asset.

Declaring and distributing cash dividends.

Entering into a new lease agreement for an office.

Explanation:

The decision to distribute profits to stockholders through cash dividends is a fundamental financial power that Section 34 explicitly prohibits from being delegated to an Executive Committee.

Question 191: The Board created a "Compensation Committee" composed of two directors and the Head of HR (a non-director) to recommend salary structures. Is this committee validly formed?

No, because all committee members must be directors.

No, because it was not mentioned in the by-laws.

Yes, because the board has the power to create special advisory committees with non-director members.

Yes, but its recommendations are final and do not need board approval.

Explanation:

This is an "other special committee," not an Executive Committee. The board has the inherent power to create such advisory groups and can determine their composition, including non-directors, to leverage their expertise.

Question 192: The by-laws allow for a 5-member Executive Committee. The Board appoints 3 directors to it. The committee meets, and 2 members vote to approve a contract. Is the contract validly approved?

Yes, because 2 is a majority of the 3 members present.

No, because the by-laws require a 5-member committee.

No, because the required vote is a majority of all 5 members (3 votes), and it only received 2.

Yes, if the contract is fair and reasonable.

Explanation:

Even if the board only appointed 3 members, the voting requirement is based on the full membership size set by the by-laws (5). A majority of 5 is 3. Since the motion only got 2 votes, it is not validly approved.

Question 193: The full Board passes a resolution stating, "The budget for Project X is hereby set at P10 million and this resolution is final and non-amendable." Can the Executive Committee later increase the budget to P12 million?

Yes, if it has the authority to approve budgets.

Yes, if all members of the committee agree.

No, because the full board expressly made the resolution non-amendable.

No, because the Executive Committee can never approve budgets.

Explanation:

This is one of the specific limitations on the power of an Executive Committee. It cannot amend or repeal a resolution that the full board has declared to be non-amendable.

Question 194: What is the primary purpose of allowing the creation of an Executive Committee?

To give senior directors more power.

To handle corporate matters more efficiently by not having to convene the full board for every decision.

To replace the need for a full Board of Directors.

To comply with a mandatory SEC requirement.

Explanation:

The Executive Committee is a tool for efficiency. For large boards or corporations with frequent decisions, it allows a smaller group to act quickly on behalf of the board without the logistical challenges of calling a full board meeting.