The Supreme Court has laid down the parameters in determining the liability of corporate officers and directors who unfairly usurp business opportunities that belong to the corporation they serve.
In a 32-page Decision penned by Justice Henri Jean Paul B. Inting, the Court granted the Petition for Review on Certiorari filed by Total Office Products and Services, Inc. (TOPROS), praying for the reversal of the Court of Appeals’ ruling which set aside the finding of the Regional Trial Court (RTC) that TOPROS director and top officer John Charles Chang, Jr. violated his fiduciary duties under the Corporation Code.
The Court remanded the case to the Pasig RTC, Branch 158 to resolve the case with dispatch following the new guidelines set by the Court in its Decision to determine the exact liability of Chang.
In 1982, Chang was designated by TOPROS’ owners, spouses Ramon and Yaona Ang Ty, to manage TOPROS as the sole distributor of Minolta plain paper copiers in the Philippines. While TOPROS grew to a multi-million enterprise, Spouses Ty eventually discovered that Chang, while still a TOPROS director and officer, incorporated TOPGOLD Philippines, Inc. (TOPGOLD), Golden Exim Trading and Commercial Corporation (Golden Exim), and Identic International Corp. (Identic) to siphon assets, funds, goodwill, equipment, and resources of TOPROS. Chang also obtained opportunities properly belonging to TOPROS and awarded these to his own corporations, to TOPROS’ prejudice. Chang was subsequently ousted as TOPROS director and officer and a case for damages was filed by TOPROS against Chang, TOPGOLD, Golden Exim, and Identic.
Under Section 34 of the Corporation Code (now Section 33 of the Revised Corporation Code), a director who acquires for himself a business opportunity which should belong to the corporation and who obtains profits to the prejudice of the corporation has the duty to refund to the corporation the profits he derived from the opportunity, unless ratified by the corporation.
The Court held that the rationale for this duty is that “a person cannot serve two hostile masters without detriment to one of them. Where a director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other.”
Hence, the fiduciary duty of corporate officers and directors prohibits them from engaging in a “business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director,” ruled the Court.
The Court held that under the doctrine of corporate opportunity, directors, officers, and controlling shareholders have the legal responsibility, “under the duty of loyalty, not to take such opportunities for themselves, without first disclosing the opportunity to the board of directors of the corporation and giving the board the option to decline the opportunity on behalf of the corporation. If the procedure is violated and a corporate fiduciary takes the corporate opportunity anyway, the fiduciary violates its duty of loyalty and the corporation will be entitled to a constructive trust of all profits obtained from the wrongful transaction.”
In the case of Chang, in order to establish whether he violated the doctrine of corporate opportunity and is thus obligated to refund the profits he derived from various business opportunities because of his position in TOPROS, the Court laid down the following elements to determine when a prohibited corporate opportunity exists, giving rise to a claim of damages:
- The corporation is financially able to exploit the opportunity;
- The opportunity is within the corporation’s line of business;
- The corporation has an interest or expectancy in the opportunity; and
- By taking the opportunity for his own, the corporate director, trustee, or officer will consequently be placed in a position inimicable to his duties to the corporation.
The Court added that in determining if the opportunity is within the corporation’s line of business, the involved corporations must be shown to be in competition with one another, such that they are both engaged in related areas of businesses, producing the same products with overlapping markets.
The Court ruled that the doctrine of corporate opportunity applied to Chang, and that his actions constituted acts of disloyalty in violation of the Corporation Code after it found that (1) Chang owned majority of the shares in TOPGOLD, Golden Exim, and Dentic; (2) TOPGOLD, Golden Exim, and Identic were in the same line of business as TOPROS; (3) TOPROS has existing service contracts with Linde, a client of Golden Exim; (4) Rental payments due TOPROS were instead paid to TOPGOLD; and (5) Chang bought the land where TOPROS’ building is located in the name of Golden Exim instead of TOPROS, justifying awarding Golden Exim the investment opportunity because “he had to make his own living.”
However, since further reception and evaluation of evidence is needed to determine the exact liability of Chang, the Court remanded the case to the RTC, concluding that “the claim for damages under Section 34 of the Corporation Code necessitates factual determinations which must be ultimately made by the RTC itself in the exercise of its judicial functions, embodied in a final judgment.”
FULL TEXT of G.R. NOS. 200070-71 at: https://sc.judiciary.gov.ph/28545/