The Anti-Wiretapping Act and board meetings through telephone and video conferencing

A little over a year after the enactment of the Electronic Commerce Act (R.A. 8792), the Securities and Exchange Commission (SEC) authorized, under certain conditions, attendance by directors of board meetings through telephone or video conferencing.

This unprecedented move was a welcome development. Before this development, complaints about physical presence in board meetings were heard time and again from many directors, many of whom are extremely busy businessmen. Foreign-based directors had to travel from as far as the Americas and Europe just to attend a one-hour board meeting and unnecessarily spent significant time and expense in the process. It was considered by a number of foreign investors a laughable rule that did not take into account technological developments in modern-day telecommunications.

In its letter-opinion authorizing tele/video conferencing for board meetings, the SEC expressly stated that such "may be deemed acceptable only when adequate safeguards have been accordingly set in place." What those safeguards were remained unclear for a period of time. Subsequently, or on Nov. 20, 2001, the SEC promulgated SEC Memorandum Circular No. 15, series of 2001, which prescribed detailed safeguards for telephone or video conferencing. The Circular required, among others, the secretary of the meeting "to store for safekeeping and mark the tape recording/s and/or other electronic recording mechanism as part of the records of the corporation." Implicit in the Circular was a requirement that the entire proceedings in the board meeting must be recorded by tape or other electronic means of recording.

Of relevance is the Anti-Wire Tapping Act (R.A. 4200), which makes it unlawful for any person, not being authorized by all parties to any private communication, to secretly overhear or record such communication by using dictaphone, tape recorder or similar devices. Any communication recorded in violation of the law not only makes the recording inadmissible in evidence but also exposes persons guilty of the violation to criminal liability.

The SEC view is that the Anti-Wiretapping Law does not apply to board meetings via tele/video conferencing. The SEC reasoned out that Circular No. 15 requires the Corporate Secretary to send out notices to all the directors which, among others, shall inquire whether the directors will attend physically or through tele/video conferencing and direct any director who chooses to attend through teleconferencing to give notice five days prior to the scheduled meeting to the Secretary. In short, the SEC said that, under SEC Circular No. 15, "all the parties to the board meeting are aware that all the communications are recorded" by means of tape recording or other electronic recording mechanism in case any of the directors chooses to attend the board meeting via tele/video conferencing.

The assumption of the SEC is workable in cases where none of the directors object to the recording of the proceedings by means of tape recording or other electronic recording mechanism. But what if any of the directors who are physically present object? Note that what the Anti-Wiretapping Act requires is that the recording must be authorized by all parties to the private communication. Remote though it may be, such a situation may arise. Imagine two factions hotly contesting a nine-member board of a listed company in a stockholders’ meeting. One group can elect five while the other can elect four members. One of the candidates belonging to the group of five has to leave for abroad two days before the election to attend to a family emergency. There is no way that he could be substituted because the by-laws require pre-screening by a Nominations Committee before a candidate could be nominated on the floor. The group of five wins a majority seat in the board. Comes the organizational meeting scheduled right after the shareholders’ meeting to elect the officers of the company. Since there are four members on each side, there would be a tie in the matter of electing the incoming officers of the company. The result is that the group of five cannot elect their own set of officers even as they won a majority seat in the board.

Take another example using the same board set-up. An extremely important matter has to be taken up by the nine-member board, which is being objected to by the faction of four members. One member belonging to the group of five is in Europe on the day of the board meeting to attend to a pressing business matter. Again, there is a standstill on the matter since there are four directors on each side who can physically attend the meeting.

In the two examples given above, a solution is provided by the SEC for the group of five directors. Under Circular No. 15, the director abroad may attend the board meeting via telephone or video conferencing. There would therefore be one more director who can vote with his allies in both the organizational meeting of the board and the regular meeting at which the transaction will be taken up. The SEC, however, requires that the entire proceedings be recorded by means of tape recording or other electronic recording mechanism. To prevent the five directors from acting, the group of four objects to the recording of the entire proceedings by tape or other electronic recording mechanism. Since this requirement is a condition sine qua non for the validity of the tele/video conferencing (SEC Opinion dated May 23, 2003), the result is that the vote of the director who is abroad may not be counted for purposes of determining whether there is a majority electing the officers of the company and approving the transaction.

These and other situations are the inevitable results of the SEC opinion that recording of the entire proceedings by tape or other electronic recording mechanism is essential to the validity of the tele/video conferencing. If only for this reason, the SEC may want to revisit its opinion on the matter. In the process, the SEC may resolve other legal issues on the interplay between the Anti-Wiretapping Act and the SEC rules on directors’ meeting via tele-phone or video conferencing. For example, are deliberations in a board meeting considered a "private communication" within the purview of the Anti-Wiretapping Act? Or, is recording the board proceedings through a tape recorder considered secret under the law? If the answer to both questions is no, then the proceedings may be recorded even over the objection of the four directors without running afoul with the Anti-Wiretapping Act. Better still, why not set aside the opinion that recording of the proceedings by electronic or tape recording is a condition sine qua non for the validity of the tele/video conferencing?

(The author is a senior partner and the co-managing partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at HYPERLINK "mailto:[email protected]" [email protected])