SEC tightens rules on disqualification, removal of company directors, trustees, officers

The Securities and Exchange Commission (SEC) has tightened the rules governing the disqualification and removal of directors, trustees, and officers of corporations, in line with its commitment to ensure good corporate governance in the country.

The Commission on February 15 issued SEC Memorandum Circular No. 4, Series of 2022, providing for the Disqualifications of Directors, Trustees and Officers of Corporations, and the Guidelines on the Procedure for their Removal.

The rules operationalize Sections 26 and 27 of Republic Act No. 11232, otherwise known as the Revised Corporation Code of the Philippines (RCC).

Section 26 of the RCC provides that a person shall be disqualified from being a director, trustee, or officer of any corporation if, within five years prior to their election or appointment, the person was convicted by final judgment of an offense punishable by imprisonment for a period exceeding six years, as well as for violating the RCC or Republic Act No. 8799, or The Securities Regulation Code (SRC).

A person shall likewise be disqualified if found administratively liable for any offense involving fraudulent acts, or found liable by a foreign court or equivalent regulatory authority for acts, violations, or misconduct similar to the aforementioned conditions.

Meanwhile, Section 27 of the RCC provides that the Commission shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election.

The memorandum circular covers pleadings, practices and procedures before the SEC in all matters of hearing and proceedings for independent administrative actions for the removal of directors; removal of directors, trustees, and officers as a sanction in the Commission’s proceedings; and imposition of sanctions on the board of directors or trustees who, with knowledge of disqualification, failed to remove a disqualified director or trustee.

Under the rules, disqualification refers to the fact or condition that disqualifies a person from being a director, trustee, or officer, while removal pertains to the act of taking away a person from such position.

Disqualification

Directors, trustees or officers may be disqualified if, within five years prior to their election or appointment, or within their tenure, they were convicted by final judgment of an offense punishable by imprisonment for more than six years, or for violating the RCC, SRC, or for any offense involving fraudulent acts punishable under the RCC, SRC, and other laws, rules, or regulations implemented by the SEC.

They may also be disqualified if, within five years prior to their election or appointment, or within their tenure, the director, trustee, or officer was found administratively liable by a foreign court or equivalent foreign regulator authority for acts, violations, or misconduct similar to those stated under the RCC.

Further, within five years prior to their election or appointment, or within their tenure, a director, trustee, or officer may be disqualified if he/she was found administratively liable by final judgment for refusal to allow the inspection and/or reproduction of corporate records.

An independent administrative action for the removal of a director, trustee, and/or officer of a corporation may be commenced upon the motu proprio issuance of a formal charge by the SEC operating department that has jurisdiction over the subject matter, or upon filing of a verified complaint with the operating department.

The formal charge will specify the grounds for removal of the company official, provide a statement of material or relevant facts, and direct the respondent to file a verified answer within 15 days from receipt thereof. Meanwhile, a verified complaint may be filed by a real party in interest for the removal of the director, trustee, and/or officer.

The director of the concerned operating department may dismiss the complaint outright if it was found to be non-compliant with requirements, or if the Commission or the operating department has no jurisdiction over the subject matter.

The complaint may also be dismissed if there is a pending action or complaint involving the same subject matter or issues in any court, tribunal, or agency; or if there is insufficient evidence that could establish the factual allegations contained therein.

On the other hand, a summons will be issued to the respondent/s should authority to act over the complaint be established by the SEC. The respondent/s will be given 15 days from receipt of the formal charge or summons to file a verified answer. Failure to do so will allow the SEC operating department to render a judgment on the complaint.

A clarificatory hearing may also be conducted for the purpose of ascertaining facts, issues, and other matters necessary for the resolution of the proceedings.

The decisions, resolutions, or final orders, as well as appeals and motions for reconsideration or execution, shall be rendered by the operating department pursuant to the 2016 SEC Rules of Procedure.

Removal

The Commission may remove a director, trustee, and/or officer of a corporation as a sanction in its proceedings if, during its administrative or adjudicative proceedings, it has been established that grounds for their disqualification are present.

The SEC will first issue an order directing the director, trustee, and/or officer of the corporation to show cause why they should not be disqualified from their position or be administratively penalized.

The respondent will be given a chance to file a verified response within 15 days from receipt of the order. Failure to answer may, motu proprio, render a judgment imposing the sanction/s, as the evidence presented or established in the course of the proceedings may warrant.

In addition to the removal of the director, trustee, and/or officer, the SEC may also issue a permanent cease and desist order, and/or impose a fine from P10,000 to P400,000 for each violation of the Commission’s orders, or any relevant laws and regulations.

For a one person corporation whose sole director has been removed, the nominee shall take the place of the single stockholder as director and manage the corporation’s affairs.

The Commission will keep a Removed Directors, Trustees, and Officers Index, containing a record of all orders, decisions, or resolutions involving the removal of a director, trustee, and/or officer of a corporation through the Corporate Filing and Records Division of the SEC Company Registration and Monitoring Department.

The index will only be for the use of the Commission, and may not be accessed or asked about by outside parties, except with the authority of the individual concerned, and the approval of the SEC operating department’s director.