Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No.

151969 September 4, 2009 VALLE VER E COUNTR! CLU", #NC., ERNESTO V#LLALUNA, RA! GAM"OA, AMA O M. SANT#AGO, $R., %ORTUNATO EE, AUGUSTO SUN#CO, V#CTOR SALTA, %RANC#SCO ORT#GAS ###, ER#C RO&AS, '( t)e'r *+p+*'t'e, +, member, o- t)e "o+r. o- 're*tor, o- V+//e Ver.e Co0(tr1 C/0b, #(*., +(. $OSE RAM#RE2,Petitioners, vs. V#CTOR A%R#CA, Respondent. DECISION "R#ON, J.: In this petition for revie on certiorari,1 the parties raise a le!al "uestion on corporate !overnance# Can the $e$bers of a corporation%s board of directors elect another director to fill in a vacanc& caused b& the resi!nation of a hold'over director( )*E +,C)-,. ,N)ECEDEN)S On +ebruar& /0, 1223, durin! the ,nnual Stoc4holders% Meetin! of petitioner Valle Verde Countr& Club, Inc. 5VVCC6, the follo in! ere elected as $e$bers of the VVCC 7oard of Directors# Ernesto Villaluna, 8ai$e C. Din!lasan 5Din!lasan6, Eduardo Ma4alintal 5Ma4alintal6, +rancisco Orti!as III, Victor Salta, ,$ado M. Santia!o, 8r., +ortunato Dee, ,u!usto Sunico, and Ra& 9a$boa.2 In the &ears 1220, 122:, 1222, /;;;, and /;;1, ho ever, the re"uisite "uoru$ for the holdin! of the stoc4holders% $eetin! could not be obtained. Conse"uentl&, the above'na$ed directors continued to serve in the VVCC 7oard in a hold'over capacit&. On Septe$ber 1, 122:, Din!lasan resi!ned fro$ his position as $e$ber of the VVCC 7oard. In a $eetin! held on October 3, 122:, the re$ainin! directors, still constitutin! a "uoru$ of VVCC%s nine'$e$ber board, elected Eric Ro<as 5Ro<as6 to fill in the vacanc& created b& the resi!nation of Din!lasan. , &ear later, or on Nove$ber 1;, 122:, Ma4alintal also resi!ned as $e$ber of the VVCC 7oard. *e as replaced b& 8ose Ra$ire= 5Ra$ire=6, ho as elected b& the re$ainin! $e$bers of the VVCC 7oard on March 3, /;;1. Respondent ,frica 5,frica6, a $e$ber of VVCC, "uestioned the election of Ro<as and Ra$ire= as $e$bers of the VVCC 7oard ith the Securities and E<chan!e Co$$ission 5SEC6 and the Re!ional )rial Court 5R)C6, respectivel&. )he SEC case "uestionin! the validit& of Ro<as% appoint$ent as doc4eted as SEC Case No. ;1'22'3100. )he R)C case "uestionin! the validit& of Ra$ire=% appoint$ent as doc4eted as Civil Case No. 3:0/3. In his nullification co$plaint3 before the R)C, ,frica alle!ed that the election of Ro<as as contrar& to Section /2, in relation to Section />, of the Corporation Code of the Philippines 5Corporation Code6. )hese provisions read# Se*. 23. The board of directors or trustees. ' -nless other ise provided in this Code, the corporate po ers of all corporations for$ed under this Code shall be e<ercised, all business conducted and all propert& of such corporations controlled and held b& the board of directors or trustees to be elected fro$ a$on! the holders of stoc4s, or here there is no stoc4, fro$ a$on! the $e$bers of the corporation, ho shall hold office for one 516 &ear until their successors are elected and "ualified. <<<< Se*. 29. Vacancies in the office of director or trustee. ' ,n& vacanc& occurrin! in the board of directors or trustees other than b& re$oval b& the stoc4holders or $e$bers or b& e<piration of ter$, $a& be filled b& the vote of at least a $a?orit& of the re$ainin! directors or trustees, if still constitutin! a "uoru$@ other ise, said vacancies $ust be filled b& the stoc4holders in a re!ular or special $eetin! called for that purpose. , director or trustee so elected to fill a vacanc& shall be elected onl& for the une<pired ter$ of his predecessor in office. <<<. AE$phasis supplied.B ,frica clai$ed that a &ear after Ma4alintal%s election as $e$ber of the VVCC 7oard in 1223, his AMa4alintal%sB ter$ C as ell as those of the other $e$bers of the VVCC 7oard C should be considered to have alread& e<pired. )hus,

accordin! to ,frica, the resultin! vacanc& should have been filled b& the stoc4holders in a re!ular or special $eetin! called for that purpose, and not b& the re$ainin! $e$bers of the VVCC 7oard, as as done in this case. ,frica additionall& contends that for the $e$bers to e<ercise the authorit& to fill in vacancies in the board of directors, Section /2 re"uires, a$on! others, that there should be an une<pired ter$ durin! hich the successor' $e$ber shall serve. Since Ma4alintal%s ter$ had alread& e<pired ith the lapse of the one'&ear ter$ provided in Section />, there is no $ore Dune<pired ter$D durin! hich Ra$ire= could serve. )hrou!h a partial decision4 pro$ul!ated on 8anuar& />, /;;/, the R)C ruled in favor of ,frica and declared the election of Ra$ire=, as Ma4alintal%s replace$ent, to the VVCC 7oard as null and void. Incidentall&, the SEC issued a si$ilar rulin! on 8une >, /;;>, nullif&in! the election of Ro<as as $e$ber of the VVCC 7oard, vice hold'over director Din!lasan. Ehile VVCC $anifested its intent to appeal fro$ the SEC%s rulin!, no petition as actuall& filed ith the Court of ,ppeals@ thus, the appellate court considered the case closed and ter$inated and the SEC%s rulin! final and e<ecutor&.5 )*E PE)I)ION VVCC no appeals to the Court to assail the R)C%s 8anuar& />, /;;/ partial decision for bein! contrar& to la and ?urisprudence. VVCC $ade a direct resort to the Court via a petition for revie on certiorari, clai$in! that the sole issue in the present case involves a purel& le!al "uestion. ,s fra$ed b& VVCC, the issue for resolution is hether the re$ainin! directors of the corporation%s 7oard, still constitutin! a "uoru$, can elect another director to fill in a vacanc& caused b& the resi!nation of a hold'over director. Citin! la and ?urisprudence, VVCC posits that the po er to fill in a vacanc& created b& the resi!nation of a hold' over director is e<pressl& !ranted to the re$ainin! $e$bers of the corporation%s board of directors. -nder the above'"uoted Section /2 of the Corporation Code, a vacanc& occurrin! in the board of directors caused b& the e<piration of a $e$ber%s ter$ shall be filled b& the corporation%s stoc4holders. Correlatin! Section /2 ith Section /> of the sa$e la , VVCC alle!es that + member4, term ,)+// be -or o(e 1e+r and 0(t'/ )', ,0**e,,or ', e/e*te. +(. 50+/'-'e.6 other ise stated, a $e$ber%s ter$ e<pires onl& hen his successor to the 7oard is elected and "ualified. )hus, Duntil such ti$e as Aa successor isB elected or "ualified in an annual election here a "uoru$ is present,D VVCC contends that Dthe ter$ of Aa $e$berB of the board of directors has &et not e<pired.D ,s the vacanc& in this case as caused b& Ma4alintal%s resi!nation, not b& the e<piration of his ter$, VVCC insists that the board ri!htfull& appointed Ra$ire= to fill in the vacanc&. In support of its ar!u$ents, VVCC cites the Court%s rulin! in the 12/0 El Hogar6 case hich states# O in! to the failure of a "uoru$ at $ost of the !eneral $eetin!s since the respondent has been in e<istence, it has been the practice of the directors to fill in vacancies in the directorate b& choosin! suitable persons fro$ a$on! the stoc4holders. )his custo$ finds its sanction in ,rticle 01 of the 7&'.a s, hich reads as follo s# ,rt. 01. )he directors shall elect fro$ a$on! the shareholders $e$bers to fill the vacancies that $a& occur in the board of directors until the election at the !eneral $eetin!. <<<< -pon failure of a "uoru$ at an& annual $eetin! the directorate naturall& holds over and continues to function until another directorate is chosen and "ualified. -nless the la or the charter of a corporation e<pressl& provides that an office shall beco$e vacant at the e<piration of the ter$ of office for hich the officer as elected, the !eneral rule is to allo the officer to hold over until his successor is dul& "ualified. Mere failure of a corporation to elect officers does not ter$inate the ter$s of e<istin! officers nor dissolve the corporation. )he doctrine above stated finds e<pression in article 33 of the b&'la s of the respondent hich declares in so $an& ords that directors shall hold office Dfor the ter$ of one &ear or until their successors shall have been elected and ta4en possession of their offices.D <<<. It results that t)e pr+*t'*e o- t)e .'re*tor+te o- -'//'(7 8+*+(*'e, b1 t)e +*t'o( o- t)e .'re*tor, t)em,e/8e, ', 8+/'.. Nor can an& e<ception be ta4en to the personalit& of the individuals chosen b& the directors to fill vacancies in the bod&. AE$phasis supplied.B ,frica, in opposin! VVCC%s contentions, raises the sa$e ar!u$ents that he did before the trial court.

)*E CO-R)%S R-.IN9 Ee are not persuaded b& VVCC%s ar!u$ents and, thus, find its petition un$eritorious. )o repeat, the issue for the Court to resolve is hether the re$ainin! directors of a corporation%s 7oard, still constitutin! a "uoru$, can elect another director to fill in a vacanc& caused b& the resi!nation of a hold'over director. )he resolution of this le!al issue is si!nificantl& hin!ed on the deter$ination of hat constitutes a director%s ter$ of office. )he holdover period is not part of the ter$ of office of a $e$ber of the board of directors )he ord Dter$D has ac"uired a definite $eanin! in ?urisprudence. In several cases, e have defined Dter$D as the ti$e durin! hich the officer $a& clai$ to hold the office as of ri!ht, and fi<es the interval after hich the several incu$bents shall succeed one another.7 )he ter$ of office is not affected b& the holdover. 8 )he ter$ is fi<ed b& statute and it does not chan!e si$pl& because the office $a& have beco$e vacant, nor because the incu$bent holds over in office be&ond the end of the ter$ due to the fact that a successor has not been elected and has failed to "ualif&. )er$ is distin!uished fro$ tenure in that an officer%s DtenureD represents the ter$ durin! hich the incu$bent actuall& holds office. )he tenure $a& be shorter 5or, in case of holdover, lon!er6 than the ter$ for reasons ithin or be&ond the po er of the incu$bent. 7ased on the above discussion, hen Section /> 9 of the Corporation Code declares that Dthe board of directorsFshall hold office for one 516 &ear until their successors are elected and "ualified,D e construe the provision to $ean that the ter$ of the $e$bers of the board of directors shall be onl& for one &ear@ their ter$ e<pires one &ear after election to the office. )he holdover period C that ti$e fro$ the lapse of one &ear fro$ a $e$ber%s election to the 7oard and until his successor%s election and "ualification C is not part of the director%s ori!inal ter$ of office, nor is it a ne ter$@ the holdover period, ho ever, constitutes part of his tenure. Corollar&, hen an incu$bent $e$ber of the board of directors continues to serve in a holdover capacit&, it i$plies that the office has a fi<ed ter$, hich has e<pired, and the incu$bent is holdin! the succeedin! ter$.10 ,fter the lapse of one &ear fro$ his election as $e$ber of the VVCC 7oard in 1223, Ma4alintal%s ter$ of office is dee$ed to have alread& e<pired. )hat he continued to serve in the VVCC 7oard in a holdover capacit& cannot be considered as e<tendin! his ter$. )o be precise, Ma4alintal%s ter$ of office be!an in 1223 and e<pired in 1220, but, b& virtue of the holdover doctrine in Section /> of the Corporation Code, he continued to hold office until his resi!nation on Nove$ber 1;, 122:. )his holdover period, ho ever, is not to be considered as part of his ter$, hich, as declared, had alread& e<pired. Eith the e<piration of Ma4alintal%s ter$ of office, a vacanc& resulted hich, b& the ter$s of Section /2 11 of the Corporation Code, $ust be filled b& the stoc4holders of VVCC in a re!ular or special $eetin! called for the purpose. )o assu$e C as VVCC does C that the vacanc& is caused b& Ma4alintal%s resi!nation in 122:, not b& the e<piration of his ter$ in 1220, is both illo!ical and unreasonable. *is resi!nation as a holdover director did not chan!e the nature of the vacanc&@ the vacanc& due to the e<piration of Ma4alintal%s ter$ had been created lon! before his resi!nation. )he po ers of the corporation%s board of directors e$anate fro$ its stoc4holders VVCC%s construction of Section /2 of the Corporation Code on the authorit& to fill up vacancies in the board of directors, in relation to Section /> thereof, effectivel& ea4ens the stoc4holders% po er to participate in the corporate !overnance b& electin! their representatives to the board of directors. )he board of directors is the directin! and controllin! bod& of the corporation. It is a creation of the stoc4holders and derives its po er to control and direct the affairs of the corporation fro$ the$. )he board of directors, in dra in! to the$selves the po ers of the corporation, occupies a position of trusteeship in relation to the stoc4holders, in the sense that the board should e<ercise not onl& care and dili!ence, but ut$ost !ood faith in the $ana!e$ent of corporate affairs.12 )he underl&in! polic& of the Corporation Code is that the business and affairs of a corporation $ust be !overned b& a board of directors hose $e$bers have stood for election, and ho have actuall& been elected b& the stoc4holders, on an annual basis. Onl& in that a& can the directorsG continued accountabilit& to shareholders, and the le!iti$ac& of their decisions that bind the corporationGs stoc4holders, be assured. )he shareholder vote is critical to the theor& that le!iti$i=es the e<ercise of po er b& the directors or officers over properties that the& do not o n. 13 )his theor& of dele!ated po er of the board of directors si$ilarl& e<plains h&, under Section /2 of the Corporation Code, in cases here the vacanc& in the corporation%s board of directors is caused not b& the e<piration of a $e$ber%s ter$, the successor Dso elected to fill in a vacanc& shall be elected onl& for the une<pired ter$ of the his predecessor

in office.D )he la has authori=ed the re$ainin! $e$bers of the board to fill in a vacanc& onl& in specified instances, so as not to retard or i$pair the corporation%s operations@ &et, in reco!nition of the stoc4holders% ri!ht to elect the $e$bers of the board, it li$ited the period durin! hich the successor shall serve onl& to the D unexpired term of his predecessor in office.D Ehile the Court in El *o!ar approved of the practice of the directors to fill vacancies in the directorate, e point out that this rulin! as $ade before the present Corporation Code as enacted 14 and before its Section /2 li$ited the instances hen the re$ainin! directors can fill in vacancies in the board, i.e., hen the re$ainin! directors still constitute a "uoru$ and hen the vacanc& is caused for reasons other than b& re$oval b& the stoc4holders or b& e<piration of the ter$.
1avvphi1

It also bears notin! that the vacanc& referred to in Section /2 conte$plates a vacanc& occurrin! ithin the director%s ter$ of office. Ehen a vacanc& is created b& the e<piration of a ter$, lo!icall&, there is no $ore une<pired ter$ to spea4 of. *ence, Section /2 declares that it shall be the corporation%s stoc4holders ho shall possess the authorit& to fill in a vacanc& caused b& the e<piration of a $e$ber%s ter$. ,s correctl& pointed out b& the R)C, hen re$ainin! $e$bers of the VVCC 7oard elected Ra$ire= to replace Ma4alintal, there as no $ore une<pired ter$ to spea4 of, as Ma4alintal%s one'&ear ter$ had alread& e<pired. Pursuant to la , the authorit& to fill in the vacanc& caused b& Ma4alintal%s leavin! lies ith the VVCC%s stoc4holders, not the re$ainin! $e$bers of its board of directors. 9:ERE%ORE, e DENH the petitioners% petition for revie on certiorari, and ,++IRM the partial decision of the Re!ional )rial Court, 7ranch 1I/, Manila, pro$ul!ated on 8anuar& />, /;;/, in Civil Case No. 3:0/3. Costs a!ainst the petitioners.