Disloyalty of a Director

DISLOYALTY OF A DIRECTOR – “Doctrine of Corporate Opportunity” SECTION 34. Disloyalty of a Director . — Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders, owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. (n) This happens when a director who, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of the corporation. He shall be considered disloyal notwithstanding that he risked his own funds for the venture. Because of the knowledge that he acquired as a director, he took undue advantage of that knowledge. Example 1: Corporation is engaged in selling lots. A director through the board meeting learned that somebody was looking for a parcel of land. The Board already discussed the details of the transaction – the price, the possible terms and conditions. When the director learned about the price that his corporation is offering to the buyer, he simply offered another price which is lower. So that the buyer will be induced to buy the other land (owned by the director) instead the land owned by the corporation. Because of that knowledge, he was able to adjust the price in such a way that the buyer will have no other option but to buy the other land, at a lower price. He took advantage of that knowledge to make sure that he can consummate his own transaction instead that of the corporation. Example 2: Corporation now wants to buy a lot. The director, upon knowing the details of the plan to buy, and even before the corporation could approach the seller, he approached the seller and offered to buy the land on more liberal terms than that offered by the corporation.

Conclusion: Director has knowledge of the proposed transaction and he took advantage of that knowledge, to convert it for his own benefit or profit.

REMEDIES: 1. The contract may be ratified by the stockholders, owning or representing at least two-thirds (2/3) of the outstanding capital stock, OR: 2. If the stockholders will not ratify, the director must account to the corporation all such profits derived by him from the said business opportunity by refunding the profits to the corporation.

EXECUTIVE COMMITTEE When there is difficulty in convening the board, the law proposes that the corporation may have an executive committee. The committee will be delegated such powers that the board is empowered by the law to exercise. The executive committee will have the powers of the board but this does not mean total relinquishment of the powers of the board. Discretionary powers are not included.