TITLE IV - POWERS OF CORPORATIONS

Section 36. Corporate powers and capacity. - Every corporation incorporated under
this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
stocks to subscribers and to sell treasury stocks in accordance with the provisions of
this Code; and to admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this
Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation. (13a)
Section 37. Power to extend or shorten corporate term. - A private corporation may
extend or shorten its term as stated in the articles of incorporation when approved by
a majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise his appraisal right under
the conditions provided in this code. (n)
Section 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless approved by a majority
vote of the board of directors and, at a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the capital
stock or of the incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder's meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number of no-
par stock subscribed by each, and the amount paid by each on his subscription in
cash or property, or the amount of
capital stock or number of shares of no-par stock allotted to each stock-holder if such
increase is for the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing
of any bonded indebtedness shall require prior approval of the Securities and
Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation
and the other shall be filed with the Securities and Exchange Commission and
attached to the original articles of incorporation. From and after approval by the
Securities and Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) percent of
the subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the
same, with the approval by a majority vote of the board of trustees and of at least
two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof. (17a)
Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation
shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless such right is denied by
the articles of incorporation or an amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued in compliance with laws
requiring stock offerings or minimum stock ownership by the public; or to shares to
be issued in good faith with the approval of the stockholders representing twothirds
(2/3) of the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
Section 40. Sale or other disposition of assets. - Subject to the provisions of existing
laws on illegal combinations and monopolies, a corporation may, by a majority vote
of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets, including its
goodwill, upon such terms and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of money or other
property or consideration, as its board of directors or trustees may deem expedient,
when authorized by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or in case of non-stock corporation, by the vote of at
least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property and assets, subject to
the rights of third parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without
the authorization by the stockholders or members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of any of its property and assets if the same
is necessary in the usual and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property and assets be appropriated
for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by this section.
Section 41. Power to acquire own shares. - A stock corporation shall have the power
to purchase or acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during
said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code. (a)
Section 42. Power to invest corporate funds in another corporation or business or for
any other purpose. - Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any purpose other than
the primary purpose for which it was organized when approved by a majority of the
board of directors or trustees and ratified by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the
members in the case of non-stock corporations, at a stockholder's or member's
meeting duly called for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder shall have appraisal right as provided in
this Code: Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be necessary.
(17 1/2a)
Section 43. Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided, further, That no stock
dividend shall be issued without the approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for
probable contingencies. (n)
Section 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such contract shall
have been approved by the board of directors and by stockholders owning at least
the majority of the outstanding capital stock, or by at least a majority of the members
in the case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of both the managing and
the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the stockholders of
the managed corporation owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the
case of a non-stock corporation. No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby
a corporation undertakes to manage or operate all or substantially all of the business
of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such service contracts
or operating agreements which relate to the exploration, development, exploitation or
utilization of natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations. (n)
Section 45. Ultra vires acts of corporations. - No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by
its articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred. (n)

Soriano Notes:
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
Sec. 36.
C o r p o r a t e p o w e r s a n d c a p a c i t y . - Every corporation incorporated
under this Code has the power and capacity: 1. To sue and be sued in its corporate
name; 2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
stocks to subscribers and to sell treasury stocks in accordance with the provisions of
this Code; and to admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this
Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
The statement of the objects, purposes or powers in the AOI results practically in
defining the scope of the authorized corporate enterprise or undertaking. This
statement both confers and also limits the actual authority of the corporation.
Along with the powers indicated in the AOI, a corporation can also exercise powers
that may be granted by law, particularly those provided under Sec. 36 and 44 of the
Corporation Code and those which may be necessary or incidental to tis existence.
In short, corporate authority may be classified as: 1. Express powers – those
expressly granted by law inclusive of the corporate charter or AOI; 2. Implied Powers
– those impliedly granted as are essential or reasonably necessary to the carrying
out of the express powers; and 3. Incidental Powers – those incidental to its
existence.
A. POWER TO SUE AND BE SUED
A corporation may sue and be sued in its corporate name just like any other person.
VENUE: the action filed against it must be instituted at the place of principal office of
the corporation.
SERVICE OF SUMMONS : Sec. 11, Rule 14 of the Rules of Court provide:
Sec. 11.
S e r v i c e u p o n d o m e s t i c p r i v a t e j u r i d i c a l e n t i t y . When the
defendant is a corporation, partnership or association organized under the laws of
the Philippines with a juridical personality, service may be made on the president,
managing partner, general manager, corporate secretary, treasurer, or in-house
counsel.
Service of summons upon persons other than those named under than those named
in the above provision is without force and effect.
DELTA MOTOR SALES CORPORATION, petitioner, vs. HON. JUDGE IGNACIO
MANGOSING, Branch XXIV, Court of First Instance of Manila, THE CITY SHERIFF
OF MANILA, and JOSE LUIS PAMINTUAN, respondents (GR No. L - 41667; April
30, 1976)
FACTS: Herein respondent Pamintuan initiated an action against petitioner Delta
Motors for the alleged defective Toyota car sold to him and for failure to fulfill the
warranty obligation by not repairing the car.
The summons were served on Dionisia Miranda, employee of the petitioner. Delta
Motors failed to answer the complaint and was declared in default and evidence was
presented and a decision was rendered against herein petitioner.
Petitioner filed a motion to lift the order of default and to set aside the judgment and
for new trial, which was denied.
ISSUE: WON there was proper service of summons?
HELD: No. Rule 14 of the Revised Rules of Court provides:
SEC. 13.
Service upon private domestic corporation or partnership. — If defendant is a
corporation organized under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager, secretary, cashier,
agent, or any of its directors.
For the purpose of receiving service of summons and being bound by it, a
corporation is identified with its agent or officer who under the rule is designated to
accept service of process. "The corporate power to receive and act on such service,
so far as to make it known to the corporation, is thus vested in such officer or agent."
(Lafayette Insurance Co. vs. French, 15 L. Ed. 451, 453).
A strict compliance with the mode of service is necessary to confer jurisdiction of the
court over a corporation. The officer upon whom service is made be one who is
named in the statute; otherwise the service is insufficient. So, where the statute
required that in the case of a domestic corporation summons should be served on
"the president or head of the corporation secretary treasurer, cashier or managing
agent thereof", service of summons on the secretary's wife did not confer jurisdiction
over the corporation in the foreclosure proceeding against it. Hence, the decree of
foreclosure and the deficiency judgment were void and should be vacated. (Reader
vs. District Court, 94 Pacific 2nd 858).
The purpose is to render it reasonably certain that the corporation will receive prompt
and proper notice in an action against it or to insure that the summons be served on
a representative so integrated with the corporation that such person will know what
to do with the legal papers served on him. In other words, "to bring home to the
corporation notice of the filing of the action". (35A C.J.S. 288 citing Jenkins vs. Lykes
Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston D.C. Fla., 23 F.R.D. 249).
In the instant case the Manila court did not acquire jurisdiction over Delta Motor
because it was not properly served with summons. The service of summons on
Dionisia G. Miranda, who is not among the persons mentioned
in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor. Courts
acquire jurisdiction over the person of a party defendant and of the subject-matter of
the action by vertue of the service of summons in the manner required by law.
Where there is no service of summons or a voluntary general appearance by the
defendant, the court acquires no jurisdiction to pronounce a judgment in the cause.
(Syllabi Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil. 556).
Consequently, the order of default, the judgment by default and the execution in Civil
Case No. 97373 are void and should be set aside.
E. B. VILLAROSA & PARTNER CO., LTD., petitioner, vs. HON. HERMINIO I.
BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati City and
IMPERIAL DEVELOPMENT CORPORATION, respondent. (GR No. 136426; Aug. 6,
1999)
FACTS: Petitioner is a limited partnership with principal office address at Davao City
and with branch offices at Parañaque, Metro Manila and Lapasan, Cagayan de Oro
City.
Petitioner and private respondent executed a Deed of Sale with Development
Agreement wherein the former agreed to develop certain parcels of land located at
Cagayan de Oro belonging to the latter into a housing subdivision for the
construction of low cost housing units. They further agreed that in case of litigation
regarding any dispute arising therefrom, the venue shall be in the proper courts of
Makati.
Private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Damages against petitioner, as defendant, before the RTC Makati for failure of the
latter to comply with its contractual obligation in that, other than a few unfinished low
cost houses, there were no substantial developments therein.
Summons, together with the complaint, were served upon the defendant, through its
Branch Manager at the stated address at Cagayan de Oro City but the Sheriff's
Return of Service stated that the summons was duly served "upon defendant E.B.
Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. at their new office Villa
Gonzalo, Nazareth, Cagayan de Oro City, and evidenced by the signature on the
face of the original copy of the summons.
Defendant filed a motion to dismiss on the ground of improper service of summons
which was denied.
ISSUE: WON the court acquired jurisdiction?
HELD: No. Earlier cases have uphold service of summons upon a construction
project manager; a corporation's assistant manager; ordinary clerk of a corporation;
private secretary of corporate executives; retained counsel; officials who had charge
or control of the operations of the corporation, like the assistant general manager; or
the corporation's Chief Finance and Administrative Officer. In these cases, these
persons were considered as "agent" within the contemplation of the old rule. Notably,
under the new Rules, service of summons upon an agent of the corporation is no
longer authorized.
The designation of persons or officers who are authorized to accept summons for a
domestic corporation or partnership is now limited and more clearly specified in
Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule now states
"general manager" instead of only "manager"; "corporate secretary" instead of
"secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its
directors" is conspicuously deleted in the new rule.
The particular revision under Section 11 of Rule 14 was explained by retired
Supreme Court Justice Florenz Regalado, thus:
. . . the then Sec. 13 of this Rule allowed service upon a defendant corporation to "be
made on the president, manager, secretary, cashier, agent or any of its directors."
The aforesaid terms were obviously ambiguous and susceptible of broad and
sometimes illogi cal interpretations , especially the word "agent" of the corporation.
The Filoil case, involving the litigation lawyer of the corporation who precisely
appeared to challenge the validity of service of summons but whose very
appearance for that purpose was seized upon to validate the defective service, is an
illustration of the need for this revised section with limited scope and specific
terminology . Thus the absurd result in the Filoil case necessitated the amendment
permitting service only on the in-house counsel of the corporation who is in effect an
employee of the corporation, as distinguished from an independent practitioner.
(emphasis supplied).
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court
Revision Committee, stated that "(T)he rule must be strictly observed. Service must
be made to one named in (the) statute . . .
It should be noted that even prior to the effectivity of the 1997 Rules of Civil
Procedure, strict compliance with the rules has been enjoined. In the case of Delta
Motor Sales Corporation vs . Mangosing , the Court held:
A
strict compliance with the mode of service is necessary to confer jurisdiction of the
court over a corporation. The officer upon whom service is made must be one who is
named in the statute; otherwise the service is insufficient. . . .
The purpose is to render it reasonably certain that the corporation will receive prompt
and proper notice in an action against it or to insure that the summons be served on
a representative so integrated with the corporation that such person will know what
to do with the legal papers served on him. In other words, "to bring home to the
corporation notice of the filing of the action." . . . .
The liberal construction rule cannot be invoked and utilized as a substitute for the
plain legal requirements as to the manner in which summons should be served on a
domestic corporation . . . . . (emphasis supplied).
Accordingly, we rule that the service of summons upon the branch manager of
petitioner at its branch office at Cagayan de Oro, instead of upon the general
manager at its principal office at Davao City is improper. Consequently, the trial court
did not acquire jurisdiction over the person of the petitioner.
B. POWER OF SUCCESSION
This right basically means that the corporation persists to exist despite death,
incapacity, civil interdiction, or withdrawal of the stockholders or members thereof.
C. POWER TO ADOPT AND USE A COMMON SEAL
This right has been expressly granted by law. However, it is not mandatory but
merely permissive. This is because the corporate seal performs no further or greater
function than to impart prima facie evidence of the due execution by the corporation
of a written document or obligation.
D. POWER TO AMEND ITS ARTICLES OF INCORPORATION
The procedures for the exercise of this right are provided under Sec. 16, Sec. 37 and
38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER AND ITS
AMENDMENTS.
As far as corporations created by special law are concerned, amendment may NOT
be considered as a matter of right. The law creating it may or may not authorize or
empower the corporation to make any changes in its AOI or charter. However,
whether empowered or not, Congress may amend or repeal a corporate charter by
virtue of its inherent authority to amend or repeal laws under the Constitution.
E. POWER TO ADOPT BY-LAWS
The Corporation Code actually REQUIRES a corporation to adopt by-laws, not
contrary to law, morals, or public policy, within 1 month from receipt of
official notice of the issuance of the certificate of incorporation or registration (Sec.
46).
Amendment of the by-laws are allowed subject to the procedure and requirement
provided under Sec. 48.
F. POWER TO ISSUE OR SELL STOCKS AND TO ADMIT MEMBERS
The power of a corporation to issue or sell its stocks is an inherent right of any stock
corporation except only as it may be regulated by law or by the AOI.
Admission, as well as termination of members is a prerogative granted by law to
non-stock corporations and the manner, requirements or procedures for such
admission or termination may be contained in the AOI or by-laws.
G. POWER TO ACQUIRE OR ALIENATE REAL OR PERSONAL PROPERTY
When a corporation is expressly empowered by law to acquire or alienate real and/or
personal properties, the limitations imposed by Sec. 36 are as follows:
Sec. 36. Xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, (1) as the transaction of the lawful business of the
corporation may reasonably and necessarily require, (2) subject to the limitations
prescribed by law and the Constitution.
The first limitation practically sets the limit of the corporate authority to acquire, own,
hold or alienate property. As it has been said the purpose clause in the AOI grants
as well as limits the powers which a corporation may exercise. Verily, WON the
acquisition of such property is within the corporate powers or authority may
reasonably be determined from the purpose or purposes indicated in the AOI.
LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET AL.,
respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion executed a chattel
mortgage covering a certificate of public convenience granted to him to operate
taxicab service of 27 units in Manila, in favor of petitioner, to secure a loan
evidenced by a promissory note guaranteed by Concepcion and one Placid Esteban.
Concepcion mortgaged the same certificate to cover a second loan with
Rehabilitation Finance.
Petitioner filed an action to foreclose the mortgage. While it was pending, RF also
foreclosed the second chattel mortgage where the certificate was sold at a public
auction in favor of AD Santos who applied for the approval of the sale which was
granted by the Public Service Commission.
Later on, the CFI rendered a judgment in favor of petitioner, where the certificate
was sold at a public auction in favor of the petitioner who immediately filed for
approval with the Commission. AD Santos Inc., recipient of the certificate from AD
Santos, opposed the application for approval.
ISSUE: WON Petitioner may acquire the certificate of public convenience?
HELD: No. Petitioner claims in this regard that its corporate purposes are to carry on
a general mercantile and commercial business, etc., and that it is authorized in its
articles of incorporation to operate and otherwise deal in and concerning
automobiles and automobile accessories' business in all its multifarious ramification
(petitioner's brief p. 7) and to operate, etc., and otherwise dispose of vessels and
boats, etc., and to own and operate steamship and sailing ships and other floating
craft and deal in the same and engage in the Philippine Islands and elsewhere in the
transportation of persons, merchandise and chattels by water; all this incidental to
the transportation of automobiles ( id . pp. 7-8 and Exhibit B).
We find nothing in the legal provision and the provisions of petitioner's articles of
incorporation relied upon that could justify petitioner's contention in this case. To the
contrary, they are precisely the best evidence that it has no authority at all to engage
in the business of land transportation and operate a taxicab service. That it may
operate and otherwise deal in automobiles and automobile accessories; that it may
engage in the transportation of persons by water does not mean that it may engage
in the business of land transportation — an entirely different line of business. If it
could not thus engage in the line of business, it follows that it may not acquire a
certificate of public convenience to operate a taxicab service, such as the one in
question, because such acquisition would be without purpose and would have no
necessary connection with petitioner's legitimate business.
GOVERNMENT VS. EL HOGAR FILIPINO
(supra) – the directors of El Hogar Filipino erected a modern reinforced concrete
office building at the site of its old building. The acquisition of the lot and the
construction of the new office building thereon is not the subject of the second cause
of action for being ultra vires on the part of the corporation.
ISSUE: WON the erection of the building was reasonable?
HELD: Yes. With this contention we are unable to agree. Under the Corporation Law,
every corporation has the power to purchase, hold and lease such real property as
the transaction of the lawful business of the corporation may reasonably and
necessarily require. When this property was acquired in 1916, the business of El
Hogar Filipino had developed to such an extent, and its prospects for the future were
such as to justify its directors in acquiring a lot in the financial district of the City of
Manila and in constructing thereon a suitable building as the site of its offices; and it
cannot be fairly said that the area of the lot — 1,413 square meters — was in excess
of its reasonable requirements. The law expressly declares that corporations may
acquire such real estate as is reasonably necessary to enable them to carry out the
purposes for which they were created; and we are of the opinion that the owning of a
business lot upon which to construct and maintain its offices is reasonably necessary
to a building and loan association such as the respondent was at the time this
property was acquired. A different ruling on this point would compel important
enterprises to conduct their business exclusively in leased offices — a result which
could serve no useful end but would retard industrial growth and be inimical to the
best interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully
acquired by the respondent, it is entitled to the full beneficial use thereof. No
legitimate principle can discovered which would deny to one owner the right to enjoy
his (or its) property to the same extent that is conceded to any other owner; and an
intention to discriminate between owners in this respect is not lightly to be imputed to
the Legislature. The point here involved has been the subject of consideration in
many decisions of American courts under statutes even more restrictive than that
which prevails in this jurisdiction; and the conclusion has uniformly been that a
corporations whose business may properly be conducted in a populous center may
acquire an appropriate lot and construct thereon an edifice with facilities in excess of
its own immediate requirements
It would seem to be unnecessary to extend the opinion by lengthy citations upon the
point under consideration, but Brown vs. Schleier (118 Fed., 981), may be cited as
being in harmony with the foregoing authorities. In dealing with the powers of a
national bank the court, in this case, said:
When an occasion arises for an investment in real property for either of the purposes
specified in the statute the national bank act permits banking associations to act as
any prudent person would act in making an investment in real estate, and to exercise
the same measure of judgment and discretion. The act ought not to be construed in
such a way as to compel a national bank, when it acquires real property for a
legitimate purpose, to deal with it otherwise than a prudent land owner would
ordinarily deal with such property.
At any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining
the validity of the acts alleged in the second cause of action to have been done by
the respondent in excess of its powers that we refrain
from commenting at any length upon said cases. The ground stated in the second
cause of action is in our opinion without merit.
THE DIRECTOR OF LANDS, petitioner, vs. THE HONORABLE COURT OF
APPEALS and IGLESIA NI CRISTO, respondents (GR No. L56613; March 14, 1988)
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
registration of a parcel of land which it claimed to have acquired by virtue of a Deed
of Absolute Sale from Aquelina de la Cruz, alleging that the applicant and its
predecessors-in-interest have been in actual, continuous, public, peaceful and
adverse possession and occupation of the said land for more than 30 years, which
was opposed by the Government as represented by the Director of Lands. The CFI
and the CA ruled in favor of INC.
ISSUE: WON the corporation may acquire the land in question?
HELD Yes. As observed at the outset, had this case been resolved immediately after
it was submitted for decision, the result may have been quite adverse to private
respondent. For the rule then prevailing under the case of Manila Electric Company
v. Castro - Bartolome et al., 114 SCRA 799, reiterated in R e p u blic v . Villa n u e v
a , 114 SCRA 875 as well as the other subsequent cases involving private
respondent adverted to above', is that a juridical person, private respondent in
particular, is disqualified under the 1973 Constitution from applying for registration in
its name alienable public land, as such land ceases to be public land "only upon the
issuance of title to any Filipino citizen claiming it under section 48[b]" of
Commonwealth Act No. 141, as amended. These are precisely the cases cited by
petitioner in support of its theory of disqualification.
Since then, however, this Court had occasion to re-examine the rulings in these
cases vis-a-vis the earlier cases of Carino v. Insular Government, 41 Phil. 935, Susi
v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among others. Thus, in the
recent case of Dir e c t o r o f L a n d s v . I n t e r m e dia t e Appellate Court , 146
SCRA 509, We categorically stated that the majority ruling in Meralco is "no longer
deemed to be binding precedent", and that "[T]he correct rule, ... is that alienable
public land held by a possessor, personally or through his predecessors-in-interest,
openly, continuously and exclusively for the prescribed statutory period [30 years
under the Public Land Act, as amended] is converted to private property by mere
lapse or completion of said period, ip s o j u r e ." We further reiterated therein the
timehonored principle of non-impairment of vested rights.
The crucial factor to be determined therefore is the length of time private respondent
and its predecessors-in-interest had been in possession of the land in question prior
to the institution of the instant registration proceedings. The land under consideration
was acquired by private respondent from Aquelina de la Cruz in 1947, who, in turn,
acquired by same by purchase from the Ramos brothers and sisters, namely:
Eusebia, Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of
Commonwealth Act No. 141, as amended, "those who by themselves or through
their predecessorsin-interest have been in open, continuous, exclusive and notorious
possession and occupation of agricultural lands of the public domain, under a bona
fide claim of acquisition or ownership, for at least thirty years immediately preceding
the filing of the application for confirmation of title except when prevented by war or
force majeure" may apply to the Court of First Instance of the province where the
land is located for confirmation of their claims, and the issuance of a certificate of title
therefor, under the Land Registration Act. Said paragraph [b] further provides that
"these shall be conclusively presumed to have performed all the conditions essential
to a Government grant and shall be entitled to a certificate of title under the
provisions of this chapter." Taking the year 1936 as the reckoning point, there being
no showing as to when the Ramoses first took possession and occupation of the
land in question, the 30-year period of open, continuous, exclusive and notorious
possession and occupation required by law was completed in 1966.
The completion by private respondent of this statutory 30-year period has dual
significance in the light of Section 48[b] of Commonwealth Act No. 141, as amended
and prevailing jurisprudence: [1] at this point, the land in question ceased by
operation of law to be part of the public domain; and [2] private respondent could
have its title thereto confirmed through the appropriate proceedings as under the
Constitution then in force, private corporations or associations were not prohibited
from acquiring public lands, but merely prohibited from acquiring, holding or leasing
such type of land in excess of 1,024 hectares. If in 1966, the land in question was
converted ipso jure into private land, it remained so in 1974 when the registration
proceedings were commenced. This being the case, the prohibition under the 1973
Constitution would have no application. Otherwise construed, if in 1966, private
respondent could have its title to the land confirmed, then it had acquired a vested
right thereto, which the 1973 Constitution can neither impair nor defeat.
H. POWER TO ENTER INTO MERGER OR CONSOLIDATION
This is an express power granted by the law under the Code, particularly Title IX
thereof.
I. POWER TO MAKE REASONABLE DONATIONS
Ordinarily, a pure gift of funds or property by a corporation not created for charitable
purpose is not authorized and would constitute a violation of the rights of its
stockholders unless it is empowered by statute. There are circumstances, however,
under which a donation by a corporation may be to it benefit as a means of
increasing its business or promoting patronage.
Thus, Sec. 36 (9) expressly authorizes a corporation to make donations, subject to
the following limitations: 1. The donation must be reasonable; 2. It must be for public
welfare, or for hospital, charitable, scientific, cultural or similar purpose; and 3. It
shall not be in aid of political party or candidate, or for purposes of partisan political
activity.
J. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS
It is now generally recognized in almost all jurisdiction to empower a corporation to
establish pension plans, pension trust, profit sharing plans, stock bonus or stock
option plans and other incentive plans to directors, officers and employees. In fact,
the power may include any act to promote convenience, welfare and benefit of the
employees or officers.
REPUBLIC VS. ACOJE MINING COMPANY INC.
(7 SCRA 361; Feb. 28,
1963) - A post office branch was opened in herein respondent’s mining camp at Sta.
Cruz Zambales, at its request, where Hilario M. Sanchez, an employee of such
company, was the postmaster. Prior to the opening the company, at the request of
the Bureau of Posts, adopted a resolution that the former would assume full
responsibility for all cash received by the postmaster. On May 11, 1954, the
postmaster went on a three day leave but never returned. As a result, an action was
brought by the government to recover P13,867.24, the amount of shortage in the
accounts of the postmaster, from the company.
ISSUE: WON the subject resolution is within the powers of the company to adopt?
HELD: Yes. The opening of the post office branch was undertaken because of a
request submitted by respondent company to promote the convenience and benefit
of its employees. The idea did not come from the government and the Director of
Posts was prevailed upon to agree to the request only after studying the necessity
for its establishment and after imposing upon the company certain requirements
intended to safeguard and protect the interest of the government. Accordingly, the
company cannot now be heard to complain of its liability upon the technical plea that
the resolution is ultra vires. The least that can be said is that it cannot now go back
on its plighted word on the ground of estoppel.
The resolution covers a subject which concerns the benefit, convenience and welfare
of the company’s employees and their families. There are certain corporate acts that
may be performed outside of the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that “although not expressly authorized to do so a
corporation may become a surety where the particular transaction is reasonably
necessary or proper to the conduct of its business”, and here it is undisputed that the
establishment of the local post office is a vital improvement in the living condition of
its employees and laborers who came to settle in it mining camp which is far
removed from the postal facilities or means of communication accorded to people
living in a city or municipality.
IMPLIED POWERS
Sec. 36. Xxx
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation
It is a question, in each case, of the logical relation of the act to the corporate
purpose expressed in the charter. For if the act is one which is lawful in itself and not
otherwise prohibited, and is done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those ends in a substantial and not in a
remote and fanciful sense, it may be fairly considered within the corporation’s charter
powers (Montelibano vs. Bacolod - Murcia Milling Co., Inc. as cited in NPC vs.
VERA)
I. POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY
TO CARRY OUT ITS PURPOSES
TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C
(21 SCRA 198;
S e p t. 2 5 , 1 9 6 7 ) – Respondent Filipinas Cement Corporation filed an
application with herein respondent PSC for a certificate of public convenience to
install, maintain and operate an electric plant in Teresa, Rizal for the purpose of
supplying electric power and light to its cement factory and its employees living
within its compound. Herein petitioner, operating an electric plant in Teresa Rizal
filed an opposition claiming that Filipinas is not authorized to operate the proposed
electric plant under its articles of incorporation. PSC decided in favor of Filipinas.
ISSUE: WON under its articles of incorporation, Filipinas is authorized to operate
and maintain an electric plant?
HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to secure from
any governmental, state, municipality, or provincial, city or other authority, and to
utilize and dispose of in any lawful manner, rights, powers, privileges, franchises and
concessions – obviously necessary or at least related to the operation of its cement
factory. Moreover, said AOI also provide that the corporation may generally perform
any and all acts connected with the business of manufacturing portland cement or
arising therefrom or incidental thereto.
It cannot be denied that the operation of an electric light, heat and power plant is
necessarily connected with the business of manufacturing cement. If in the modern
world where we live today electricity is virtually a necessity for our daily needs, it is
more so in the case of industries like the manufacture of cement.
NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
FACTS: Private Respondent Sea Lion International Port Terminal Services Inc. filed
a complaint for prohibition and mandamus with damages against petitioner NPC and
Philippine Ports Authority after NPC did not renew its Contract for Stevedoring
Services for coal-handling of NPC’s plant and in taking over its stevedoring services.
ISSUE: WON NPC may embark in stevedoring and arrastre services?
HELD: Yes. The NPC was created and empowered not only to construct, operate
and maintain power plants, reservois, transmission lines and other works, but also:
… t o e x e r cis e s u c h p o w e r s a n d d o s u c h t hin g s a s m a y b e r e a s o
n a bly necessary to carry out the business and purposes for which it was organized,
or which, from time to time, may be declared by the Board to be necessary, useful,
incidental or auxiliary to accomplish said purpose… (Sec. 3[1] of RA 6395, as
amended)
To determine whether or not the NPC act falls within the purview of the above
provision, the Court must decide whether or not a logical and necessary relation
exists between the act questioned and the corporate purpose expressed in the NPC
charter. For if the act is one which is lawful in itself and not otherwise prohibited, and
is done for the purpose of serving corporate ends, and reasonably contributes to the
promotion of those ends in a substantial and not in a remote and fanciful sense, it
may be fairly considered within the corporation’s charter powers (Montelibano vs.
Bacolod - Murcia Milling Co., Inc.)
In the instant case, it is an undisputed fact that the pier owned by NPC, receives
various shipment of coal which is used exclusively to fuel the Batangas Coal-Fired
Thermal Power Plant of the NPC for the generation of electric power. The
stevedoring services which involve the unloading of the coal shipments into the NPC
pier for its eventual conveyance to the power plant are incidental and indispensable
to the operation of the plant. The Court holds that NPC is empowered under its
Charter to undertake such services, it being reasonably necessary to the operation
and maintenance of the power plant.
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988)
FACTS: 14 plaintiffs, all associate members of the International School, Inc. brought
an action for injunction against 10 members of the Board of Trustees, after a letter of
Donal Marshall, president of the board, was sent stating that the school would be
collecting a “development fee” of P2,625 per enrollee for the purpose of constructing
new buildings and remodel existing ones to accommodate the increasing enrollment
in the school which would need P35M. The CFI of Manila dismissed the complaint.
ISSUE: WON the imposition of the development fee is within the powers of the
school?
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol,
expressly authorized the Board of Trustees “upon consultation with the Secretary of
Education and Culture” to determine the amount of fees and assessments which
may be reasonably imposed upon its students, to maintain or conform to the school’s
standard of education. Such consultation complied with and the Secretary expressed
his conformity with the reasonableness of the assessment. The lower court observed
that:
Xxx the expansion of the school facilities, which is to be done by improving old
buildings and/or constructing new ones, is an ordinary business transaction well
within the competence of the Board of Trustees to act upon. Xxx Being directly
related to the purpose of elevating and maintaining the school’s standard of
instruction, which is ordained in fact by PD 732, the expansion cannot result in any
radical or fundamental change in the kind of activity being conducted by the school
that might require the consent of the members composing it.
J. POWER TO EXTEND OR SHORTEN CORPORATE TERM
This has been discussed in Chapter 5: CORPORATE CHARTER AND ITS
AMENDMENTS.
Sec. 37.
P o w e r t o e x t e n d o r s h o r t e n c o r p o r a t e t e r m . - A private corporation
may extend or shorten its term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or trustees and ratified at a
meeting by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise his
appraisal right under the conditions provided in this code.
From the above-provision and jurisprudence, the requirements and procedure for
extending or shortening the corporate term are as follows: 1. Approval by the
majority vote of the BOD/T; 2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock (including non-voting shares) or 2/3 of the
members in case of non-stock corporations; 3. The ratification must be made at a
meeting duly called for that purpose; 4. Prior written notice of the proposal to extend
or shorten the corporate term must be made stating the time and place of meeting
addressed to each stockholder or member at his place of residence, either by mail or
personal service; 5. In case of extension, the same cannot be made earlier than 5
years prior to the original or subsequent expiry date unless there are justifiable
reasons for an earlier extension; 6. In case of extension, the same must be made
during the lifetime of the corporation; 7. Any dissenting stockholder may exercise his
appraisal right; 8. Submission of the amended articles with the SEC; and 9. Approval
thereof by the SEC (as required under Sec. 37 for extension, and Sec. 120 for
shortening the term with the effect of dissolution)
READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC
K. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE
OR INCREASE BONDED INDEBTEDNESS
Sec. 38. Power to increase or decr ease capital stock; incur, create or i n c r e a s e
b o n d e d i n d e b t e d n e s s . - No corporation shall increase or decrease its
capital stock or incur, create or increase any bonded indebtedness unless approved
by a majority vote of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring, creating or increasing of
any bonded indebtedness. Written notice of the proposed increase or diminution of
the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of
any bonded indebtedness is to be considered, must be addressed to each
stockholder at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with; (2) The amount
of the increase or diminution of the capital stock; (3) If an increase of the capital
stock, the amount of capital stock or number of shares of no-par stock thereof
actually subscribed, the names, nationalities and residences of the persons
subscribing, the amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each stock-
holder if such increase is for the purpose of making effective stock dividend therefor
authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5)
The actual indebtedness of the corporation on the day of the meeting; (6) The
amount of stock represented at the meeting; and (7) The vote authorizing the
increase or diminution of the capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing
of any bonded indebtedness shall require prior approval of the Securities and
Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation
and the other shall be filed with the Securities and Exchange Commission and
attached to the original articles of incorporation. From and after approval by the
Securities and Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) percent of
the subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the
same, with the approval by a majority vote of the board of trustees and of at least
two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof.
The following requirements or procedure should be complied with: 1. Approval by the
majority vote of the BOD/T; 2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock (including non-voting shares) or 2/3 of the
members in case of non-stock corporations at a meeting duly called for that purpose;
3. Prior written notice of the proposal to extend or shorten the corporate term must
be made stating the time and place of meeting addressed to each stockholder or
member at his place of residence, either by mail or personal service; 4. A certificate
in duplicate must be signed by a majority of the directors of the corporation,
countersigned by the chairman and the secretary of the stockholders meeting,
setting forth the matters contained in subsection 1 to 7 of Sec. 38; 5. In case of
increase in capital stock, 25% of such increased capital must be subscribed and that
at least 25% of the amount subscribed must be paid either in cash or property; 6. In
case of decrease of capital stock, the same must not prejudice the right of the
creditors; 7. Filing of the certificate of increase and amended AOI with the SEC; and
8. Approval thereof by the SEC.
METHODS OF INCREASING CAPITAL STOCK : 1. Increase the par value of the
existing number of shares without increasing the number of shares; 2. Increase the
number of existing shares without increasing the par value thereof; 3. Increasing the
number of shares and at the same time increasing the par value of the shares
REASONS/PURPOSE FOR THE INCREASE: 1. Expansion; 2. Payment of Debt
Obligations; 3. To acquire additional assets such as providing cars to employees to
distribute the goods;
*Nothing in law prohibits increase of capital stock
REASONS FOR DECREASE: 1. To reduce or wipe out existing deficit where no
creditors would thereby by affected; 2. When the capital is more than what is
necessary to procreate the business or reduction of capital surplus; 3. To write down
the value of its fixed assets to reflect their present actual value in case where there is
a decline in the value of the fixed assets of the corporation.
T R U S T F U N D D O C T R I N E : The subscriptions to capital stock of the
corporation constitute a fund which the creditors have a right to look up for
the satisfaction of their claims. Accordingly, if the decrease would affect the rights of
creditors, the same would not be approved by the SEC.
PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923) - Shortly
after its incorporation, the stockholders of Cooperativa Naval Filipina, adopted a
resolution to the effect that the capital should be reduced by 50% and the
subscribers be released from the obligation to pay their unpaid balance.
In the course of time, the company became insolvent and went into the hands of
Philippine Trust Company (Philtrust), as assignee in bankruptcy, and by it this action
was instituted to recover ½ of the stock subscription of herein defendant who
subscribed to 450 of the 1,000 authorized capital stock.
It does not appear that the formalities under the Corporation Code for the reduction
of capital stock were observed and in particular it does not appear that any certificate
was at any time filed in the Bureau of Commerce and Industry, showing such
reduction.
Respondent judge ruled in favor of Philtrust and directed respondent to pay ½ of the
subscription price of his shares.
ISSUE: WON the reduction is valid and proper?
HELD: No. A corporation has no power to release an original subscriber to its capital
stock from the obligation of paying for his shares, without a valuable consideration
for such release; and as against creditors a reduction of the capital stock can take
place only in the manner and under the conditions prescribed by the statute or the
charter or the AOI. Moreover, strict compliance with the statutory regulations is
necessary. In the case before us, the resolution releasing the shareholders from their
obligation to pay 50% of their respective subscriptions was an attempted withdrawals
of so much capital from the fund upon which the company’s creditors were entitled
ultimately to rely and, having been effected without compliance with the statutory
requirements, was wholly ineffectual.
MADRIGAL & COMPANY VS. ZAMORA
(151 SCRA 355; June 30, 1987) - The Madrigal Central Office Employees Union
sought for the renewal of its CBA, proposing a P200 wage increase and an
allowance of P100 a month. Petitioner company requested for the deferment of its
negotiation.
Meanwhile, the company effected two reductions of its capital stock by issuing
marketable securities owned by petitioner in exchange for shareholders’ shares.
After the petitioner’s failure to sit down with the respondent union, the latter
commenced a case with the NLRC for unfair labor practice. In due time, petitioner
filed its position paper, alleging operating losses.
The Labor Arbiter rendered a decision in favor of respondent Union.
ISSUE: WON the decrease in capital stock is valid and binding?
HELD: No. What clearly emerges from the recorded facts is that the petitioner,
awash with profits from its business operations but confronted with the demand of
the union for wage increase, decided to evade its responsibility towards the
employees by a devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all indications, just a mask for
the purge of union members, who, by then, had agitated for wage increases. In the
face of the petitioner company’s piling profits, the unionists had the right to demand
for such salary adjustments.
That the petitioner made quite handsome profits is clear from the records.
This court is convinced that the petitioner’s capital reduction efforts were, to begin
with, a subterfuge, a deception as it were, to camouflage the fact that it had been
making profits, and consequently, to justify the mass layoff in it employee ranks,
especially the union members. They were nothing but a premature and plain
distribution of corporate assets to obviate a just sharing to labor of the vast profits
obtained by its joint efforts with capital through the years. Surely, we can neither
countenance nor condone this. It is an unfair labor practice.
L. POWER TO DENY PRE-EMPTIVE RIGHT
PRE-EMPTIVE RIGHT is a right granted by law to all existing stockholders of a stock
corporation to subscribe to all issues or disposition of shares of any class, in
proportion to their respective holdings, subject only to the limitation imposed under
Sec. 39, which provides:
Sec. 39.
Power to deny pre - emptive right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless such right is denied by
the articles of incorporation or an amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued in compliance with laws
requiring stock offerings or minimum stock ownership by the public; or to shares to
be issued in good faith with the approval of the stockholders representing twothirds
(2/3) of the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
BASIS OF RIGHT : The grant of this right is for the preservation, unimpaired and
undiluted, of the old stockholders’ relative and proportionate voting strength and
control, that is, the existing ratio of their property interest and voting power in the
corporation.
EXCEPTIONS (Under Sec. 39): 1. When shares to be issued is in compliance with
laws requiring stock offerings or minimum stock ownership by the public; or 2.
Shares to be issued in good faith with the approval of the stockholders representing
2/3 of the outstanding capital stock either: a. In exchange for property needed for
corporate purpose; or b. In payment of a previously contracted debt.
The exceptions will not apply to stockholders of close corporation whose preemptive
right, is broader if not absolute. See Sec. 102.
The right may likewise be lost by waiver, express or implied or inability or failure to
exercise it having been notified of the proposed disposition of shares.
BENITO VS. SEC
( 1 2 3 S C R A 7 2 2 ; J uly 2 5 , 1 9 8 3 ) -Respondent Jamiatul Philippines – Al
Islamia, Inc. was incorporated with P2,000,000 authorized capital stock divided into
20,000 shares, of which 460 belong to herein petitioner. In a stockholders meeting,
an increase of the authorized capital stock to P1,000,000 was approved, where the
previously unissued shares were all issued.
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC
alleging that the additional issue of previously unissued shares was made in violation
of his pre-emptive right and that the increase of capital stock was illegal considering
that the stockholders on record were not notified, and that such issuance be
cancelled.
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the original
unsubscribed shares, but can exercise such right with regards the increase
capitalization.
ISSUE: WON the above ruling is correct?
HELD: Yes. The issuance of the unsubscribed portion of the capital stock or
P110,980 is valid even if assuming that it was made without notice to the
stockholders as claimed by petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders’ meeting is
necessary to consider it because such issuance does not need approval of
stockholders.
The general rule is that pre-emptive right is recognized only with respect to new
issue of shares, and not with respect to additional issues of originally authorized
shares. This is on theory that when a corporation, at its inception offers its first
shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are reoffered, he cannot
therefore claim a dilution of interest.
With respect to the claim that the increase in the authorized capital stock was without
consent, expressed or implied, of the stockholder, it was the finding of the
Commission that a meeting was called for the purpose. The petitioner had not
sufficiently overcome the evidence of respondent that such meeting was in fact held.
What petitioner successfully proved, however, was the fact that he was not notified
of said meeting and that he never attended the same as he was out of the country at
the time, attending the Mecca pilgrimage. Another thing that petitioner was able to
disprove was the allegation that all stockholders who did not subscribe to the
increase have waived their pre-emptive right. As far as petitioner is concerned, he
had not waived his pre-emptive right to subscribe as he could not have done so for
the reason that he was not present at the meeting and had not executed a waiver,
thereof. Not having waived such right and for reasons of equity, he may still be
allowed to subscribe to the increased capital stock proportionate to his present
shareholdings.
M. POWER TO SELL OR DISPOSE OF ASSETS
Sec. 40.
Sale or other disposition of assets. - Subject to the provisions of existing laws on
illegal combinations and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill,
upon such terms and conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock corporation, by the vote of at least
to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property and assets, subject to
the rights of third parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without
the authorization by the stockholders or members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of any of its property and assets if the same
is (1) necessary in the usual and regular course of business of said corporation or (2)
if the proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by this section.
The conditions for the valid exercise of this power are thus as follows: 1. Resolution
by a majority of the BOD/T; 2. Authorization from the stockholders representing at
least 2/3 of the outstanding capital stock or 2/3 of the members; 3. The ratification of
the stockholders or member must be made at a meeting duly called for that purpose;
4. Prior written notice of the proposed action and of the time and place of meeting
must be made addressed to all stockholders of record, either by mail or personal
service; 5. The sale of the assets shall be subject to the provisions of existing laws
on illegal combinations and monopolies; and 6. Any dissenting stockholder shall
have the option to exercise his appraisal right.
The above requirements will not apply: 1. In case the sale is NOT covering all or
substantially all of the assets of a corporation as to render it incapable of continuing
the business or accomplishing the purpose for which it was incorporated; or if the
proceeds are to be used to continue the conduct of the remaining business of the
company; 2. If the sale is in the usual and regular course of business of the
company.
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA
(272 SCRA 454;
M a y 4 , 1 9 9 7 ) – The Islamic Directorate of the Philippines received two parcels of
land from the Libyan government for the purpose of putting up a Mosque, Madrasah
(arabic school) and other religious infrastructures. In 1972, Martial Law was
declared, most of the members of the Board of Trustees, together with petitioner
Sen. Mamintal Tamano, fled to the middleeast to escape political prosecution.
Thereafter, two Muslim groups sprung claiming to be the legitimate IDP. One headed
by Engr. Farouk Caprizo, not having been properly elected as new members of the
Board of Trustees caused to be sold, through a resolution of IDP, the two lots to
respondent Iglesia Ni Cristo.
The 1971 Board of Trustees now filed a petition to declare the sale null and void.
ISSUE: WON the sale is valid?
HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave its
consent through a legitimate Board of Trustees. Therefore, this is not a case of
vitiated consent, but one where consent on the part of one of the contracting parties
is totally wanting. Ineluctably, the subject sale is void and produces no effect
whatsoever.
The Caprizo group-INC sale is further deemed null and void ab initio because of the
Caprizo Group’s failure to comply with Sec. 40 of the Corporation Code pertaining to
the disposition of all or substantially all assets of the corporation.
The Tandang Sora property, it appears from the records, constitutes the only
property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the
corporate property and assets of IDP falling squarely within the contemplation of
Sec. 40. For the sale to be valid, the majority vote of the legitimate Board of
Trustees, concurred in by vote of at least 2/3 of the bona fide members of the
corporation should have been obtained. These twin requirements were not met as
the Caprizo Groups which voted to sell the property was a fake Board and those
whose names and signatures were affixed by the Caprizo Group together with the
sham Board Resolution authorizing negotiation for the sale were, from all indications,
not bona fide members of the IDP as they were made to appear to be.
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov. 29, 1965) -
The appellant secured in a civil case against Insular Famrs, Inc. a judgment for the
balance of the price of a pump sold by the former to the latter. A writ of execution
was issued but was returned unsatisfied, saying that Insular Farms had no leviable
property. Soon after appellant filed with the same Municipal Court the present action
against Pacific Farms claiming it to be an alter ego of Insular Farms, which the court
denied. On appeal, the CFI and CA also denied the petition.
ISSUE: WON Pacific Farms should answer for the liability of Insular Farms?
HELD: No. It appears on record that the appellee purchase 1,000 shares of stock of
Insular Farms, and thereupon sold said shares of stock to certain individuals, who
forthwith reorganized said corporation and that the board of
directors thereof, as reorganized, then caused its assets, including its leasehold right
over a public land in Pangasinan to be sold to herein appellee. These facts do not
prove that the appellee is an alter ego of Insular Farms, or is liable for its debts.
Generally where on corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except: (1) where the purchaser expressly or impliedly agrees to assumes
such debts; (2) where the transaction amounts to a consolidation or merger of the
corporations; (3) where the purchasing corporation is merely a continuation of the
selling corporation; and (4) where the transaction is entered into fraudulently in order
to escape liability for such debts.
In the case at bar, there is neither proof nor allegation of the foregoing exceptions. In
fact, these sales took place not only over 6 months before the rendition of the
judgment sought to be collected in the present action, but also, appellee purchase
the shares of stock of Insular Farms as the highest bidder at an auction sale held at
the instance of a bank to which said shares had been pledged as security for the
obligation of Insular Farms in favor of said bank.
N. POWER TO ACQUIRE OWN SHARES
Sec. 41.
Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends; 2. To collect or
compromise an indebtedness to the corporation, arising out of unpaid subscription,
in a delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code.
The limitation that the corporation must at all times have “unrestricted retained
earnings” is a condition for the exercise of this power, EXCEPT: 1. Redemption of
redeemable shares under Sec. 8; 2. Exercise of stockholders right to compel a close
corporation to purchase his shares for any reason under Sec. 105 when the
corporation has sufficient assets in its book to cover its debts and liabilities exclusive
of capital stock; 3. In case of deadlocks under Sec. 104.
Once purchased, the shares are considered as treasury shares and while they
remain so, they have no voting rights and dividend rights. The corporation may (1)
re-issue them even below par; (2) issue them as stock dividends; (3) retire or cancel
them and thereby remove from issue effectively reducing the number of shares
issued stated in the AOI.
STEINBERG VS. VELASCO
(52 Phil 953; Ma rch 12, 1929) - the Board of Directors of Trading Company
approved and authorized the purchases of the capital stock of the company from its
various stockholder, herein respondents, at par value amounting to P3,300.
Petitioner assails the recovery of the amount paid to such stockholders and the
P3,000 dividends declared which were claimed to be made to the injury and in fraud
of its creditors. The complaint was dismissed.
ISSUE: WON recovery can be made?
HELD: Yes. The Board of Directors acted on the assumption that it had accounts
receivable of the face value of P19,126.02 but there was no stipulation as to the
value of such accounts and P12,512.47 of which had but little, if any value. The
purchase of the stocks and the dividend declaration further decreased the assets of
the corporation. The profits amounted only to P3,314.72. In other words, that the
corporation did not then have actual bona fide surplus from which the dividends
could be paid, and that the payment of them in full at the time would “affect the
financial condition of the corporation”. It is indeed peculiar that the action of the
board in the assailed acts was all done at the same meeting of the board of
directors, and it appears that the stockholders, whose shares were purchased, were
former directors and resigned before the board approved the purchase and
declaration of dividends. In other words, the directors were permitted to resign so
that they could sell their stock to the corporation. In this situation and upon this state
of facts, it is very apparent that the directors did not act in good faith or that they
were grossly ignorant of their duties.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are important
and we have given them consideration which they deserve.
O. POWER TO INVEST FUNDS
Sec. 42.
Power to invest corporate funds in another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the primary
purpose for which it was organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations, at a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed investment and the time and
place of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal right as provided in this Code:
Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be necessary.
“MAY INVEST FUNDS” has been held by the SEC to mean an investment in the
form of money, stock, bonds and other liquid assets and does not include real
properties or other fixed assets, otherwise the law would have phrased Sec. 42 to
include “assets” rather than “to invest funds”.
SECONDARY PURPOSE: the law uses the phrase “for any purpose other than the
primary purpose” signifying that even if the business or undertaking is allowed or
authorized in the secondary purpose or purposes of the corporation, the provision of
Sec. 42 would apply.
REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE FUNDS: 1.
Resolution by a majority of the BOD/T; 2. Ratification by the stockholders
representing 2/3 of the outstanding capital stock (or 2/3 of members); 3. The
ratification must be made at a meeting duly called for that purpose; 4. Prior written
notice of the proposed investment and the time and place of the meeting shall be
made, addressed to each stockholder or member by mail or by personal service; and
5. Any dissenting stockholder shall have the option to exercise his appraisal right.
RATIFICATION: as a requirement, applies only to investments that are beyond the
corporation’s primary purpose, or outside the express or implied powers of the
investing corporation. Thus, if the investment is reasonably necessary to accomplish
its primary purpose, the approval of the stockholders or members is not required.
DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA 247; Feb. 2 8 , 1
9 6 9 ) - Defendant Ma-ao Sugar Central Co, Inc., engaged in the manufacture of
sugar, invested P655,000 in shares of stock of Philippine Fiber Processing Co., Inc.,
which is engaged in the manufacture of sugar bags. The sale, though not previously
authorized, was ratified by the 2/3 vote of the stockholders. Claiming the business of
defendant is not related to that of Philippine Fiber, such sale was attacked but the
trial court decided on its legality.
ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec. 17-1/2
of the Corporation Law?
HELD: Yes. In his work entitled “The Philippine Corporation Law”, Professor Sulpicio
S. Guevarra of the UP College of Law, reconciled par. (9) and (10) of Sec. 13, as
follows:
“j. Power to acquire or dispose of shares or securities. – A private corporation, in
order to accomplish it purpose as stated in its articles of incorporation, and imposed
by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose
of shares, bonds, securities, and other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of the corporate purpose,
does not need the approval of the stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to accomplish the purpose
of its incorporation, the vote of approval of the stockholders is necessary”
“40. Power to invest corporate funds. – A private corporation has the power to invest
its corporate funds in any other corporation or business, or for any other purpose
other than the main purpose for which it was organized, provided that its board of
directors has been authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least two-thirds of the
voting power on such a proposal at a stockholders’ meeting called for that purpose.
When the investment is necessary to accomplish its purpose or purposes as stated
in its articles of incorporation, the approval of the stockholders is not necessary”
We agree with Professor Guevarra. We therefore agree with the finding of the lower
court that the investment in question does not fall under the purview of Sec. 17 ½ of
the Corporation Law.
JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE
COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,
ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO
TANJUATCO, SR., and EDUARDO R. VISAYA, respondents. (GR No. L - 45911;
April 11, 1979)
FACTS: Petitioner John Gokongwei alleged that the respondent corporation has
been investing corporate funds in other corporations or business outside of its
primary purpose in violation of Sec. 17 ½ of the Corporation Law.
Respondents sent notices of the annual stockholders’ meeting including in the
agenda thereof the re-affirmation of the authorization of the BOD by the stockholders
at the meeting to invest corporate funds in other companies or businesses or for
purposes other than the main purpose. An injunction was prayed for by petitioner,
but the date of hearing originally set was cancelled. No action was taken up to the
date of the filing of the instant petition.
ISSUE: WON respondent SEC committed grave abuse of discretion in allowing the
above agenda to be taken up in the stockholders’ meeting?
HELD: No. Section 17-1/2 of the Corporation Law allows a corporation to "invest its
funds in any other corporation or business or for any purpose other than the main
purpose for which it was organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding shares entitling them to
exercise at least two-thirds of the voting power. If the investment is made in
pursuance of the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for investment
and not to accomplish the purpose of its incorporation that the vote of approval of the
stockholders holding shares entitling them to exercise at least two-thirds of the voting
power is necessary.
As stated by respondent corporation, the purchase of beer manufacturing facilities by
SMC was an investment in the same business stated as its main purpose in its
Articles of Incorporation, which is to manufacture and market beer. It appears that
the original investment was made in 1947-1948, when SMC, then San Miguel
Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 19701971 thru the organization of SMI
in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co.,
Inc., supra, appears relevant. In said case, one of the issues was the legality of an
investment made by Manao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders' voting power, in the
Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of
sugar bags. The lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the investing
corporation and would aid it in its purpose, to require authority of the stockholders
would be to unduly curtail the power of the Board of Directors.”
Assuming
arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized acts of its officers or other
agents. This is true because the questioned investment is neither contrary to law,
morals, public order or public policy. It is a corporate transaction or contract which is
within the corporate powers, but which is defective from a supported failure to
observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting
power. This requirement is for the benefit of the stockholders. The stockholders for
whose benefit the requirement was enacted may, therefore, ratify the investment and
its ratification by said stockholders obliterates any defect which it may have had at
the outset. "Mere ultra vires acts", said this Court in Pirovano, "or those which are
not illegal and void ab initio , but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of May 10, 1977 cannot be construed as an
admission that respondent corporation had committed an ult r a vir e s act,
considering the common practice of corporations of periodically submitting for the
gratification of their stockholders the acts of their directors, officers and managers.
P. POWER TO DECLARE DIVIDENDS
DIVIDENDS are corporate profits set aside, declared and ordered by the BOD to be
paid to the stockholders. It is a fruit of investment, the recurrent return, analogous to
interest and rent upon other forms of invested capital.
Sec. 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided, further, That no stock
dividend shall be issued without the approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary under special circumstances
obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies.
UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of the
corporation which have not been allocated for any managerial, contractual or legal
purposes and which are free for distribution to the stockholders as dividends.
TYPES OF DIVIDENDS: 1. Cash dividends – payable in lawful money or currency;
2. Property dividends - those paid in the form property (e.g., bonds, notes, shares in
another corporation); 3. Stock dividends – corporation’s own shares of stock out of
the remaining unissued shares which would require the approval of the stockholders
representing 2/3 of the outstanding capital stock at a regular or special meeting duly
called for that purpose. This is to be valued at par value or issue price.
Cash and property dividends have the effect of reducing corporate assets to the
extent of the dividends declared. In stock dividends, it would generally not increase
the proportionate interest of the stockholders of the corporation although it will have
the effect of increasing the subscribed and paid-up capital (exception is when the
stock dividend declaration would result in fractional shares like when 1 share is
declared as dividend for every 9 shares held)
OVERISSUANCE OF SHARES: happens when a corporation issues shares beyond
its authorized capital stock, even in the form of stock dividends.
DELINQUENCY: is a requirement for the application of the second part of the first
paragraph of Sec. 43. Such that, cash dividends declared are first applied on the
unpaid balance on the subscription plus costs and expenses and stock dividends are
withheld until the subscription is fully paid.
WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled to declare
dividends, except: (1) When the unrestricted retained earnings is in excess of 100%
of the paid-up capital; and (2) In the case of Mandatory If Earned Preference Shares.
The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad faith; (2)
for a dishonest purpose; (3) they act fraudulently, oppressively, unreasonably or
unjustly; or (4) abuse of discretion can be shown as to impair the rights of the
complaining shareholders. The TEST of bad faith is to determine if the policy of the
directors is dictated by their personal interest rather than the corporate welfare.
WHEN DIVIDENDS RIGHTS VEST : It has been succinctly said that the right of the
stockholders to be paid dividends vest as soon as they have been lawfully and finally
declared by the BOD. It is not revocable unless: (1) it has not been officially
communicated to the stockholders; or (2) it is in the form of stock dividends which is
revocable any time prior to distribution because this does not result in the distribution
of assets but merely the division of existing shares of a stockholder into smaller units
or integers.
T R A N S F E R O F S H A R ES: The dividends already declared belong to the
owner at the time of declaration. Usually, however, the dividends are payable to
stockholders of record on a specific future date and as far as the corporation is
concerned, the registered owner is the one entitled to dividends. As against his
transferor, however, the transferee has presumably the right to such dividends and is
oftentimes taken into account in entering effecting the transfer of shares.
NIELSON & COMPANY, INC., plaintiff-appellant, vs. LEPANTO CONSOLIDATED
MINING COMPANY, defendant-appellee (GR No. L - 21601; Dec. 28, 1968)
FACTS: This is a motion for reconsideration filed by respondent Lepanto contending
that the order of the SC to pay Nielson 10% of the stock dividends, declared by
Lepanto during the extension of the contract, as compensation for services under a
management contract is in violation of the Corporation Law and that it could not be
the intention of the parties that the services of Nielson should be paid in stock
dividends.
ISSUE: WON Nielson & Co. is entitled to receive stock dividends?
HELD: No. The considerations for which shares of stock may be issued are: (1)
cash; (2) property; and (3) undistributed profits. Shares of stock are given the special
name "stock dividends" only if they are issued in lieu of undistributed profits. If
shares of stocks are issued in exchange of cash or property then those shares do
not fall under the category of "stock dividends". A corporation may legally issue
shares of stock in consideration of services rendered to it by a person not a
stockholder, or in payment of its indebtedness. A share of stock issued to pay for
services rendered is equivalent to a stock issued in exchange of property, because
services is equivalent to property. Likewise a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for cash. But a share of
stock thus issued should be part of the original capital stock of the corporation upon
its organization, or part of the stocks issued when the increase of the capitalization of
a corporation is properly authorized. In other words, it is the shares of stock that are
originally issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the corporation has
original shares of stock unsold or unsubscribed, either coming from the original
capitalization or from the increased capitalization. Those shares of stock may be
issued to a person who is not a stockholder, or to a person already a stockholder in
exchange for services rendered or for cash or property. But a share of stock coming
from stock dividends declared cannot be issued to one who is not a stockholder of a
corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation
declaring or authorizing such dividend. It is, what the term itself implies, a distribution
of the shares of stock of the corporation among the stockholders as dividends. A
stock dividend of a corporation is a dividend paid in shares of stock instead of cash,
and is properly payable only out of surplus profits. So, a stock dividend is actually
two things: (1) a dividend, and (2) the enforced use of the dividend money to
purchase additional shares of stock at par. When a corporation issues stock
dividends, it shows that the corporation's accumulated profits have been capitalized
instead of distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far from being a realization of
profits for the stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from surplus to assets and no
longer available for actual distribution. Thus, it is apparent that stock dividends are
issued only to stockholders. This is so because only stockholders are entitled to
dividends. They are the only ones who have a right to a proportional share in that
part of the surplus which is declared as dividends. A stock dividend really adds
nothing to the interest of the stockholder; the proportional interest of each
stockholder remains the same. If a stockholder is deprived of his stock dividends -
and this happens if the shares of stock forming part of the stock dividends are issued
to a non-stockholder — then the proportion of the stockholder's interest changes
radically. Stock dividends are civil fruits of the original investment, and to the owners
of the shares belong the civil fruits.
The term "dividend" both in the technical sense and its ordinary acceptation, is that
part or portion of the profits of the enterprise which the corporation, by its governing
agents, sets apart for ratable division among the holders of the capital stock. It
means the fund actually set aside, and declared by the directors of the corporation
as dividends and duly ordered by the director, or by the stockholders at a corporate
meeting, to be divided or distributed among the stockholders according to their
respective interests.
It is Our considered view, therefore, that under Section 16 of the Corporation Law
stock dividends cannot be issued to a person who is not a stockholder in payment of
services rendered. And so, in the case at bar Nielson can not be paid in shares of
stock which form part of the stock dividends of Lepanto for services it rendered
under the management contract. We sustain the contention of Lepanto that the
understanding between Lepanto and Nielson was simply to make the cash value of
the stock dividends declared as the basis for determining the amount of
compensation that should be paid to
Nielson, in the proportion of 10% of the cash value of the stock dividends declared.
And this conclusion of Ours finds support in the record.
Q. POWER TO ENTER INTO MANAGEMENT CONTRACT
Sec. 44.
Power to enter into management contract. - No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority
of the outstanding capital stock, or by at least a majority of the members in the case
of a non-stock corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed corporation, then
the management contract must be approved by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-
stock corporation. No management contract shall be entered into for a period longer
than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby
a corporation undertakes to manage or operate all or substantially all of the business
of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such service contracts
or operating agreements which relate to the exploration, development, exploitation or
utilization of natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations.
This provision was inserted to assure not only technical competence but continuity in
management policy in running corporate affairs which can be achieved through a
management contract.
REQUIREMENTS OF A VALID MANAGEMENT CONTRACT: 1. Resolution of the
BOD; 2. Approval by the stockholders representing a majority of the outstanding
capital stock or majority of the members of both the managing and the managed
corporation; 3. The approval of the stockholders or members must be made at the
meeting called for that purpose; and 4. The contract shall not be for a period longer
than 5 years for any one term, except those which relate to exploration, development
or utilization of natural resources which may be entered into for such periods as may
be provided by pertinent laws and regulations; 5. 2/3 of the stockholders or members
would be required, where: a. The stockholders representing the same interest of
both the managing and the managed corporation own or control more than 1/3 of the
total outstanding capital stock of the managing corporation; b. A majority of the
members of the BOD of the managing corporation also constitute a majority of the
directors of the managed corporation; c. The contract would constitute the
management or operation of all or substantially all of the business of another
corporation, whether such contracts are called service contracts. If it will not
constitute the management of all or substantially all of the business of another
corporation, the first paragraph of Sec. 44 will apply and not that of the second, that
is, only the vote of the majority is required.
R. ULTRA VIRES ACTS
Sec. 45.
Ultra vires acts of corporations. - No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles
of incorporation and except such as are necessary or incidental to the exercise of the
powers so conferred.
ULTRA VIRES ACTS are those which cannot be executed or performed by a
corporation because they are not within its express, inherent, or implied powers as
defined by its charter or AOI. Accordingly, it may be subject to a collateral attack
questioning the authority of the corporation to engage in such particular endeavor.
CONSEQUENCES: 1. On the Corporation itself: The proper forum may suspend or
revoke, after proper notice and hearing, the franchise or certificate of registration of
the corporation for serious misrepresentation as to what the corporation can do or is
doing to the great damage or prejudice of the general public. 2. On the rights of the
Stockholders: A stockholder may bring either an individual or derivative suit to enjoin
a threatened ultra-vires act or contract. If already performed, a derivative suit against
the directors may be filed, but their liability will depend on whether they acted in good
faith and with reasonable diligence in entering into the contract. 3. On the immediate
parties: a. If the contract is fully executed in both sides, the contract is effective and
the courts will not interfere to deprive either party of what has been acquired under it;
b. If the contract is executory on both sides, as a rule, neither party can maintain an
action for its non-performance; and c. Where the contract is executory on one side
only, and has been fully performed on the other, the courts differ as to whether an
action will lie on the contract against the party who has received benefits of
performance under it. Majority of the courts, however, hold that the party who has
received benefits from the performance is “estopped” to set up that the contract is
ultra vires to defeat an action on the contract.
READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje Minin g (both in
this chapter)
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO.
(96 Phil. 335; Dec.
2 9 , 1 9 5 4 ) - The Board of directors of defendant company adopted a resolution
wherein the proceeds of the insurance taken on the life of its previous President and
General Manager Enrico Privano be set aside and used to purchase 4,000 shares to
be given to Privano’s heirs, which was approved by the stockholders in a meeting
duly called for the purpose.
The donation of the shares was later on modified to transfer all the proceeds directly
to the heirs which would become a loan of the company with 5% interest per annum
and payable after the settlement of its bonded indebtedness, and still later, modified
to be payable “whenever the company is in a position to meet said obligation”.
On an opinion by the SEC, sought by the President of the corporation, Sergio
Osmena, Jr., it was opined by the SEC that the donation was void for being ultra
vires. The Board planned to adopt a different resolution to effect the donation but
failed to act on it. The heirs, through Mrs. Estefania R. Privano, acting as guardian,
demanded the settlement of the obligation.
ISSUE: WON the donation was an ultra vires act?
HELD: No. After a careful perusal of the AOI, we find that the corporation was given
broad and almost unlimited powers to carry out the purposes for which it was
organized among them, (1) “to invest and deal with the money of the company not
immediately required, in such manner as from time to time may be determined” and
(2) “to aid in any manner any person association, or corporation or in the affairs of
the property of which this corporation has lawful interest”. The donation in question
undoubtedly comes within the scope of this broad power for it is a fact appearing in
the evidence that the insurance proceeds were not immediately required when they
were given away.
We don’t see much distinction between the acts of generosity of the benevolence
extended to some employees of the corporation, and even to some in whom the
corporation was merely interested because of certain moral or political consideration,
and the donations which the corporation has seen fit to give the children of the late
Enrico Privano from the point of view of the power of the corporation as expressed in
the AOI. And if the former had been sanctioned
and had been valid and intra-vires, we see no plausible reasons why the latter
should now be deemed ultra-vires. It may perhaps be argued that the donation given
to the children of the late Enrico Privano is so large and disproportionate that it can
hardly be considered a pension or gratuity that can be placed on par with the
instances above-mentioned, but this argument overlooks one consideration: the
gratuity here given was not merely motivated by pure liberality or act of generosity,
but by a deep sense of recognition of the valuable services rendered by the late
Enrico Privano which had immensely contributed to the growth of the corporation to
the extent that from its humble capitalization it blossomed into a multi-million
corporation that it is today.
Granting that it was ultra-vires, it may be said that the same cannot be invalidated, or
declared legally ineffective for that reason alone, it appearing that the donation
represents not only the act of the BOD but of the stockholders themselves as shown
by the fact the same has been expressly ratified in a resolution duly approved by the
latter. By this ratification, the infirmity of the corporate act, if any has been obliterated
thereby making the act perfectly valid and enforceable. This is specially so if the
donation is not merely executory but executed and consummated and no creditors
are prejudiced, or if there are creditors affected, the latter has expressly given their
conformity.
ISSUE2: What is the difference between an illegal act and that which is ultra-vires?
HELD: The former contemplates the doing of an act which is contrary to law, morals,
or public order or contravene some rules of public policy or public duty, and are, like
similar transactions between the individuals, void. They cannot serve as basis of a
court action, nor acquire validity by performance, ratification or estoppel. Mere ultra-
vires acts, on the other hand, or those which are not illegal and void ab initio, but are
merely beyond the scope of the AOI, are merely voidable and may become binding
and enforceable when ratified by the stockholders.
Since it is not contended that the donation under consideration is illegal, or contrary
to any of the express provisions of the AOI, nor prejudicial to the creditors of the
defendant corporation, we cannot but logically conclude that said donation, even if
ultra vires in the supposition we have adverted to, is not void, and if voidable its
infirmity has been cured by ratification and subsequent acts of the defendant
corporation. The corporation is now prevented or estopped from contesting the
validity of the donation.
IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET AL.,
defendant-appellees (57 Phil. 343; Oct. 26, 1932) - Mindoro Sugar Company (MSC)
transferred all of its property to Philippine Trust Company (PTC) in consideration of
the bonds it had issued to the value of P3,000,000, each bond being $1,000, which
par value, with interest at 8% per annum, PTC guaranteed to the holders.
PTC paid Ramon Diaz upon presentation of the coupons, the stipulated interest from
the date of maturity until July 1, 1928, when its stopped payments, alleging that it did
not deem itself bound to pay such interest or to redeem the obligation because the
guarantee given for the bonds was illegal and void.
The CFI of Manila absolved the defendants from the complaint except MSC which
was sentenced to pay the value of the bond.
ISSUE: WON PTC’s act was ultra-vires?
HELD: No. Firstly, PTC although secondarily engaged in banking, was primarily
organized as a trust corporation with full power to acquire personal property such as
the bonds in question according to both sec. 13 (par. 5) of the Corporation Law and
its duly registered by-laws and AOI; Secondly, that being thus authorized to acquire
the bonds, it was given implied power to guarantee them in order to place them upon
the market under better, more advantageous conditions, and thereby secure the
profit derived from their sale.
“It is not, however, ultra vires for a corporation to enter into contracts of guaranty
where it does so in the legitimate furtherance of its purposes and business. And it is
well settled that where a corporation acquires commercial papers or bonds in the
legitimate transaction of its business it may sell them, and in furtherance of such a
sale, it may in order to make them more readily marketable, indorse or guarantee
their payment.”
Even if PTC did not acquire the bonds in question, but only guarnteed them, it would
at any rate, be valid and the said corporation is bound to pay the appellant their
value with the accrued interest in view of the fact that they become due on account
of the lapse of 60 days, without the accrued interest due having been paid; and the
reason is that it is estopped from denying the validity of its guarantee.
The doctrine of ultra vires as a defense, is by some courts regarded as an
ungracious and odious one, to be sustained only where the most persuasive
consideration of public policy are involved, and there are numerous decisions and
dicta to the effect that the plea should not as a general rule prevail whether
interposed for or against the corporation, where it will not advance justice but on the
contrary will accomplish a legal wrong.
When a contract is not on its face necessarily beyond the scope of the power of the
corporation by which it was made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to contract within their powers.
The doctrine of ultra vires, when invoked for or against a corporation, should not be
allowed to prevail where it would defeat the ends of justice or work a legal wrong.
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC
(101 Phil
540; May 23, 1957) - The SEC issued an order requiring petitioner herein and its
President Alfredo Abcede to show cause why it should not be proceeded against for
making misrepresentations to the public about the need of registering and depositing
war notes, with a view of probable redemption as contemplated in Senate Bill No.
163 and in Senate Concurrent Resolution No. 14, for otherwise they would be
valueless.
Petitioner contended that the statement was made in good faith as President
Magsaysay would soon make representations to the US to have the war notes
redeemed.
Respondent SEC found that according to its AOI, the petitioner has the privilege to
work for the redemption of the war notes of its members alone, but that it cannot
offer its services to the public for a valuable consideration, because there is nothing
definite and tangible about the redemption of the war notes and its success is
speculative that any authority given to offer services can easily degenerate into a
racket; that under its AOI the petitioner is a civic and non-stock corporation and upon
should not engage in business for profit; that it has received war notes for deposit,
upon payment of fees, without authority in its articles to do so; that it had previously
been rendered to desist from collecting from those registering the war notes, but
notwithstanding this prohibition it has done so in the guise of service fees. Hence the
Commission ordered to stop receiving war notes, receiving same for deposit and
charging fees therefore.
ISSUE: WON the SEC erred in issuing the questioned order?
HELD: No. The articles authorize collection of fees from members; but they do not
authorize the corporation to engage in the business of registering and accepting war
notes for deposit and collecting fees from such services. This was the ruling of the
Commission and this we find to be correct.
Neither do we find any merit in the third contention that the association has authority
to accept and collect fees for reparation claims for civilian casualties and other
injuries. This is beyond any of the powers of the association as embodied in its
articles and has absolutely no relation to the avowed purpose of the association to
work for the redemption of war notes.
ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 8059 9; Sept. 15, 1989) The
Vice-president of Mover Enterprises, Inc. issued a check drawn against Traders
Royal Bank, payable to petitioner Ernestina Crisologo-Jose, for the accommodation
of his client. Petitioner-payee was charged with the knowledge that the check was
issued at the instance and for the personal
account of the President who merely prevailed upon respondent vicepresident to act
as co-signatory in accordance with the arrangement of the corporation with its
depository bank. While it was the corporation's check which was issued to petitioner
for the amount involved, petitioner actually had no transaction directly with said
corporation.
ISSUE: WON private respondent, one of the signatories of the check issued under
the account of Mover Enterprises, Inc., is an accommodation party under NIL and a
debtor of petitioner to the extent of the amount of said check?
HELD: Yes. The liability of an accommodation party to a holder for value, although
such holder does not include nor apply to corporations which are accommodation
parties. This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of another is ultra
vires. One who has taken the instrument with knowledge of the accommodation
nature thereof cannot recover against a corporation where it is only an
accommodation party. By way of exception, an officer or agent of a corporation shall
have the power to execute or indorse a negotiable paper in the name of the
corporation for the accommodation of a third person only if specifically authorized to
do so. Corollarily, corporate officers, such as the president and vice-president, have
no power to execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or in relation to
matters in which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation, especially
since it is not involved in any aspect of the corporate business or operations, the
signatories thereof (president and vice-president) shall be personally liable therefor,
as well as the consequences arising from their acts in connection therewith.

LADIA NOTES:

CORPORATE POWERS AND AUTHORITY

 Corporate authority may be classified into three classes namely:

1. Those expressly granted or authorized by law inclusive of the corporate charter or

articles of incorporation;

2. Those impliedly granted as are essential or reasonably necessary to the carrying out
of the express powers;

3. Those that are incidental to its existence.

 Section 36 to 45- POWER GRANTED BY LAW

Section 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
 1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this

Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks
to subscribers and to sell treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and
the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this

Code;

9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or
for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation. (13a)

Section 37. Power to extend or shorten corporate term. - A private corporation may
extend or shorten its term as stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this code. (n)
 Section 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a majority vote of the board
of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of
the outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number of shares
of no-par stock thereof actually subscribed, the names, nationalities and residences of
the persons subscribing, the amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on his subscription in cash or
property, or the amount of capital stock or number of shares of no-par stock allotted
to each stock-holder if such increase is for the purpose of making effective stock
dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least twenty-five (25%)
percent of such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to the corporation
or that there has been transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the
capital stock shall be approved by the Commission if its effect shall prejudice the rights of
corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with
the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
(17a)

Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation
shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a previously contracted debt.

Section 40. Sale or other disposition of assets. - Subject to the provisions of existing
laws on illegal combinations and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose
of all or substantially all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors
or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the rights of third parties under
any contract relating thereto, without further action or approval by the stockholders or
members.

Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of its remaining
business.

In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.

Section 41. Power to acquire own shares. - A stock corporation shall have the power
to purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provisions of this Code. (a)

Section 42. Power to invest corporate funds in another corporation or business or for
any other purpose. - Subject to the provisions of this Code, a private corporation may invest
its funds in any other corporation or business or for any purpose other than the primary
purpose for which it was organized when approved by a majority of the board of directors or
trustees and ratified by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-
stock corporations, at a stockholder's or member's meeting duly called for the purpose.
Written notice of the proposed investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a)

Section 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate
expansion projects or programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies. (n)

Section 44. Power to enter into management contract. - No corporation shall conclude
a management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations own or control more than one-
third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation;
or (2) where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a period longer than five years
for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or operating agreements which
relate to the exploration, development, exploitation or utilization of natural resources may
be entered into for such periods as may be provided by the pertinent laws or regulations. (n)

Section 45. Ultra vires acts of corporations. - No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by its articles
of incorporation and except such as are necessary or incidental to the exercise of the powers
so conferred. (n)

Section 36
 Where should the corporation be sued?

- principal office is important because it establishes the residence of the corporation

and determining service of summons, venue of action
- it can be sued in the city or municipality where its principal office is found

 Principal office is also important for venue of meetings

 Non-stock corporation may provide in its by-laws that the venue of meeting be
anywhere in the Philippines

 Upon whom service of summons be made?

- Section 11. Service upon domestic private juridical entity- when the defendant is a
corporation, partnership or association organized under the laws of the Philippines
with a juridical personality, service may be made upon the president, managing
partner, general manager, corporate secretary, treasurer, or in house counsel.

Delta motor vs. Mangosing

- strict compliance is necessary

- should be served to those named in the statute

- secretary of a dep’t are not those included in the statute

E.B. Villarosa vs. Benito

- decision En Banc repeals all other pronouncement

- section 13 Rule 14 was repealed

- the old rules was ambiguous and broad and at all time illogical

 the particular revision under Section 11 of Rule 14 was explained by retired Supreme
Court Justice Florenz Regalado, thus:

“xxx the then section 13 of this Rule allowed service upon a defendant
corporation to “be made on the president, manager, secretary, cashier, agent
or any of its directors.” The aforesaid terms were obviously ambiguous and
susceptible of broad and sometimes illogical interpretations, especially the
word “agent” of the corporation. The Filoil case, involving the litigation lawyer
of the corporation who precisely appeared to challenge the validity of service
of summons but whose very appearance for that purpose was seized upon to
validate the defective service, is an illustration of the need for this revised
section with limited scope and specific terminology. Thus the absurd result in
the Filoil case necessitated the amendment permitting service only on the in-
house counsel of the corporation who is in effect an employee of the
corporation, as distinguished from an independent practitioner.”
o notes: additional knowledge
- special appearance enter for that particular appearance you are not the counsel in
the case

- would apply only if it does not involve an intra-corporate controversy (controversy

between and among the stockholders)

- upon any of the statutory officers or officers fixed in the by-laws any secretary, any of
the directors; any managers in the by-laws

 Seal

- merely ministerial or permissive

 Power to amend

- section 16

- special 37,38,120

 Power to adopt by-laws

- section 46-48

 Power to issue or sell stocks and to admit members

- stock of stockholders and provision governing non-stock

 Power to acquire or alienate real or personal property

- is there any limitation? YES

- Two specific limitation

1. Section 36, as lawful transactions of business of the corporation may reasonably and
necessarily require

2. Constitution and law

Luneta vs. A.D. Santos

- Importance of the purpose clause

- Cannot have the power to acquire

- Cannot engage in land transportation

- Doctrine of limited capacity

Gov’t vs. El Hogar

- As the lawful transaction of its business may reasonably represent

Director of Lands vs. CA

- Exception to the rule in the constitution

- Alienable public land

- Converts the property to a private land automatically once converted it can now be
registered

 Power to make donation

- Limitation section 36 par.9

- These are circumstances, however, under which a donation by a corporation may be

to its benefit as a means of increasing its business or promoting patronage. Thus,
paragraph 9 of section 36 expressly authorizes a corporation to make donations. The
only limitations imposed are the following:

1. The donation must be “reasonable”;

2. It must be for public welfare, or for hospital, charitable, scientific, cultural or similar
purpose; and,

3. It shall not be in aid of political party or candidate, or for purposes of partisan political
activity.

 Power to establish pension

- Include any act to promote and improve the convenience, welfare and benefit of the
employees or offices

Republic vs. Acoje

- While as a rule an ultra-vires act is one committed outside the object for which a
corporation is created as defined by law, there are however certain corporate acts
that may be performed outside of the scope of the powers expressly conferred if they
are necessary to promote the interest or welfare of the corporation. Thus, it has been
held that “although not expressly authorized to do so a corporation may become a
surety where the particular transaction is reasonably necessary or proper to the
conduct of its business,” and here it is undisputed that the establishment local post
office is a reasonable and proper adjunct to the conduct of the business of appellant
company. Indeed, such post office is a vital improvement in the living condition of its
employees and laborers who came to settle in its mining camp which is far removed
from the postal facilities or means of communication accorded to people living in a
city or municipality.
 Power to exercise such other powers essential or necessary to carry out its purpose
(implied power)

1. Acts in the usual course of business;

2. Acts to protect debts owing to the corporation;

3. Embarking in a different business;

4. Acts in part or wholly to protect or aid employees; and,

5. Acts to increase business

Teresa Electric and Power Co. vs. P.S.C.

- Examined the articles of incorporation to arrive at its decision

National Power vs. Vera

- For purpose of prohibiting the NAPOCOR

- The court must decide whether or not a logical and necessary relation exists between
the act questioned and the corporate purpose expressed in the NPC charter

 Importance of PLACE of registration

- Residence

- Venue

- Place of meetings

- Place or registration of chattel mortgage

 Power to extend its terms

- Once its term expires, already dissolved automatically, thus can no longer ask for
extension

- After dissolution, it has 3 years to windup

 What are the modes of increasing capital stock?

1. Increasing the par value of the existing number of shares without increasing the
number of shares;

2. Increasing the number of existing shares without increasing the par value thereof;
and,
3. Increasing the number of existing shares and at the same time increasing the par value
of the shares.

 Why a corporation increases it capital stock?

- Generate funds, business expansion, or payment of liabilities, purposes of acquiring

other business. (example: to buy cars for the officers, purpose of acquiring other
business, expansion, other valid reasons)

 How do you decrease capital stock and why a corporation decreases?

- Reduce or wipeout existing deficit where no creditors would thereby be effected

- When capital is more than necessary to procreate the business or reduction of capital
surplus

- To write down the value of its fixed assets to reflect those present and actual

o NOTE: any increase or decrease of capital stock requires approval of government

agency like SEC it can never take place unless SEC approves the same

 Relevance of decrease of capital?

1. To reduce or wipe out existing deficit where no creditors would thereby be affected;

2. When the capital is more than what is necessary to procreate the business or
reduction of capital surplus; or,

3. To write down the value of its fixed assets to reflect there present actual value in case
where there is a decline in the value of the fixed assets of the corporation.

- Examples: Php 10M capital for grocery business, mayor didn’t want to issue
license/permit because mayor has 3 other grocery stores, only allowed sari-sari store
permit, reduce capital for sari-sari so that the money will not sleep in bank

- Example: car rental agencies-Php 10M capital for 20 taxi’s, after some time each taxi
is only 250K, nagmura ang taxi, to reduce capital is to show actual assets

 Limitation imposed by law

- Decrease shall not in any way affect the rights of the creditors

 Philippine Trust Company vs. Rivera

- Without the appraisal of SEC, a decrease in capital stocks has no effect

 TRUST FUND DOCTRINE:

- Subscription to capital stock of a corporation constitute a fund to which the creditors
have a right to look upon for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.

Madrigal vs. Zamora

- Decrease in capital has a subterfuge to evade payment

- Thus not valid and effective

- Must not prejudice creditors which includes the employees

 Bond

- Commonly understood as an obligation of a state, its subdivision or a private

corporation, represented by a certificate or an instrument for the principal and by
detachable coupons for the payment of interests. In its simplest term, it is one where
an obligor obliges himself to pay a certain sum of money to another at a day named.

- There are different kinds of bond but before they may be issued or floated by the
corporation, the same must be registered and approved by the SEC subject to the rules
and regulations that may be adopted by that agency. The procedure and requirements
set forth in section 38 is the same as in increasing or decreasing the capital stock
except that the certificate does not have to state the matters required in sub-section
2 & 3 thereof.

 Pre-emptive rights

- A right granted by law to all existing stockholders of a stock corporation to subscribe

to all issues or disposition of shares of any class, in proportion to their respective
stockholdings, subject only to the limitations imposed under section 39 of the Code.

- Internationally granted

 Pre-emptive rights, why it is granted?

- In order that the existing stockholders may maintain their proportionate right as not
to dilute their right

 Power to deny pre-emptive rights

Section 39. Power to deny pre-emptive right. - All stockholders of a stock

corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective shareholdings, unless such right
is denied by the articles of incorporation or an amendment thereto: Provided, That
such pre-emptive right shall not extend to shares to be issued in compliance with laws
 requiring stock offerings or minimum stock ownership by the public; or to shares to
be issued in good faith with the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.

 May it be denied? How?

- Yes, if provided by articles of incorporation or by an amendment

- However, pre-emptive rights is unavailable to shares in trading in stock exchange

otherwise stockholders must waive first their right before they may sell such.

 Exceptions

1. When the shares to be issued is in compliance with laws requiring stock offerings
or minimum stock ownership by the public

2. Shares to be issued in good faith with the approval of the stockholders

representing 2/3 of the outstanding capital stock either

a. In exchange for property needed for corporate purpose or,

b. In payment of a previously contracted debt

- The exceptions, however will not apply to stockholders of a close corporation by virtue
of a subsequent and specific provision of the Code which provides that the “pre-
emptive right of a stockholder in a close corporation shall extend to all stock to be
issued, including reissuance of treasury shares, whether for money, property or
personal services or in payment of a corporate debt, unless the articles of
incorporation provide otherwise, if not entirely absolute, in that it extends to all
issuance and disposition of shares

- Such right of pre-emption may be lost by waiver of the stockholder, expressly or

impliedly by his inability or failure to exercise it after having been notified of the
proposed issuance or disposition of shares

 When is it unavailable?

- In shares traded openly in stock exchange/market

 Is it applicable to close corporations?

- See section 96, close corporations must provide it first on its articles of incorporation,
that its articles does not really deny such pre-emptive rights.

 Section 102, will not apply to close corporations

 The right of pre-emptive rights is absolute in close corporations

“All issues or depositing shares of any class” form part of ACS
 Certain instances when a stockholder may nevertheless be unable to exercise this
right:

- Issued for public ownership

- Issued in good faith, with approval of 2/3 of outstanding capital stock either a) in
exchange for property needed or b) for payment of a previously contracted debt

 Pre- emptive rights of stockholders in ordinary stock corporations may be denied

- if the shares are to be issued in compliance with laws requiring stock offering or
minimum stock ownership by the pubic

- In exchange for property needed for corporate purposes

- In payment of previously contracted debts

 This rule, however, does not apply in a close corporation as the pre-emptive rights of
the stockholders thereof is broadened to include all issues without exceptions unless,
of course, denied or limited by the articles of incorporations. Section 102 provides:

Section 102. Pre-emptive right in close corporations. - The pre-emptive right of

stockholders in close corporations shall extend to all stock to be issued, including
reissuance of treasury shares, whether for money, property or personal services, or in
payment of corporate debts, unless the articles of incorporation provide otherwise.

 Denial will not apply to a close corporation, ABSOLUTE

- section 96

 May a stock holder in a close corporation insist in the exercise of his pre-emptive
rights?

- Yes, section 102

 What type or shares are covered by pre-emptive rights?

 Does it include those originally unsubscribed?

- NO. Benito vs. SEC

 Will the stockholders be able to exercise their pre-emptive right with respect to the
old unissued shares?

- Pre-emptive rights is applicable only to new issued shares and not to the old unissued
shares because it is presumed that the original subscribers is deemed to have taken
 his shares knowing that they form a definite proportionate part of the whole number
of authorized shares

- When the shares, left unsubscribed are re-offered, he cannot therefore claim.
DILUTION OF INTEREST

 Will the acquiring purchaser be liable for debts of the former corporation?

- Generally no, corporate entity theory because there may be instances when
purchasing corporation may be held liable

 May a corporation acquire its own shares?

- Yes

 Is there any restriction provided for by law in reacquiring its own shares?

- Yes, it must have been unrestricted retained earnings appearing in the books of
corporation

 A corporation can never acquire its own shares if it has no unrestricted retained
earnings

- False, exception close corporation and redeemable shares

EXAMPLE:
ACS 2M
SUBSCRIBED 1M
PAID UP 1M

1 100K

2 100K

TO
10 100K

 If 1-5 became 200K each, may 6-10 demand the exercise their pre-emptive right?

- YES

 May 1-5 subscribe to the unsubscribed capital stock to the exclusion of 6-10?

- If a corporation makes 2M unrestricted retained earnings, it is the shares and not the
number of persons that matters

 May 6-10 complain for a dilution of their interest?

 - YES, it’s an internationally recognized right because it includes “all issues and
disposition of shares of any class” and all kinds of shares new or old

- If the remaining unsubscribed shares are issued, it’s an issuance of any class

 May a corporation sell/dispose all or substantially all of its corporate assets and
liabilities?

- YES

- 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION 4) PRIOR WRITTEN NOTICE 5)

SALE SUBJECT TO PROVISIONS OF EXITING LAWS 6) DISSENTING STOCKHOLDERS HAVE
THE RIGHT TO EXERCISE THEIR APPRAISAL RIGHT

 If a corporation sells substantially all of it assets and properties, will the buyer assume
liability?

- NO, EXCEPT

1) Express or implied agreement to the purchase

2) Where the transaction amounts to consolidation or merger of the corporations

3) When purchasing corporation is merely a continuation of the selling corporation

4) Where the transaction is entered into fraudulently in order to escape liability for such
debt

 Legitimate purpose: for a corporation to reacquire its own shares

- Limitation: it must have surplus/unrestricted retained earnings

- Exception: may redeem irrespective of unrestricted retained earnings

1) Exercise of stockholders’ right to compel “close corporation” to purchase his shares

2) Where corporation has sufficient assets in its books to cover its debts and liabilities
exclusive of capital stock

ACS 1M
SUBSRIBED 1M

PAID-UP 1M

ASSETS 500K
1M PROFITS
- 500K LIABILITIES
____________________
500K RESERVES IN A CLOSE CORPORATION IT CAN USE THIS TO
REACQUIRE ISSUED STOCKS
X – REALTY CORPORATION

 THE ONLY PROPERTY OF THE CORPORATION

 BOARD OF DIRECTORS DECIDED TO SELL IT

Will it need the approval of the stockholders?

- NO, if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property and
assets be appropriated for the conduct of its remaining business

 If X is a manufacturing company, then it can sell its only property upon approval of the
stockholders because it will render itself capable of continuing its business, BUT if the
proceeds will be used to purchase a better one for the continuance of its business,
then it does not need the approval of the stockholders

 Conditions for the valid exercise of this power are the following

1. Resolution by the majority vote of the board of directors/trustees

2. Authorization from the stockholders representing at least 2/3 of the outstanding

capital stock or 2/3 of the members;

3. The ratification of the stockholders or members must be made at a meeting duly called
for that purpose

4. Prior written notice of the proposed action and of the time and place of meeting must
be made addressed to all stockholders of record, either by mail or personal service;

5. The sale of the assets shall be subject to the provisions of existing laws on illegal
combinations and monopolies

6. Any dissenting stockholder shall have the option to exercise his appraisal right

IDP vs. CA

- Consent of the members was not secured

Edward Nell Co. vs. Pacific Farms

- Generally where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except:
 1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;

3. Where the purchasing corporation is merely a continuation of the selling

corporation;

4. Where the transaction is entered into fraudulently in order to escape liability for
such debts.

 Power to acquire own shares

Section 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares

under the provisions of this Code. (a)

 The corporation must at all times have “unrestricted retained earnings” to exercise
this corporate power

Steinberg vs. Velasco

- For as long as there are debts and liabilities, a corporation may not reacquire its shares
(subject to exceptions)

- Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.

 Power to invest funds <sec.42>

Section 42. Power to invest corporate funds in another corporation or business

or for any other purpose. - Subject to the provisions of this Code, a private corporation
may invest its funds in any other corporation or business or for any purpose other than
the primary purpose for which it was organized when approved by a majority of the
board of directors or trustees and ratified by the stockholders representing at least
 two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the
members in the case of non-stock corporations, at a stockholder's or member's
meeting duly called for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal right as provided in this Code:
Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of incorporation,
the approval of the stockholders or members shall not be necessary. (17 1/2a)

- For any other purpose other than the primary purpose, stockholder’s consent or
approval is necessary

- Thus, if it’s for the secondary purpose, it is necessary

- If it’s in connection with the primary purpose, only board resolution is necessary

 Requirements and steps to be followed for a valid investment of corporate funds are:

1. Resolution by the majority of the board of directors or trustees;

2. Ratification by the stockholders representing at least 2/3 of the outstanding capital

stock or 2/3 of the members in case of non-stock corporations;

3. The ratification must be made at a meeting duly called for that purpose;

4. Prior written notice of the proposed investment and the time and place of the meeting
shall be made, addressed to each stockholder or member by mail or by personal
service, and;

5. Any dissenting stockholder shall have the option to exercise his appraisal right

Dela rama vs. Ma-ao Sugar

- There is a substantial and not remote connection between the sugar bags and the
sugar manufacture, thus stockholder’s approval is not necessary for validity

- A private corporation, in order to accomplish its purpose as stated in its articles of

incorporation, and imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge, or dispose of shares bonds, securities and other evidences of
indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance
of the corporate purpose, does not need the approval of the stockholders; but when
the purchase of shares of another corporation is done solely for investment and not
to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary.
 Gokongwei vs. SEC

- Investments made by SMC is necessarily connected with its primary purpose and this
was ratified in a meeting

- Submission of previous action is a sound corporate practice

 Redeemable shares

 Closed corporation (see section 105)

- For any reason, compel the value of shares “withdrawal shares” provided corporation
has sufficient funds to cover its debts and liabilities

Section 105. Withdrawal of stockholder or dissolution of corporation. - In

addition and without prejudice to other rights and remedies available to a stockholder
under this Title, any stockholder of a close corporation may, for any reason, compel
the said corporation to purchase his shares at their fair value, which shall not be less
than their par or issued value, when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital stock: Provided, That any
stockholder of a close corporation may, by written petition to the Securities and
Exchange Commission, compel the dissolution of such corporation whenever any of
acts of the directors, officers or those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are being misapplied or wasted.

 If shares are reacquired, what happens?

- It becomes treasury shares

 Stockholder’s consent/ approval is not necessary and mere board action is sufficient
if in accordance with primary purpose

 The logical relation of act done and primary purpose of corporation and between the
board of directors to undertake submission of acts is a sound corporate practice

 Dividends

Section 43. Power to declare dividends. - The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent
stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder
until his unpaid subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose. (16a)
 Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when justified
by definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for
probable contingencies. (n)

 What are dividends?

- Corporate profits set aside, declared and ordered by the Board of Directors to be paid
to the stockholders.

 What are property dividends?

- Those paid in property surplus

 Like tables and chairs? Can tables and chairs make surplus profits?

- No, they do not make surplus, bonds, etc.

 Where should dividends come from?

- Stock dividends are declared as stocks coming from corporation

 Who declares dividends to be declared? Do stockholders have any say?

- Board of Directors, if stock approval of 2/3 outstanding capital stock

ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus profits of the

corporation)
1-100k
2-100k
To
10-100k
1M
 Board decides to declare 1M, how much will each receive? May the board declare
stock dividend

- NO. that would be over issuance of shares, violation of securities regulation code

- It must have a free portion

 - The corporation may increase its capital

 Z co. 1M to X Co. is 2/3 of Xco. Stockholders reacquired?

- No, because in property 2/3 is not required

 What is the effect of declaration of dividends with regards to the assets of a company?

- As compared to stock dividends, the declaration of cash or property dividends have

the effect of reducing corporate assets to the extent of dividends declared.

- Neither would stock dividends increase the proportionate interest of the stockholders
of the corporation although it will have the effect of increasing the subscribed and
paid-up capital of the corporation. It gives the stockholders nothing in the way of
distribution of assets but merely divides his existing shares into smaller units.

 Earnings belong to the corporation until declared or given

 Revocation

- No revocation of dividend may be has unless it has not been officially communicated
to the stockholders or is in the form of stock dividends which is revocable at any time
prior to distribution.

 Stock dividends- no reduction, you capitalize your restricted retained earnings, what
is issued is a piece of paper. The restricted earnings remain in the corporation

 Cash and property- reduces corporate assets

 Stock dividends increase corporate assets? No, it will only have the effect of increasing
the subscribed and paid-up capital of the corporation

 Will there be a corresponding increase in their proportionate interest?

- REMAINS THE SAME

- Exception: when stock dividends will result in a fractional share

ACS-2M 1-100K 200 (10%) *VOTING AND DIVIDEND RIGHTS STILL

THE SAME
SUB-1M TO 10%
PU-1M 10-100K
ACS 2M
SUB 1M
PU 1M
1M RE
1 100K
2 100K
TO
10 100K
1M
 May they be compelled?

- NO. You cannot declare if it does not come from unrestricted retained earnings.

1. 1M-U.R.E. (is it true there is no way to compel?)

2. 2M-U.R.E.

 May they be compelled to declare dividends

- Mandatory if earned, the board may be compelled to declare dividends

- if exceeds 100% of the paid-up capital the boards may be compelled

ACS 2M 1M U.R.E.
SUB 1M
PU 800K
1-100K 50K PU
2-100K 50K
TO
10-100K
1M

 Will 1 and 2 receive full amount of dividends?

- YES. They are entitled however if they are declared delinquent, the amount due them
shall first be applied to his delinquency plus expenses.

 Delinquency occurs, you are called to pay, but you failed to pay. In case of stock
dividend, the delinquent stock holder will not be entitled thereto until he has paid his
subscription in full.

 Are non-stockholders entitled to receive dividends?

 - No, tock dividends are civil fruits of the original investment, and to the owners of the
shares belong the civil fruits.

 How did the court decide dividends in the case of Neilsen

- Stock dividends cannot be issued to a person who is not a stockholder in payment of

services rendered.

- Whether cash, property or stock, only stockholders may receive dividends. Dividends
are fruits of investments. They come from the U.R.E. or surplus profits of the
corporation.

ACS 2M 1M U.R.E.
SUB 1M JULY 24 DECLARATION JULY 31
PU 1M

1 100K 100T JULY 26-Y(NEW ONE WAS DECLARED TO Y) JULY 30- 100K

TO TO HAVE THE TRANSFER RECORDED

10 100K
1M
 Insofar as 1 and Y who has a better right? Already declared, but not yet paid?

- Right to receive vest upon declaration. Who ever owns at the time of declaration owns
the dividends

- Unless there is a stipulation to the contrary

 TRUST FUND DOCTRINE

- The power to declare it if paid-up capital is not maintained or is impaired

- Trust fund must be kept intact for the protection of creditors who have the right to
rely on such subscription and the paid-up capital for the satisfaction of their claims

 Cannot accumulate surplus unreasonably

 Basis is the paid-up capital

 Entitled to dividends

 Irrespective of whether the subscription is full

 Illegally declared
- Declare dividend with the belief that it formed part of the U.R.E., but yun pala sa
capital

 Directors are not liable, unless sec31 acted in bad faith or gross negligence in the
conduct of corporate affairs

 Directors even if acting in behalf of the corporation, may still be held solidarily liable

 Power to enter into management contract

- New provision

Section 44. Power to enter into management contract. - No corporation shall

conclude a management contract with another corporation unless such contract shall
have been approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members in
the case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of both the managing and
the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the stockholders of
the managed corporation owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the
case of a non-stock corporation. No management contract shall be entered into for a
period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all of the
business of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such service contracts
or operating agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations. (n)

 The requirement for a valid management contract are as follows:

1. Resolution of the board of directors

2. Approval by the stockholders holding or representing a majority of the outstanding
capital stock or majority of the members in case of non-stock corporation of both the
managing and the managed corporation
3. The approval of the stockholders or members must be made at the meeting called for
that purpose
4. The contract shall not be for a period longer than 5 years for any one term, except
those which relate to exploration, development or utilization of natural resources
 which may be entered into for such periods as may be provided by pertinent laws and
regulations

 Every corporate act emanates from the BOARD

 Is the voting requirements of a majority stockholder ABSOLUTE?

- Not only a majority but 2/3 of the outstanding capital stock or 2/3 of the members in
a non-stock corporation would be required for the approval of a management contract
in the following instances:

1. Where the stockholders representing the same interest of both the managing and
managed corporation own or control more than 1/3 of the total outstanding capital
stock of the managing corporation; and

2. Where a majority of the members of the board of directors of the managing

corporation also constitute a majority of the directors of the managed corporation

3. Where the contract would constitute the management or operation of all or

substantially all of the business of another corporation, whether such contracts are
called service contracts. If it will not constitute the management of all or substantially
all of the business of another corporation the first paragraph of section 44 will apply
and not that of the second, that is, only the vote of the stockholders holding or
representing at least a majority of the outstanding capital stock or majority of the
members in the case of non-stock corporation will be required.

 How long?

- Not longer than 5 years for any one term

- Exception: exploration, development or utilization of natural resources

 What is an ultra-vires act or contract?

- Doctrine of limited capacity. Corporation can do such acts and things as it is allowed
to do

- Acts beyond it will be ultra vires, allowing a collateral attack

- If not illegal per se merely voidable. Can be ratified expressly or impliedly or even
stopped as equitable grounds

- Ultra-vires acts which are not illegal per se may become binding and enforceable
either by satisfaction, estoppels or equitable grounds

 Consequences of ultra-vires acts?

1. On the corporation itself

- The proper forum, in accordance with the provisions of PD 902-A, as amended and
R.A. No. 8799 may suspend or revoke, after proper notice and hearing, the franchise
or certificate of registration of the corporation for serious misrepresentation as to
what the corporation can do or is doing to the great damage or prejudice of the
general public

2. On the rights of the stockholders

- A stockholder may bring either an individual or derivative suit to enjoin a threatened

ultra-vires act or contract. If the act or contract has already been performed, a
derivative suit for damages against the directors may be filed, but their liability will
depend on whether they acted in good faith and with reasonable diligence in entering
into the contract.

3. On the immediate parties

- The courts have not agreed as to the legal effect of a corporate contract outside of its
authorized business but Ballatine gives the following summary of the doctrines
evolved:

a. If the contract is fully executed on both sides, the contract is effective and the
courts will no interfere to deprive either party of what has been acquired under it

b. If the contract is executory on both sides, as a rule, neither party can maintain an
action for its non-performance

c. Where the contract is executor on one side only, and has been fully performed on
the other, the courts differ as to whether an action will lie on the contract against
the party who has received benefits of performance under it. Majority of the
courts, however, hold that the party who has received benefits from the
performance is estopped to set up that the contract is ultra-vires to defeat an
action on the contract. This is more in conformity with the doctrine that no person
shall be allowed to enrich himself at the expense of another

Privano vs. Dela Rama

- Court looked into the purpose clause

- The purpose clause empowers and limits

- Articles likewise provide that it may deal with any of its money

- “deal” broad enough to cover the donation it is not then ultra-vires

- Not illegal per se hence (law of agency) excess powers are subject to ratification

- Ratified by passing the resolution in question

 Carlos vs. Mindoro sugar Co.

- PTC- trust company as such, it also has implied powers as to make them more
attractable

- Not ultra-vires in pursuance of its legitimate business

Japanese war notes vs. SEC

- Non-stock corporations cannot make profits and distribute profits to its shareholders

- Ultra-vires because Japanese war notes is a non-stock corporation

Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN SUNDIANG)

- The negotiable instruments law which holds an accommodation party liable on the
instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, does not include nor apply
to corporations which are accommodation parties. This is because the issue or
indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra-vires

- Corporate officers may guarantee or endorse an accommodation only if specifically

authorized

Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the agreement of the stockholders rather than any
director

- It may sell and it may guarantee, contract not necessarily illegal, it will in the absence
of proof to the contrary presumed within its power. Corporations are presumed to
contract with in its powers- CARLOS CASE

- Purpose clause may be stretched to cover PLDT internet. It may be within its business.

- May it sell computers? NO! other line of business. Its trading!