Friday, September 11, 2009

Fiduciary duties

For many years I taught Private Corporation Law at the Institute of Law of the Far Eastern University (FEU) in Manila, my high school and law alma mater.

I noticed that among Filipino trial lawyers, Section 144 of the Corporation Code of the Philippines is not commonly invoked. It is the penal clause of the code.

Recently, however, Sections 31 to 34 of the code, re: directors’ fiduciary duties, are more and more being invoked in commercial litigations in the Philippines, which is a good thing, because it helps in disciplining and regulating the greedy and anti-social behavior of misguided directors and corporate officers in the Philippines whose malevolent models are the power-hungry and profit-conscious bankers of Wall Street, including the likes of the notorious Bernie Madoff.

Below is an article by Atty. Raul J. Palabrica, a columnist of the Philippine Daily Inquirer, which discusses a recent litigation on the matter, which I wish to share to the visitors of this law blog.

Corporate Securities Info

Directors’ fiduciary duties
By Raul J. Palabrica

Philippine Daily Inquirer
First Posted 01:58:00 09/11/2009

IN WHAT MAY BE CONSIDERED A “FIRST” in Philippine business history, the chair, president and director of a local corporation are today facing criminal charges for violation of their fiduciary duties and responsibilities.

The case started with the complaint filed with the prosecutor’s office in 2008 by Tullett Prebon (Phils.) Inc., a company that acts as broker between market participants in high-level financial transactions, against the three director-officers.

Tullett alleged that, in conspiracy with other parties, they orchestrated the mass resignation of its entire brokering staff to join a rival company, Tradition Financial Services Phils. Inc.

Tradition, which was in the process of organization at that time, planned to go into the same business that Tullett was engaged in.

The pirating was supposedly done to grab Tullett’s business without Tradition having to go through the process of developing its own staff and clientele.

According to the complaint, the president intentionally let the employees’ contracts lapse when they fell due, in violation of his duty to have them renewed.

The employees, upon the directors’ promise of higher pay and indemnity payments if they get sued for quitting their jobs, resigned en masse and moved to Tradition.

Worse, the complaint pointed out, the president (who later transferred to Tradition) asked the employees to call up their clients to tell them about their relocation to Tradition.

The directors denied Tullett’s allegations and argued that, among others, there was nothing illegal or criminal about their actions, employee movements among competitors are normal in their business, and every citizen has a right to seek or change his employment.

They also claimed that the employees’ transfer to Tradition was “done out of free will without any force, intimidation or pressure on their part.”

Tullett accused the directors of violating Sections 31 and 34, in relation to Sec. 144, of the Corporation Code.

Under Sec. 31, directors may be held liable for damages if they are “guilty of gross negligence or bad faith in directing the affairs of the corporation, or they acquire any personal or pecuniary interest in conflict with their duty as such director ...”

On the other hand, Sec. 34 provides that a director who acquires for himself a business opportunity which should belong to the corporation must account for all such profits by refunding them to the corporation.

Accordingly, Tullett asked that the directors be held liable under Sec. 144 which provides that violations “shall be punished by a fine of not less than P1,000 but not more than P10,000 or by imprisonment of not less than 30 days but not more than five years or both, at the discretion of the court.”

The complaint went through the legal mill. Initially, it was dismissed by the prosecutor for lack of merit. Acting on the complainant’s petition, then Justice Secretary Raul Gonzales set aside the dismissal and ordered the filing of charges against the directors.

The accused brought the case to the Court of Appeals. The court threw out the appeal and gave the go-signal for the filing of the case.

In substance, the justice secretary and the court stated there was probable cause to hold the directors and their coaccused liable for breach of the subject provisions of the Code.

The resolution stated that the directors acted in bad faith in directing the affairs of their own corporation.

Holding positions of high responsibility and great trust, they were “required to exercise the best care, skill and judgment in the management of the corporate business and act solely for the interest of the corporation.”

The court also saw a clear conflict of interest in the directors “advancing the interest of an emerging competitor in the field rather than fiercely protecting the business of their own company.”


The resolution further said that dishonesty and fraud were committed by the directors when they held meetings, conducted loyalty checks and caused the signing of ready-made employment and indemnity contracts to pressure and induce the employees to join their new company, Tradition.

On the matter of acquiring a business opportunity adverse to that of the corporation, this became evident when the directors told the employees to convince their clients to transfer their business to Tradition so that the profits of Tullett, which rightfully belong to it, will be transferred to a competitor company to be headed by the directors.

If found guilty of the crimes charged, the accused face stiff civil and criminal sanctions.

According to the court, the damages that an erring director is obliged to pay the aggrieved corporation under Sec. 31 are in addition to the fine or imprisonment, or both, that Sec. 144 imposes for violation of that provision.

Although no pronouncement was made in case Sec. 34 is proven to have been similarly violated, it is safe to say that the profits earned by the directors as a result of their illegal acts may be ordered reimbursed to the corporation.

Moral of the story? Pirating other company’s employees can be hazardous to your health. More so, if the company involved is your own.