Opinion No. 14-04 RE: Qualification/Disqualification of Board of Directors; Conflict of Interest

SEC Building, EDSA, Greenhills, Mandaluyong City Securities and Exchange Commission Republic of the Philippines Department of Finance

Office of the General Counsel

April 21, 2014

SEC-OGC Opinion No. 14-04 Re: Qualification/Disqualification Of Interest of Board of Directors; Conflict

Mid/East Scientific Medical Equipment & Services, Inc. Tropicana Suites 1630 L. Ma. Guerrero St. Malate, Manila DR. SHIRLEY JANE D. CHUA-PANGANIBAN President/CEO

Dear Dr. Chua-Panganiban,

conflict of interest of one of the members of your Board of Directors. This refers to your letter dated 25 June 2013 requesting for opinion regarding a

name of Equilife Medical Equipment Supplies & Services, Inc. ("Equilife") was registered with the Commission which has a similar primary purpose with your corporation, and which is eighty percent (80%) owned by Ma. Ysabel E. Valenzuela, the daughter of one of your through the efforts of Mr. Valenzuela, considering that as Director, he may have direct access Equilife is engaged in a business that is directly and substantially competing with your corporation by offering the same services that your company is rendering, thus, some of your clients did not renew their subsisting contracts with your corporation in favor of Equilife which adversely affected your business operations: You claim that this is possibly done to your corporation's business and trade plans. Board of Directors, Abelardo H. Valenzuela III ("Mr. Valenzuela"). You further stated that In your letter, you mentioned that on 21 December 2012, a corporate entity under the

conflict of interest citing the case decided by the Supreme Court in John Gokongwei, Jr. v. Securities and Exchange Commission, et al.' which held that: Consequently, it is your lawyer's position that the act of Mr. Valenzuela constitutes a

(1) A director shall not be directly or indirectly interested as a stockholder in any other firm, company, or association which competes with the subject corporation. ' G.R..No. L-45911, 11 April 1979.

Re: Qualification/Disqualification of Board of Directors; SEC-OGC Opinion No.I4-05 Conflict of Interest Page 2 of 4 (2) A director shail not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation.

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the subject corporation.

holding office. (4) A director shall be of good moral character as an essential qualification to

service on the board. (5) No person who is an attorney against the corporation in a law suit is eligible for

Accordingly, you now seek our opinion whether there exists a conflict of interest.

2003, the Commission refrains from rendering an opinion on the matter stated in your request Such is the nature of your query which involves rights that are litigious in nature and may thereafter lead to an intra-corporate issue, jurisdiction over which is already transferred to the involving as it does the substantial and contractual rights of private parties who would, in all probability, contest the same in court if the opinion turns out to be adverse to their interest. Regional Trial Courts, pursuant to Section 5.2 of the Securities and Regulation Code ("SRC"). However, for purposes of information only, the following are imparted. Please be advised that pursuant to SEC Memorandum Circular No. 15, Series of

its members towards itself and among themselves in reference to the management of its its by-laws the qualifications of its directors, officers and employees. for its internal government, and to regulate the conduct and prescribe the rights and duties of affairs" .2 Thus, under section 47(5) of the Corporation Code, a corporation may prescribe in It is important to note that "every corporation has the inherent power to adopt by-laws

the family of any stockholder in any other firm, company, or association which competes with the subject corporation" is a qualificational by-law provision which may be added to Accordingly, the qualification that "a director shall not be the immediate member of

2 (b id.

Re: Qualification/Disqualification of Board of Directors; SEC-OGC Opinion No.14-05 Conflict of Interest

Page 3 of 4

be ineligible for the corporation's Board of Directors and a provision which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation However, these qualifications become effective only when the by-laws of the Corporation case of Gokongwei v. Securities and Exchange Commission et al.5 Thus, corporations have the power to make by-laws declaring a person employed in the service of a rival company to whose business is in competition with or is antagonistic to the other corporation is valid.c those"specified in the Corporation Code, (i.e. Section 233 and Section 27), pursuant to the expressly provides for the same.

liability and accountability of directors as follows: In this connection, as a general proposition, the Corporation Code provides the

trustees who willfully and knowingly vote for or assent to patently unlawful jointly and severally for all damages resulting therefrom suffered by the acts of the corporation or who are guilty of gross negligence or bad faith in interest in conflict with their duty as such directors or trustees shall be liable corporation, its stockholders or members and other persons. directing the affairs of the corporation or acquire any personal or pecuniary Sec. 31. Liability of directors, trustees or officers. - Directors or

trustee for the corporation and must account for the profits which otherwise violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a would have accrued to the corporation. When a director, trustee or officer attempts to acquire or acquires, in

must account to the latter for all such profits by refunding the same, unless his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he Sec. 34. Disloyalty of a director. - Where a director, by virtue of his

owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or 6 Ibd. director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the or trustees of all corporations organized under this Code must be residents of the Philippines. appointment, shall qualify as a director, trustee or officer of any corporation. 4 No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six S'Supra, note I. xxx Every director must own at least one (1) share of the capital stock of the corporation of which he is a

Re: Qualification/Disqualification of Board of Directors; SEC-OGC Opinion No.14-05 Conflict of Interest Page 4 of 4

applicable, notwithstanding the fact that the director risked his own funds in least two-thirds (2/3) of the outstanding capital stock. This provision shall be the venture. act has been ratified by a vote of the stockholders owning or representing at

on the facts and circumstances disclosed and relevant solely to the particular issues raised other cases or upon courts, whether of similar or dissimilar circumstances."If upon therein and shall not be used in the nature of a standing rule binding upon the Commission in investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void. In any case, it shall be understood that the foregoing opinion is rendered based solely.

Very truly yours

CAM 0s CRREA

Gehe.

Paragraph 7, SEC Memorandum Circular No. 15, Series of 2003, Re: Requests for Legal Opinions.