SEC Enumerates Disqualifications of Directors, Trustees, and Officers of Corporations and Provides Guidelines on the Procedure for their Removal

The Securities and Exchange Commission (“SEC”) released Memorandum Circular No. 4, series of 2022 (“M.C. No. 4”), which provided the grounds for disqualification and the procedure for removal of directors, trustees, and officers of corporations. MC No. 4 was released pursuant to the SEC’s power under the Revised Corporation Code (“RCC”) to impose qualifications or other disqualifications to promote good corporate governance or as a sanction in its administrative proceedings.

The rules under MC No. 4 shall not cover actions or proceedings to prohibit the nomination, election, or appointment of an individual as a director, trustee, or officer. Further, the pertinent provisions of the 2016 SEC Rules of Procedure including the amendments thereto, and the Rules of Court of the Philippines, may be applied by analogy or in a suppletory manner in the interest of expeditious dispensation of justice.

Grounds for disqualification of directors, trustees, or officers

MC No. 4 enumerates the grounds for disqualification of directors, trustees, or officers, as follows:

1. Within five (5) years prior to the election or appointment, the director, trustee, or officer was:
   1. Convicted by final judgment for an offense punishable by imprisonment for a period exceeding six (6) years, or for violating the RCC, the Securities Regulation Code (“SRC”), or by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct like those enumerated in Section 26 (a) and (b) of the RCC.
   2. Found administratively liable by final judgment for any offense involving fraudulent acts punishable under the RCC, SRC, or other laws, rules, or regulations enforced or implemented by the SEC.
   3. Found administratively liable by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct similar to those enumerated in paragraphs (a) and (b) of Section 26 of the RCC.
   4. Found administratively liable for refusal to allow inspection and/or reproduction of corporate records
2. Within the tenure, the director, trustee, or officer was:
   1. Convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or for violating the RCC or the SRC, or by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct like those enumerated in Section 26 paragraphs (a) and (b) of the RCC
   2. Found administratively liable by final judgment for any offense involving fraudulent acts punishable under the RCC, SRC, or other laws, rules or regulations enforced or implemented by the SEC
   3. Found administratively liable by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct like those enumerated in Section 26 paragraphs (a) and (b) of the RCC.

Procedure for removal of directors, trustees, and/or officers

An independent administrative action for removal shall be commenced upon the motu proprio issuance of Formal Charge by or filing of a Verified Complaint with, the Operating Department that has jurisdiction over the subject matter. 

The Director of the Operating Department or his duly authorized representative, may dismiss outright the Complaint based on any of the following grounds:

1. It is not compliant with the requirements for a verified complaint set in these rules;
2. The SEC or the Operating Department has no jurisdiction over the subject matter of the complaint;
3. There is an existing pending action or complaint involving the same subject matter or issues;
4. The Operating Department finds insufficient evidence as would reasonably tend to establish prima facie the truth of the factual allegations contained therein, on the basis of the documents, affidavits, and other evidence attached to the complaint. 

Within fifteen (15) calendar days from the receipt of the Formal Charge or Summons, the Respondent shall file three (3) original copies of his/her Verified Answer to the Formal Charge or Verified Complaint and serve a copy thereof to the Complainant. In case there is a need to clarify certain material facts, the Officer of the Operating Department may conduct a Clarificatory Hearing. Fifteen (15) calendar days after the termination of the Clarificatory Hearing, the parties may be required to submit their positions paper. The case shall be deemed submitted for resolution upon the submission of the said position papers or upon expiration of the fifteen-day period.

The decisions, resolutions, or final orders shall be rendered by the Operating Department pursuant to the 2016 SEC Rules of Procedure and the amendments thereto. Appeals and Motions for Reconsideration or Execution shall also be filed pursuant to the 2016 SEC Rules of Procedure and the amendments thereto.

The SEC may remove a director, trustee and/ or officer of a corporation if it has been established by substantial evidence that any of the listed grounds for disqualification is present. However, prior to the removal, the Commission shall issue show cause order directing to explain with fifteen (15) days why he/she should not be disqualified or removed. If the Respondent fails to answer the Show Cause Order within the fixed period, the SEC may motu proprio, render a judgment imposing the sanction/s.

In addition to the removal as a director, trustee and/or officer, the SEC may issue a permanent cease and desist order, and/or impose a fine ranging from Ten Thousand Pesos (PHP10,000) to Four Hundred Thousand Pesos (PHP400,000) for each violation of the SEC’s orders, or any of the provisions of the RCC on the disqualifications and removal of directors, trustees, and/or officers, taking into consideration the extent of the violation.

Application to close corporations and one person corporations

If the Articles of Incorporation of a close corporation provides that the business of the corporation shall be managed by the stockholders rather than by a board of directors, the stockholders removed pursuant to the foregoing rules shall be excluded from being part of the governing body which exercises the corporate powers, conducts all business, and controls all properties of the corporation.

In case of removal of the sole director of one person corporations under the aforementioned rules, the nominee shall take the place of the single stockholder as director and shall manage the corporation’s affairs, subject to the rights, obligations and responsibilities required under the RCC, provided that the nominee shall possess the qualifications and none of the disqualifications of a director.
The full text of MC No. 4 may be accessed here.