When rules are not enough

Black’s Law Dictionary defines a corporation’s by-laws as “regulations, ordinances, or rules enacted by a private corporation for its own government.”

The late Justice Emilio Gancayco of the Supreme Court (G.R. No. 91478, Feb. 7, 1991) elucidated the concept by saying, “The by-laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. They are in effect, written, into the charter. In this sense they become part of the fundamental law of the corporation with which the corporation and its directors and officers must comply.”

Having said this, by-law provisions are a guide to how a corporation runs its internal affairs. In general, they provide a guide on the subscription of shares, conduct of meetings, powers of the Board of Directors, appointment of officers, amendments, etc. As long as the rules are embodied in the by-laws, a corporation can act in the manner and within the formalities prescribed under such rules.

But if a change in the rules is required, how do we proceed in amending a corporation’s by-laws?

Section 48 of the Corporation Code (Code) outlines the procedure in introducing amendments to by-laws. It prescribes the manner of amendment consisting of the conduct of the meeting, quorum requirement, and minimum stockholder votes for an amendments to be valid and binding. It also mentions the effectivity of the by-law amendment which is when the Securities and Exchange Commission (SEC) issues a Certificate of Amendment of By-Laws.

While the provisions of the Code may have captured the steps in amending the by-laws, the SEC had the occasion to discuss in a legal opinion why Section 48 of the Code is not enough to enforce an amendment to a corporation’s by-laws.

In an opinion dated 20 April, the Office of the General Counsel (OGC) of the SEC resolved the issue of whether a corporation can delegate to its board the power to amend or repeal its by-laws. The question arose from a proposed amendment to a corporation’s by-laws which delegates to its board the authority to amend or repeal its own by-laws. The opinion requested from the SEC was based on the provisions of Section of 48 of the Code, with the relevant provision quoted below:

“… The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws.”

Citing previous SEC Opinions, the OGC explained that the delegation to the board of the power to amend or repeal by-laws or adopt new by-laws should not be embodied in the by-laws alone, but must be supported by a resolution adopted by 2/3 of the subscribed capital stock of the corporation. The rationale for this is that the vested authority is only temporary in nature. At any time, stockholders may decide to revoke the delegated power by a majority vote in a meeting called for this purpose.

The OGC added that what is not allowed in the by-law amendment is the simple inclusion of the very provision on the delegated power. Merely lifting the provisions of Section 48 of the Code and adopting it in the by-laws is not sufficient to comply with the requirement. Actual delegation must be embodied in a resolution, i.e. 2/3 of the stockholders must explicitly vote to delegate to the board the power to amend or repeal the by-laws.

In the case at hand, the corporation failed to satisfy the requirement since it merely lifted Section 48 of the Corporation Code on the power of its stockholders to delegate the authority to amend or repeal, without complying with the resolution requirement. To operationalize the delegation requirement, owners of at least two-thirds (2/3) of the outstanding capital stock must pass the appropriate resolution in a stockholder’s meeting. The resolution may spell out the extent or limits of the delegated authority, including when it expires or becomes ‘functus officio.’

While the Code and the by-laws itself have explicitly outlined the rules to amend a corporation’s by-laws, the shareholders as owners of the corporation will still have the final say. Delegation of the stockholder’s authority should be considered more of an exception from the regular course of corporate procedures. Hence, the legal requirements must be construed strictly against delegation of authority.