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CORPORATION LAW

Part IV

JGA Medina
Bus. Org II, Philippine Law School
Section 31. Liability of directors, trustees or officers. –

• Shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons if:

• Willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
• Guilty of gross negligence or bad faith in directing the affairs of the corporation;
• Acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees

• When a director, trustee or officer attempts to acquire or acquire, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Lozada v. Mendoza
G.R. No. 196134, October 12, 2016

• Before a director or officer of a corporation can be held personally liable for corporate
obligations,the following requisites must concur:
(1) the complainant must allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith;
and
(2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith.

• Corporate directors and officers are solidarily liable with the corporation for the termination of
employees done with malice or bad faith; and declared that bad faith did not connote bad
judgment or negligence, but a dishonest purpose or some moral obliquity and conscious doing of
wrong, or meant a breach of a known duty through some motive or interest or ill will, or partook
of the nature of fraud
Sanchez v. Republic
G.R. No. 172885, October 9, 2009

• Bad faith implies breach of faith and willful failure to respond to plain and well understood
obligation. It does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty
through some motive or interest or ill will. It partakes of the nature of fraud.
• Gross negligence is the want of even slight care, acting or omitting to act in a situation where
there is duty to act, not inadvertently but willfully and intentionally, with a conscious indifference
to consequences insofar as other persons may be affected. It evinces a thoughtless disregard of
consequences without exerting any effort to avoid them; the want or absence of or failure to
exercise slight care or diligence, or the entire absence of care.
• Section 31 lays down the "doctrine of corporate opportunity" and holds personally liable
corporate directors found guilty of gross negligence or bad faith in directing the affairs of the
corporation, which results in damage or injury to the corporation, its stockholders or members,
and other persons.
Section 32. Dealings of directors, trustees or officers with the corporation.

• A contract of the corporation with directors or trustees or officers is voidable, at the option of
such corporation, unless all the following conditions are present:
1. The presence of such director or trustee in the meeting approving the contract was not
necessary to constitute a quorum;
2. The vote of such director or trustee was not necessary for the approval of the contract;
3. The contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.

• Where any of the first two conditions set forth in the preceding paragraph, the contract may be
ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of the members in a meeting called for the purpose, provided, that full disclosure
of the adverse interest of the directors or trustees involved is made at such meeting: Provided,
that the contract is fair and reasonable under the circumstances.
Section 33. Contracts between corporations with interlocking directors.

• Except in cases of fraud, and if contract is fair and reasonable a contract between two or more
corporations having interlocking directors shall not be invalidated on that ground alone.
• If the interest of the interlocking director in one corporation is substantial (exceeding 20% of
capital stock) and his interest in the other corporation or corporations is merely nominal, he shall
be subject to the provisions Sec. 32 insofar as the latter corporation is concerned.

Section 34. Disloyalty of a director. –

• A director, by virtue of his office, acquires a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he must account to
the latter for all such profits by refunding the same, unless ratified by a vote of the owning or
representing at least two-thirds (2/3) of the outstanding capital stock. This provision apply even if
the director risked his own funds in the venture.
Prime White Cement Corp. v. Intermediate Appellate Court
G.R. No. 68555, March 19, 1993.

• A director of a corporation holds a position of trust and as such, he owes a


duty of loyalty to his corporation. In case his interests conflict with those of
the corporation, he cannot sacrifice the latter to his own advantage and
benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders.

• . . . He cannot by the intervention of a corporate entity violate the ancient


precept against serving two masters . . .
Lent v. Tullett Prebon (Philippines), Inc.,
G.R. Nos. 189158 & 189530, January 11, 2017

• The Corporation Code was intended as a regulatory measure, not


primarily as a penal statute. Sections 31 to 34 in particular were
intended to impose exacting standards of fidelity on corporate
officers and directors but without unduly impeding them in the
discharge of their work with concerns of litigation. Considering the
object and policy of the Corporation Code to encourage the use of the
corporate entity as a vehicle for economic growth, we cannot espouse
a strict construction of Sections 31 and 34 as penal offenses in
relation to Section 144 in the absence of unambiguous statutory
language and legislative intent to that effect.
Gokongwei, Jr. v. Securities and Exchange Commission
G.R. No. L-45911, April 11, 1979

• Every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.
• No vested right of stockholder to be elected director. Any person who
buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law.
• Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." "The ordinary trust relationship of directors of a
corporation and stockholders", according to Ashaman v. Miller, "is not a
matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence
of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof . . ."
• A director is a fiduciary. . . . Their powers are powers in trust. . . . He who is in such
fiduciary position cannot serve himself first and his cestuis second. . . . He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters. . . . He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of fair
play by doing indirectly through the corporation what he could not do so directly. He
cannot violate rules of fair play by doing indirectly through the corporation what he
could not do so directly. He cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how absolute in terms that power
may be and no matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be exercised for
the aggrandizement, preference, or advantage of the fiduciary to the exclusion or
detriment of the cestuis.
• The doctrine of "corporate opportunity" is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting
for two entities with competing interests. This doctrine rests fundamentally on
the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when the interest of the
corporation justly calls for protection.

• An amendment to the corporate by-law which renders a stockholder ineligible to


be director, if he be also director in a corporation whose business is in
competition with that of the other corporation, has been sustained as valid. It is a
settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation's Board of Directors.
Section 35. Executive committee.

• The by-laws of a corporation may create an executive committee,


composed of not less than three members of the board, to be appointed by
the board.
• Execom may act, by majority vote of all its members, on such specific
matters within the competence of the board, as may be delegated to it in
the by-laws or on a majority vote of the board, except:
(1) Where shareholders’ approval is also required;
(2) The filing of vacancies in the board;
(3) Amendment or repeal of by-laws or the adoption of new by-laws;
(4) Amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.
Section 36. Corporate powers and capacity. –
1. To sue and be sued in its corporate name;
2. Succession;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal
the same;
6. To issue or sell stocks, sell treasury stocks, or admit members if a non-stock;
7. To deal with real and personal property, including securities and bonds of other
corporations;
8. To enter into merger or consolidation with other corporations;
9. To make reasonable donations, except to political party or candidate;
10.To establish pension, retirement plans;
11.To exercise powers essential or necessary to carry out its purpose as stated in the
articles.
University of Mindanao, Inc. v. BSP, G.R. Nos. 194964-65, Jan. 11, 2016.

• Corporations are artificial entities granted legal personalities upon their creation by their
incorporators in accordance with law. Unlike natural persons, they have no inherent
powers. Third persons dealing with corporations cannot assume that corporations have
powers. It is up to those persons dealing with corporations to determine their
competence as expressly defined by the law and their articles of incorporation.
• A corporation may exercise its powers only within those definitions. Corporate acts that
are outside those express definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is created" are ultra vires.
• The only exception to this rule is when acts are necessary and incidental to carry out a
corporation's purposes, and to the exercise of powers conferred by the Corporation Code
and under a corporation's articles of incorporation. This exception is specifically included
in the general powers of a corporation under Section 36 of the Corporation Code . . .
• The separate personality of corporations means that they are
"vest[ed] [with] rights, powers, and attributes [of their own] as if
they were natural persons[.]" Their assets and liabilities are
their own and not their officers', shareholders', or another
corporation's. In the same vein, the assets and liabilities of
their officers and shareholders are not the corporations'.
Obligations incurred by corporations are not obligations of
their officers and shareholders. Obligations of officers and
shareholders are not obligations of corporations. In other
words, corporate interests are separate from the personal
interests of the natural persons that comprise corporations.
• This court has recognized presumed or apparent authority or capacity
to bind corporate representatives in instances when the corporation,
through its silence or other acts of recognition, allowed others to
believe that persons, through their usual exercise of corporate
powers, were conferred with authority to deal on the corporation's
behalf.
• The doctrine of apparent authority does not go into the question of
the corporation's competence or power to do a particular act. It
involves the question of whether the officer has the power or is
clothed with the appearance of having the power to act for the
corporation. A finding that there is apparent authority is not the same
as a finding that the corporate act in question is within the
corporation's limited powers.
• The rule on apparent authority is based on the principle of estoppel.
• There can be no apparent authority and the corporation cannot be
estopped from denying the binding affect of an act when there is no
evidence pointing to similar acts and other circumstances that can be
interpreted as the corporation holding out a representative as having
authority to contract on its behalf. In Advance Paper Corporation v.
Arma Traders Corporation, this court had the occasion to say:
The doctrine of apparent authority does not apply if the principal
did not commit any acts or conduct which a third party knew and
relied upon in good faith as a result of the exercise of reasonable
prudence. Moreover, the agent's acts or conduct must have
produced a change of position to the third party's detriment.
(Citation omitted)
Section 37. Power to extend or shorten corporate term. –

• May extend or shorten its term when approved by a majority vote of


the board of directors or trustees and ratified at a meeting by two-
thirds (2/3) vote.

• In case of extension of corporate term, any dissenting stockholder


may exercise his appraisal right.
Section 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness.

• Two-thirds (2/3) vote at meeting for the purpose with notices made.
• Require prior approval of the Securities and Exchange Commission.
• The SEC shall not accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the treasurer of the
corporation showing 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.
• That no decrease of the capital stock shall be approved if its effect shall
prejudice rights of corporate creditors.
• Bonds issued by a corporation shall be registered with the SEC.
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.
Pre-emptive right under Sec. 39 of the Corporation Code refers to the
right of a stockholder of a stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings. The right may be restricted or denied under the articles
of incorporation, and subject to certain exceptions and limitations. The
stockholder must be given a reasonable time within which to exercise
their preemptive rights. Upon the expiration of said period, any
stockholder who has not exercised such right will be deemed to have
waived it. Jose Campos, Jr. & Maria Clara L. Campos, THE
CORPORATION CODE: COMMENTS, NOTES AND SELECTED CASES, Vol. II
(1990 ed.), p. 58.
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 two-thirds (2/3) approval.

• A Deemed to cover substantially all the corporate property and assets if corporation would
be rendered incapable of continuing the business or accomplishing the purpose.

• Dissenting stockholder appraisal right.

• After such authorization board may in its discretion, abandon such sale, lease, exchange.

• Exception: Sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property
and assets if necessary in the usual and regular course of business or if the proceeds of the
sale or other disposition will be appropriated for the conduct of its remaining business.
Edward J. Nell Co. v. Pacific Farms, Inc.,
G.R. No. L-20850, November 29, 1965.

The rule is set in Fletcher Cyclopedia Corporations, Vol. 15, Sec. 7122, pp.,
160-161, as follows:

"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; and (4) where the transaction is entered into fraudulently in
order to escape liability for such debts."
Y-I Leisure et. al., v. James Yu, G.R. No. 207161, Sept. 2015.

“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.

The Nell Doctrine states the general rule that the transfer of all the assets of a
corporation to another shall not render the latter liable to the liabilities of the
transferor. If any of the above-cited exceptions are present, then the transferee
corporation shall assume the liabilities of the transferor.
• Section 40 suitably reflects the business-enterprise transfer under the
exception of the Nell Doctrine because the purchasing or transferee
corporation necessarily continued the business of the selling or transferor
corporation. Given that the transferee corporation acquired not only the
assets but also the business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the former.

• It must be clarified, however, that not every transfer of the entire


corporate assets would qualify under Section 40. It does not apply (1) if the
sale of the entire property and assets is necessary in the usual and regular
course of business of corporation, or (2) if the proceeds of the sale or other
disposition of such property and assets will be appropriated for the
conduct of its remaining business. Thus, the litmus test to determine the
applicability of Section 40 would be the capacity of the corporation to
continue its business after the sale of all or substantially all its assets.
• The Caltex case, thus, affirmed that the transfer of all or substantially all
the proper from one corporation to another under Section 40 necessarily
entails the assumption of the assignor's liabilities, notwithstanding the
absence of any agreement on the assumption of obligations. The transfer
of all its business, properties and assets without the consent of its creditors
must certainly include the liabilities; or else, the assignment will place the
assignor's assets beyond the reach of its creditors. In order to protect the
creditors against unscrupulous conveyance of the entire corporate assets,
Caltex justifiably concluded that the transfer of assets of a corporation
under Section 40 must likewise carry with it the transfer of its liabilities.

• Notably, an evaluation of the relevant jurisprudence reveals that fraud is


not an essential element for the application of the business-enterprise
transfer.
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, 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)
Ong Yong v. Tiu, G.R. No. 144476, 144629, April 8, 2003.

• The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances:

(1) amendment of the Articles of Incorporation to reduce the authorized capital stock,
(2) purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and
(3) dissolution and eventual liquidation of the corporation.

Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to


acquire its own shares and in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements therefor are complied
with.
CIR v. Manning, G.R. No. L-28398, Aug. 6, 1975.

Treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. They are
therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been
retired by the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share, participates
neither in dividends, because dividends cannot be declared by the corporation to
itself, nor in the meetings of the corporations as voting stock, for otherwise equal
distribution of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation though it still
represent a paid — for interest in the property of the corporation.

Is it subject to pre-emptive rights?


Section 42. Power to invest corporate funds in another corporation or
business or for any other purpose. –

• May invest its funds in any other corporation or business for any
purpose upon two-thirds (2/3) vote.

• Any dissenting stockholder shall have appraisal right.

• 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.
Section 43. Power to declare dividends. –
• By board of directors out of the unrestricted retained earnings payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them
• 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
• No stock dividend shall be issued without 2/3 vote.
• 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;
2.prohibited under any loan agreement with any financial institution or creditor unless
consent secured;
3.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.
Section 44. Power to enter into management contract. –

• Approved by majority or both managing and managed corps. 2/3 vote if:

• 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
• 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

• No management contract shall be entered into for a period longer than five years per
term.

• Service contracts or operating agreements relating exploration, development,


exploitation or utilization of natural resources may be subject to periods provided by
laws or regulations.
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.
Ultra-Vires vs. Void ?