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C ORPORATION L AW R EVIEWER (2013 - 2014)

A TTY . J OSE M ARIA G. H OFILEÑA

CORPORATE POWERS AND AUTHORITY

I. Corporate Power and Capacity ( Article 46, Civil Code; Sections 36 and

45)

CIVIL CODE Article 46. Juridical persons may acquire and possess property of all kinds , as well as incur obligations and bring civil or criminal actions , in conformity with the laws and regulations of their organization. (38a)

This article c ompliments Section 36(1) of the Corporation Code.

o As such, even if the right to sue and be sued was not granted in the Corporation Code, the corporation can still invoke it under the Civil Code.

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, ple dge,

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 pre scribed 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, civ ic, 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 bene fit of its directors, trustees, officers and employees ; and

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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.

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)

A . Classification of Corporate Powers: Express; Implied, and Incidental

A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation, those which may be incidental to such conferred powers, those reasonably ne cessary to accomplish its purposes and those which may be incident to its existence. Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001).

o Expressed à Those stated in the law, the Code , and the articles of incorporation/by - laws

§ The powers granted under the C orporation Code need not be in the articles of incorporation or the by - laws to be exercised.

§ Some of the powers expressly granted under S ection 36 are considered to be inherent or incidental powers, which means that even when not granted under the law expressly, such incidental powers are deemed to be within the

capacity of corporate entities, such as the

power to adopt and amend a set of by - laws. 1

o

Implied à Sometimes referred to as “ necessary”; T hose powers exe rcised necessarily to perform the primary purpose for which the company was formed.

§ You can use your common sense to determine whether your corporation has an implied power to exercise or pursue certain actions.

§ Example: you can hire accountants because the SEC requires you to file financial statements.

o

Incidental à Those powers which the corporation can exercise by virtue of the purpose of the corporation.

o

Atty. Hofileña à Don’t kill yourself trying to find an objective distinction between implied or incidental powers. It can be fluid.

Express

Implied

 

Incidental

Comes from the law, by - laws and articles of incorporation.

Flow from the nature of the underlying business enterprise

Flow from the nature of the corporation as

a

juridical person.

These enumerated powers constitute part of the express powers of every juridical person constituted within Philippine jurisdiction.

These exist as a necessary consequence of the grant and/or exercise of the express powers of the corporation or the pursuit of its

Powers that attach to

a

corporation the

moment of its creation without regard to its express

powers or particular primary purpose.

1 Gokongwei v. Securities and Exchange Commission, 89 SCRA 337 (1979).

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purposes are provided in its articles.

purposes are provided in its articles.

purposes are provided in its articles.

B. Where Corporate Power Lodged

A corporation has no power except those expressly c onferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly auth orized officers and agents… In turn, physical acts of the corpo ration, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by - laws or by a specific act of the board of directors. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). 1

C. Powers of the Corporation

The right of succession

o

This is possessed for as long as the corporation exists.

o

This power is the key by which a corporation is deemed to have a “strong juridical personality,” and is the foundation of the primary doctrine that the per sonality of the corporation is separate and distinct from that of its stockholders or members.

To adopt and use a corporate seal

o What: It is an emblem or sign that represents the corporation .

1 Salenga v. Court of Appeals, 664 SCRA 635 (2012); Ellice Agro - Industrial Corp. v. Young, 686 SCRA 51 (2012); Fausto C. Ignacio v. Home Bankers Savings and Trust Co., 689 SCRA 173 (2013) .

o

Function: A corporate signature that may represent consent or agreement. However, this is not necessary for validity of agreemets.

o

Atty. Hofileña à this seems to be a remnant of the past where matters of solemnity were if importance.

To issue or sell stocks to subscribers or admit members for non - stock corporations

o

Issue v. Sell

§ Issue (of new shares) à Taken from the unissued/unsubscribed shares, which no one owns. The company is “giving” or accepting a new subscription; an act of the corporation.

§ Sell (previous ly issued shares) à Taken from shares which were previously owned; an act of the c orporation OR the owner of shares .

o

Atty. Hofileña à normally a corporation cannot sell shares to the subscribers. However, there are

exceptions whereby the company can sell shares which it owns.

§ A corporation can become the owners of (and eventually sell) issued shares if it buys it back from the subscribers. These are TREASURY SHARES. Thes e do not become unissued shares, but are still considered as outstanding stocks .

To mer ge and consolidate with other corporations

o It can be done within reasonable bounds.

SUMMARY à Corporations have inherent powers which it may exercise even if it is

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not noted in the articles of incorporation or by - laws. à Succeeding articles deal with powers of the corporation .

II. Express Powers

A. Enumerated Powers ( Section 36)

To sell, lease, dispose, or encumber assets

o Is there a limitation on the power of the corporation to deal with property? The Corporation Code provides that it is in line with the business of the corporation.

§ Doctrine: The property bought does not necessarily have to be directly related to the operations of the business, but it can be justified by over - all good of the corporation.

§ Can the company – whose main business is to operate taxis in the Philippines – acquire a condominium unit in New York at a time when it is considered a bad investment? Such investment can be justifiable.

§ Atty. Hofileña à This kind of situation is not so much whether the corporation has the power or not, but whether it is wise or not. The Court will allow the board of directors to decide on wisdom of the matter. The Courts however, can come in where there is an allegation that the corporation has no power to do so. This may be initiated where someone alleges that the act is ultra vires. In our age (2013), the world has become smaller and so it can be argued that in

the long run, such investment can be beneficial to the comp any – so it’s a matter of argument.

o A corporation can own stocks of another corporation.

B. Extend or Shorten Corporate Term ( Sections 37 and 81[1])

Section 37. Power to extend or shorten corporate term. A private corporation may extend or shorten its te rm 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 - th irds (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 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the e ffect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to

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those of outstanding shares of any class, or of extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other

disposition of all or substantially all of the corporate property and

assets as provided in the Code; and

3. In case of merger or consolidation. (n)

1. Nature of Power 1

The power to extend corporate life is not a inherent power of a corporation , since the corporate term is not only a matter that constitutes an integral clause of the articles of incorporation, but also the State in granting juridical personality to a corporation is presumed t o have granted only for the period of time provided in the corporation's charter.

T he power to shorten corporate life , although an item that would cover an amendment of the articles of incorporation, is for practical purposes, an inherent right on the par t of the corporation, since the decision to shorten the business life of a business endeavor should really be addressed to the business decision of the business venturers . Although the State would have to approve formally the shortening of the original cor porate term of a corporation, for all practical purposes, the State really compels the underlying enterprise to go on when the co - venturers have decided to cease operations

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

Atty. Hofileña à The Corporate Term is embodied in the articles of incorporation. A s such, to change the corporate term amounts to an amendment of the articles of incorporation. When such amendment takes place, the rules on amending must be complied with.

2.

Appraisal Rights Issues

In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right to have his shares bought back at fair value by the corporation. Nevertheless, under Section 81 of the Code, the appraisal right is also available to a dissenting stockholder even when it covers the shortening of the term of corporate existence.

C. Increase or Decrease Capital Stock ( Section 38)

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

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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. I f 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 subsc ribed 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 - pa r stock allotted to each stock - holder if such increase is for the purpose of making effective stock dividend ther efor 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 di minution 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 Secur ities 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 incurri ng, 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, furthe r, 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 majo rity vote of the board of trustees and of at least two - thirds (2/3) of the members in a

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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 d etermine the sufficiency of the terms thereof. (17a)

Despite the board resolution approving the increase in capital stock and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. Central Textile Mills, Inc. v. NWPC, 260 SCRA368 (1996).

A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a prem ature 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, and would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355

(1987).

1. Nature of Power 1

The power to increase or decrease capital stock is not an inherent power of the corporation, not only because it touches upon an item expressly required to be provided for in the articles of incorporation, but also the capital stock of a corporation is governed by common law doctrines, such as the trust fund doctrine, and pre - emptive rights . Therefore, in increasing or decreasing the capital stock of the corporation, th e

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

corporation must not only comply with the provisions of Section 38, but also with the provisions of Section 16 of the Code governing the amendment of the articles of incorporation.

o Atty. Hofileña à decrease of capital stock is not allowed when it would prejudice creditors . Creditors deal with the corporation that there would be a specific capital to help back the debt incurred.

2.

Appraisal Rights Issues

The policy embodied in Section 38 of the Corporation Code therefore, although it recognizes that an incr ease in authorized capital stock redefines the contractual relations in the corporate setting as it requires the approval of stockholders owning or representing two - thirds (2/3) of the outstanding capital stock, does not include the appraisal right on the part of the dissenting stockholders, in the sense that every stockholder should come into the corporate setting fully aware that the expediencies of corporate life may require that eventually the corporation may need to increase capitalization to fund its operations or expansions, and needs to look primarily into its equity investors to fund the same.

3.

Effectivity of Increase in Capital Stock

Prior to SEC approval of the increase in the authorized capital stock of the corporation, and despite the board resolution approving the increase in capital stock, and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by the SEC.

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4. Special Rules on Listed Shares 1

 

power of t he Board of Directors under the doctrine of centralized management and would not require stockholders’ ratification. o The power to incur and create indebtedness under Section 40 of the Code provides that an encumbrance of all or substantially all of the ass ets of the corporation would require stockholders’ ratification .

The SEC Rules in the case of corporations whose securities are listed in the stock exchange or registered under the then

Revised Securities Act (now covered by the Securities Regulation Code), is that no announceme nt of an offer of rights to acquire share or to issue stock dividends to stockholders shall be made after an increase of capital stock without a definite fixed date for the exercise of such right or issuance of stock dividends .

1.

Nature of a Bond 3

 

o

The rule is meant to avoid delays in the issuance of rights or distribution of stock dividends after an increase of capital stock.

In one opinion, the SEC has limited the term "bonded indebtedness" to cover only indebtedness of the corporation which are secured by mortgage on real or personal property, as distinguished from "debentures" which are unsecured corporate indebtedness.

Atty. Hofileña à regardless of the status of the ACS, you can apply for an increase.

 

o

The law does not require that the unissued shares first be released before the corporation can increase its authorized capital stocks.

Deb entures are issued on the basis of the general credit of the corporation and are not secured by collaterals, and therefore do not constitute bonded indebtedness and will not require approval of the stockholders .

D. Incur, Create or Increase Bonded Indebtedness ( Section 38) 2

Atty. Hofileña à “Public indebtedness”; not similar to debts secured for the ordinary course of business.

Differentiate between Article 38 or Article 40

 

o

The power to incur, create and increase bonded indebtedness governed by Section 38 of the Civil Code should be analyzed from the fact that it constitutes an aspect of the inherent power of every corporation to borrow or to incur loan obligations. Ordinarily, this exercise to borrow falls within t he business judgment

2.

Nature of Power

 

Ordinarily, the incurring, creating or increasing of indebtedness really does not go into or amend the corporate contractual relationship between and among the members of the corporate family. However, when it comes to bonded indebtedness, Section 38 imposes the same procedural requisites as the increase or decrease of capital stock, since they create special

1 Section 1, Rules Requiring Definite Dates for the Exercise of Pre - Emptive or Other Rights or For the Issuance of Stock Dividends (1973). 2 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate L aw. (2013 ed.). Manila, Philippines: Rex Book Store.

 

3 SEC Opinion, 29 April 1987, XXI SEC Q UARTERLY B ULLETIN 21 - 22 (No. 3, Sept. 1987). See also SEC Opinion, 6 April 1990, XXIV SEC Q UARTERLY B ULLETIN 28 - 29 (No. 3, Sept. 1990).

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burdens on the corporation , such as the need to provide for a sinking fund to answer for the maturity value of the bonds and the creation of first liens of important assets of the corporation. Usually bonded indebtedness involve very large amounts and the burdens created on the operations of the corporation usually covers a long period of time.

The rationale for the rather strict requirements under the Code for the incurring, creating or increasing of bonded indebtedness

position of the stockholders or members that they would have had if the indebtedness were not a bonded indebtedness.

E. Sell or Dispose of Assets ( Section 40)

Section 40. Sale or other disposition of assets. Subject to the p rovisions 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 ass ets, 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 exped ient, 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 m eeting 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 addr essee 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

is

to ensure that not only the board of directors alone can bind

the corporation to such burdensome affair s , but that the qualified concurrence of the stockholders or members should be obtained.

Atty. Hofileña à even without Section 38, the 2/3 requirement would still be necessary because incurring bonded indebtedness

is

burdensome.

3.

Appraisal Right

N o appra isal right is granted to dissenting stockholders when the corporation either validly incurs, creates or increases bonded indebtedness since, the granting of such appraisal right under such circumstances would drain the corporation of financial resources co ntrary to the purpose for which the power is exercise to raise funds for corporate affairs. Also, the incurring, creation or increasing of bonded indebtedness does not really go into the original intent or corporate relationship of the stockholders or memb ers with the corporation . Even when such indebtedness is not bonded under the principles of the trust fund doctrine, corporate creditors have priority over the assets of the corporation; therefore, adding the feature of being

a

bonded indebtedness did not really take anything from the

the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the

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purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the bo ard 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 busines s .

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. (28 1/2a)

1. Nature of Power 1

In other words, the exercise of such a power really affects the business enterprise level of corporate set - up, an area much left by the State to the judgment of the managers, and does not in any way affect or alter the juridical entity granted by the State.

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

Consequently, nowhere is the consent of the State required or referred to under Section 40 when the corporation sells or disposes of all or substantially all of its assets.

2. Nature of Transactions Covered 2

Theore tically, there is no change in the basic relationship between the corporation and the stockholders, other than as if the corporation were again at the starting point of it business life. The reason why a stockholders' ratification is required when the boar d sells, disposes or encumbers all or substantially all of the corporate assets is that it recognizes the stockholders right to the nature and status of the corporate business , as well as future developments proceeding therefrom, when they put their invest ments into the corporation. When the corporation, through its board, attempts to alter or dispose of such level, even when the corporation ends up with the same value covering the cash or other form of consideration received for the sale or disposition, it must get the confirmation of the stockholders. o Stockholders have a common law proprietary or beneficial interests on the corporate business enterprise, and any sale, transfer, disposition, or encumbrance thereof would be void if effected by the Board of D irectors without the appropriate stockholders’ approval.

The property of the corporation is not the property of the stockholders or members, and as such, may not be sold without

2 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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express authority from the Board of Directors . Litonjua v. Eternit Corp., 490 SCRA 204 (2006).

 

remaining business, since the sale or disposition of "all" assets or property means there is no remaining business to conduct. 2 The Corporation Code defines a sale or disposition of substantially all assets and property of a corporation as one by which the corporation “would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated” – any sale or disposition short of this will not need stockholder ratification , and may be pursued by the majority v ote of the Board of Directors. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).

3.

Transactions NOT Covered by Ratificatory Vote Requirements 1

Section 40(4) :

a. If it is necessary in the usual and regular course of business of such corporation; or

 

b. If the proceeds of the sale or other disposition of such

property and assets be appropriated for the conduct of its remaining business.

There is a clear distinction between the assets of a corporation

and its business enterprise (which is also termed as “the going concern” in other disciplines), which the author would equate as the “capability to earn profit from the business activity.” When the law therefore says “all or substantially all of the assets,” it means that what is being sold or encumbered is the “business enterprise,” because even if most assets remain after the transaction, the ability to earn profit may no longer be present.

Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.,

Facts: The Construction Development Corporation of the Philippines (CDCP) had a 30 - year franchise to construct, operate and maintain toll facilities in the North and South Luzon Tollways. Basay Mining Corporation (an affiliate of CDCP) obtained loans from Marubeni Corporation of Japan amount ing to P10 billion, which CDCP guaranteed solidarily. Thereafter, CDCP changed its corporate name to PNCC to reflect the government’s (90.3%) shareholding in the corporation.

4.

Sale or Disposition of All Corporate Assets or Property

Such a sale, disposition or encumbrance cannot be covered by the exemption provided in Section 40 where no stockholders' or members' approval is necessary because the sale of all of the assets or property of a business can never be "in the usual and regular course of business of such corporation," nor can it be argued that the proceeds of the sale or other disposition of such property a nd assets be appropriated for the conduct of its

The money owed Marubeni remained unpaid and unacknowledged for 20 years. But in October 2000, PNCC recognized this financial obligation to Marubeni. Barely 3 months after, Marubeni assigned its entire credit to Radstock Corporation for less than P100 million, who in turn sought to collect from PNCC. Eventually, Radstock and PNCC enter ed into the

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

2 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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compromise agreement whereby PNCC shall assign to a third party assignee (designated by Radstock) all its rights and interests in specified real properties (amounting to P6Billion - reduced obligation) provided the assignee shall be duly qualif ied to own real properties in the Philippines. PNCC shall also assign to Radstock 20% of the outstanding capital stock of PNCC, and 6% share in the gross toll revenue of the Manila North Tollways Corporation from 2008 - 2035.

Issue: Whether or not the compr omise agreement is valid.

5. Sale or Disposition of Substantially All of the Corporate Assets or Property

The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property and ass e ts, if thereby the corporation would be rendered incapable of (a) continuing the business or (b) accomplishing the purposes for which it was incorporated . Such a sale or disposition must be understood as valid only if it does not prejudice the creditors of the assignor, which necessarily implies that the assignee assumes the debts of the assignor. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498 SCRA 400 (2006).

The test on whether a sale or disposition or encumbrance is substantial is a qualitative, rather than a quantitative test. 1

Held: NO. The assignment of 6% revenues and outstanding capital stock is not allowed because the franchise of PNCC has already expired and all its assets turned over to the government. Therefore, the revenues and stock capital be long to the government. There can be no disbursement of public funds without appropriation by congress. Public bidding is required to dispose of governmental property. Mere assignments are prohibited. PNCC must follow preference of credit. PNCC has other c reditors, among them the national government which should be paid first, and other creditors who have final and executory judgements against PNCC. The loan from Marubeni is unsecured and should be one of the last to be paid. So the compromise agreement eff ectively

satisfying the unsecured loan to Marubeni before the preferred creditors is invalid.

Doctrine: See above. Also, see “Legal Effect on Assignee Even When Contracts Entered into With the Requisites Stockholders’ or Members’ Approval .”

o

This means that sale of one piece of machinery, if it is essential in the continuation of the business, amounts to sale of substantially all assets. § Approval of qualified majority of the outstanding capital stock is needed

o

Sale of several parcels of land, on the other hand, if not disruptive of the corporation’s business is not a substantial sale of all corporation assets. § A mere board resolution would be sufficient.

Sale by Board of Trustees of the only corporate property without compliance with Section 40 of Corporation Code requiring ratification of members representing at least two - thirds of the membership, would make the sale null and void .

 

1 Vill anueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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Islamic Directorate v. Court of Appeals, 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991).

6.

Lease or Encumb rance of All of Substantially All of the Assets 1

When a corporation decides to lease all or substantially all of its assets, then it would fall within the ambit of Section 40, because in effect the corporation can no longer pursue whatever line of business it has by having contracted away the use of the business enterprise to a lessee à basically they have nothing to use for the business.

When a corporation decides to encumber all or substantially all of its assets, it continues to retain ownership and possession thereof and still be in a position to pursue the lines of business for which the assets have been devoted to. The reason why ratification by stockholders is necessary:

o

The encumbrance of all or substantially all assets has the potential of disru pting the pursuit of the bu siness especially if foreclosure happens (i.e. dispossession ) .

o

Such encumbrance would fall within the same category of incurring or creating bonded indebtedness under Section 38.

7.

Bulk Sales Law

Aside from the requirements under Section 40, the sale of all or substantially all of the corporate assets or property may require compliance with the Bulk Sales Law, 2 when the transaction falls within the classification of the Law as "sale in bulk" and would require the seller to execute a sworn statement listing the

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store . 2 Act No. 3952, as amended by Rep. Act No. 111.

corporate creditors and the amount and nature of their claims, giving of notice of the sale, and applying the proceeds of the sale proportionately to the payment of the listed obligations.

Under the Bulk Sales Law, failure to comply with its requirements renders the transaction void and fraudulent, irrespective of the intentions of the parties to the transaction. 3

8.

Consequences of Contracts Entered Into Without the Requisite Stockholders’ Approval

Section 40(3)

E ntering into the sale, disposition or encumbrance of all or substantially all of the assets of the corporation should be treated as being within the governing doctrine of ultra vires contracts of the third type (i.e., those entered into by unauthorized officers or represe ntatives of the corporation) and should be construed and disposed under the doctrine prevailing on such ultra vires contracts. à Such contract would be void.

9.

Legal Effect on Assignee Even When Contracts Entered into With the Requisites Stockholders’ or Mem bers’ Approval 4

General Rule: When you sell assets, you simply sell it, and the liability stays with you.

Exception: Unless the buyer/assignee assumes your obligations concerning the asset .

Actions made pursuant to Section 40 would constitute a species of “business enterprise” and the legal effect is to make the

3 For a more substantive discussions on the applicability of the Bulk Sales Law, see Chapter 16, V ILLANUEVA , L AW ON S ALES , Rex Book Store, (1998 ed.). 4 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013 ). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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assignee liable for the obligations arising from the business enterprise.

Strategic v. Radstock à the Court stated that the transfer can only happen if the transferee assumes liability for all the obligations. This is because, the transfer was essentially done in fraud of creditors (including the government). This case is a “different animal” all together. 10. Appraisal Right 1

The appraisal r ight is accorded to dissenting stockholders as a matter of equity and fairness since they should be allowed to plough their investments into ventures they feel they could get a better return rather than with a corporation that is no longer capable of pursu ing the business.

F. Invest Corporate Funds for Non - Primary Purpose Endeavor ( Section

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 representi ng 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

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

duly called for the purpose. Written notice of the proposed investme nt 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: Provi ded, 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)

1.

Rational of Rule

Whenever the corporation seeks to engage into a secondary purpose allowed under its articles of incorporation, although intra vires, it must seek the approval of the stockholders or members of the corporation.

o

The law therefore presumes rather strongly that when stockholders invest, or members join, a corporation, it is with the primary expectation that the corporation, through its board, will only pursue the pr imary purpose indicated in the articles of incorporation, and if the board feels that it is propitious to pursue a secondary purpose, then it would do so only if the stockholders or members have had a chance to evaluate and decide upon such diversion of co rporate funds from the primary business of the corporation.

2.

Coverage of Funds

The SEC has ruled that the term “funds” under Section 42 includes any corporate property to be used in the furtherance of

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the business, and consequently when property is devoted in any business other that pursuit of the primary purpose for which the corporation was incorporated, it would need the ratificatory vote of two - thirds (2/3) of the outstanding capital stock of the corporation. 1 3. Investments That Should Be Considered Within Primary Purpose 2

Section 42 expressly provides 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 nec essary, since the matter lies clearly within the business discretion or judgment of the board of directors of the corporation.

o There are certain investments of the corporation that would be deemed consistent with the primary purpose by virtue of the essence of the corporation as a business enterprise.

All corporations, whatever may be their primary purposes, are deemed to have the power to invest corporate funds in another corporation or business, as a means of obtaining the best returns of their investible funds. Examples :

A fishing company, through its board, should be allowed to place say its investible fund of P100,000.00 in PLDT or San Miguel commercial papers or even perhaps their shares, if they offer the best return at that point in time for the corporation,

1 XXIX SEC Q UARTERLY B ULLETIN 2 (No. 2, June 1 995). 2 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

without need of obtaining stockholders' approval; much less should such investments trigger any appraisal right on the part of dissenting stockholders.

Investment by a sugar central in the equity of a corporation that manufactures the jute bags used in packing sugar falls within the implied powers of the sugar central as part of its primary purpose and does not need ra tification by the stockholders . De la Rama v. Ma - ao Sugar Central Co., 27 SCRA 247 (1969).

De la Rama v. Ma - ao Sugar Central Co.

Facts: De La Rama and 3 other minority stockholders of Ma - Ao Sugar Central filed a derivative suit against the Ma - Ao Sugar Central Co., Inc., and Ama do Araneta and 3 other directors . De La Rama claims that the directors made an illegal investment in Phil. Fibers Processing Co., Inc. He contends that since the investment was made NOT in pursuance of the corporate purpose and wi thout the requisite authority of 2/3 of the stockholders, then the investment was thus illegal for being in violation of Section 17 - 1/2 of the Corporation Law.

Araneta claims that the investment was not illegal as it was subsequently ratified by the Board of Directors in a resolution. Also since the company was engaged in the manufacture of sugar bags, it was thus perfectly legitimate for Ma - Ao Sugar either to manufacture sugar bags or invest in another corporation engaged in said manufacture.

Issue: Whet her or not the affirmative vote of the stockholders representing 2/3 of the voting power is necessary

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Held: NO. The court held that the affirmative vote of the stockholders representing 2/3 of the voting power is not necessary.

Doctrine: The corporation code allows a corporation to invest its funds in another corporation for any other purpose other than the main purpose.

Provided that the board has been authorized by affirmative vote of the stockholders representing 2/3 of the voting power.

BUT if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpo se, then to require authority of the stockholders would be to unduly curtail the power of the board of directors.

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.

4.

Investments Outside of Secondary Purposes 1

If one where to limit the review to the wordings of Section 42, the answer would seem to be in the affirmative.

However, the terms of Section 42 are deeme d to be circumscribed by the provisions of Sections 36 and 45 of the Corporation Code. o Section 36, after enumerating express powers of corporations, provides an all - encompassing clause that

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

a corporation may exercise such other powers as may be essential or necessary to carry out its purpose or purposes "as stated in its articles of incorporation."

o Section 45 provides expressly that no corporation shall possess or exercise any corporate power except those conferred by the Corporation Code, or by its artic les of incorporation.

Under such terms, the ratificatory vote of stockholders or members to legally allow a corporation to invest funds outside of its primary purpose (and those which are necessary or incidental t o the exercise of such purpose) would be limited to pursuing the secondary purposes of the corporation .

5.

Consequences of Non - Obtaining of Ratificatory Vote 2

The non - obtaining of the ratificatory vote of the stockholders or members under Section 42 of the Code should be construed to b e within the realm of ultra vires contracts of the second type, having been entered into by representatives of the corporation not duly authorized.

6.

Confirmation of the “Business Enterprise” Level of Relationship

The provisions of Section 42 of the Corporat ion Code recognize the legal standing of stockholders or members of ever corporate set - up on matters that affect the business enterprise, as it grants them standin g to vote on matters, and does not leave the crucial decision of whether or not to invest cor porate funds in non - primary business enterprise within the sole business discretion of the Board.

2 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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G. Declare Dividends ( Section 43)

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 balan ce 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%) p ercent 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)

Dividends from retained earnings can only be declared to those who are stockholders of the corporation; dividends cannot be declared to creditors as part of the settlement of debts. Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).

Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account . It is the same amount that can loosely be termed as the “trust fund” of the corporation. NTC v. CA, 311 SCRA 508 (1999).

When the Board distributes, it is based on the number of shares and to all stockholders. The Board cannot choose who will receive or not.

o However, in cases where the stockholder has not fully paid for his share, his cash dividends will first be applied to your unpaid subscription (which you should have pa id according to your contract ) .

( SEC Circular 11, s.2003 ) Unrestricted Retained Earnings à not allocated for any project or debt of the corporation .

Kinds of Dividends

*Rights to dividends may be affected due to various types of shares

Cash

Property

Stock

All products of your investments

Board Approval is sufficient to execute

Stockholders’ approval is required

No meeting is required

Meeting is required for approval

Issued in cash

Treasury shares which have been reissued as dividends are actually property dividends

New shares of stocks issued from unissued shares

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Only upon declaration of the board will a stockholder have a “right” to claim their cash or property dividends .

Only upon declaration of the board will a stockholder have a “right” to claim their cash

1. Retention of Surplus Profit

Section 43 prohibits stock corporations from retaining surplus profits in excess of one - hundred percent (100%) of their paid - up capital stock, 1 except in the following situations:

a. When justified by definite corporate expansion projects or programs approved by the board of directors; 2 i. “Definite” à Mere possibility of expansion is insufficient to withhold surplus profit.

b. 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

c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the

1 Even under the old Corporation Law, the SEC had issued the Rules Governing the Distr ibution of Excess Profits of Corporations (1973), which provides that "All corporations which have surplus profits in excess of necessary requirements for capital expansion and reserves shall declare and distribute the excess profits as dividends to stockh olders.” (Section 1)

2 SEC R ULES G OVERNING THE D ISTRIBUTION OF E XCESS P ROFITS OF C ORPORATIONS provides

that the amounts appropriated for such purpose shall be segregated from the free surplus; and that upon completion of the expansion program, the reserve established shall be declared as stock dividends.

corporation, such as when there is need for special reserve for probable contingencies. 3

Under the SEC Rules Governing the Distribution of Excess Profits of Corporations, where the financial statements of the corporation show surplus profits in excess of 100% of paid - up capital, it shall explain by footnotes why the same has not been declared as dividends; if the explanation is not satisfactory, the SEC shall direct the cor poration to distribute the excess as dividends. 4

The power granted to stockholders to demand from the Board the declaration of dividends under Section 43 is one of the few instances under the Code where the stockholders themselves exercise a primary power , instead of the usual ratificatory vote on actions taken primarily by the board of directors.

2.

Report to SEC

Any declaration of dividends, whether cash or stock, shall be reported to the SEC within fifteen (15) days from the date of declaration. For corpor ations whose shares or securities are listed in the stock exchange or registered and licensed under the Revised Securities Act (now the Securities Regulation Code), the report shall be filed with the SEC before or simultaneously with the release or publica tion of the notice of declaration of dividends to stockholders. 5

3.

Restrictions on Banks

3 SEC R ULES G OVERNING THE D ISTRIBUTION OF E XCESS P ROFITS OF C ORPORATIONS includes

as justification for non - declaration of dividends when the same is consistent with policy or requirements of a government of fice. 4 Section 2 thereof.

5 Section 3, SEC R ULES G OVERNING THE D ISTRIBUTION OF E XCESS P ROFITS OF C ORPORATIONS (1973)

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Under Section 57 of the General Banking Law of 2000, 1 no bank or quasi - bank shall declare dividends greater than its accumulated net profits then on hand deducting ther efrom its losses and bad debts. Neither shall the bank or quasi - bank declare dividends, if at the time of declaration:

a. Its clearing account with the Bangko Sentral is overdrawn;

b. It is deficient in the required liquidity floor for government deposits for f ive (5) or more consecutive days;

c. It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or

d. It has committed a major violation as may be determined by t he Bangko Sentral.

H. Management Contracts ( Section 44): Why the difference in rule between entity and individual?

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 th e managed corporation, at a meeting duly called for the purpose :

Provided , That (1) where a stockholder or stockholders representing

1 Rep. Act 8791.

the same interest of both the managing and the managed corporations own or control more than one - third (1/3) of the total o utstanding 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 ne xt 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 regulat ions.

(n)

Atty. Hofileña à While this provision provides substantial basis for a corporation’s management of another, the board of the managed corporation must not abdicate their power completely. At the end of the day, they must still call the shots.

1. Co verage of “Management Contract” (Section 44(2))

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A management contract is not the same as an agency contract , and therefore is not revocable at will . Nielson & Co., Inc. v.

o

Exception: Under these principles, the ratificatory procedure should not therefore be applicable to a

Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. Moya, 195 SCRA 247 (1991).

Rationale for Ratification Requirements 1

corporation

that

is

organized

primarily

as

a

2.

management company , and its entering into a management contract is clearly within the primary

On Part of the Managed Corporation : Such a management contract is a deviation from the principle under Section 23 that the corporate affairs shall be managed by the board of directors, and thereby a departur e from such an arrangement would require the approval of the stockholders under the principle that it would vary the contractual corporate arrangements, by allowing basically an outsider to involve itself in the management of corporate affairs.

purpose of the corporation and in accordance with the contractual u nderstanding with the stockholders of such managing corporation.

3. Ratification Requirements When There is Common Control of Involved Corporations (Section 44(1))

4. Cases Not Covered by Section 44 2

 

It would seem from the express language of Section 44, that w hen it comes to a management contract entered into by the managed corporation under the definition of Section 44, not with another corporation but with a partnership or an individual, the same would not be covered by and thereby need not comply with the ratificatory requirements of Section 44.

I. Purchase Own Shares (Section 41)

On Part of the Managing Corporation : The rationale for ratificatory measures on the part of the managing corporation is that the management arrangement is a deviation from the principle also that the board of directors in the managing corporation assumed office with the understanding that they would devote their time and resources for the affairs of the corporation, and the entering into the management contract whereby the board, as the direct agents of the managing corporation, would be devoting their time and resour ces towards the operations of another corporation , would be a deviation from such a contractual relationship, and thereby would require the confirmation of the stockholders of the managing corporation.

They become treasury shares.

 

Requisites:

 

o

Legal purpose

o

Out of unrestricted earnings

 

III. Implied Powers Examples:

 

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

2 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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When the articles expressly provide that the purpose of the corporation was to “engage in the transportation of person by water,” such corporation cannot engage in the business of land transportation, which is an entirely different line of business, and, for which reason, may not acquire any certificate of public c onvenience to operate a taxicab service . Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962).

A corporation whose primary purpose is to generate electric power has no authority to undertake stevedoring services to unload coal into its pier since it is not reasonably necessary for the operation of its power plant. NPC v. Vera, 170 SCRA 721

(1989).

A corporation organized to engage as a lending investor cannot engage in pawnbroker . Philipinas Loan Co. v. SEC, 356 SCRA 193

(2001).

A mining company has no power to engage in real estate development. Heirs of Antonio Pael v. Court of Appeals, 372 SCRA 587 (2001).

An officer who is authorized to purchase the stock of another corporation has implied power to perform all other obligations arising therefrom such as payment of the shares of stock. Inter - Asia Investments Industries v. Court of Appeals, 403 SCRA 452

(2003).

IV. Incidental Powers

As a creature of the law, the powers and attributes of a corporation are those set out, expressly or implied, in the law. Among the general powers granted by law to a corporation is the power to sue in its own name . This power is granted to a

duly - organized corporation, unless specifically revoked by another law. Umale v. ASB Realty Corp., 652 SCRA 215 (2011).

The act of issuing checks is within the ambit of a valid corporate act, for it as for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).

V . Other Powers ( Secti on 36)

A. Sell Land and Other Properties

When the corporation’s primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much l ess when acting through the treasurer. Articles 1874 and 1878 of Civil Code requires that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale is void. San Juan Structur al v. CA, 296 SCRA 631 (1998). 1

B. Borrow Funds

The power to borrow money is one of those cases where even a special power of attorney is required under Article 1878 of Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors . The argume nt that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the

1 AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Cosco Philippines Shipping, Inc. v. Kemper Insurance Company, 670 SCRA 343 (2012).

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corporation is devoid of merit because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in b ehalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

shopping is necessary — a certification not signed by a duly author ized person renders the petition subject to dismissal. Gonzales v. Climax Min ing Ltd., 452 SCRA 607 (2005); 2 such as the administrator or project manager, Esteb an, Jr. v. Vda. de Onorio, 360 SCRA 230 (2001); or the General Manager, Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).

C. Power to Sue and Be Sued

 

Under Section 36 in relation to Section 23 of Corporation Code, where a corporation is an injured party, its power to sue is lodged with its Board of Directors. A minority stockholder who

Nonetheless, such lack of authority may be cured: even if the counsel executed the verification and certificate of non - forum shopping before the board authorized him, the passing of the board resolution of auth orization before the actual filing of the complaint. Median Container Corp. v. Metropolitan Bank and Trust Co., 561 SCRA 622 (2008); the submission in the motion for reconsideration of the authority to sign the verification and certification constitutes su bstantial compliance with the procedural requirements. Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008).

When a corporate officers has been granted express power by the Board of Directors to institute a suit, the same is considered broad enough to include the power of said corporate officer to execute the verification and certification against forum shopping required in initiatory pleadings under the Rules of Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620

is

a member of the Board has no such power or authority to sue

on the corporation’s behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001). 1

1.

Power to Bind the Corporation in a Suit

When the power to sue is delegated by the by - laws to a particular officer, such officer may appoint counsel to represent the corporation in a pre - trial hearing without need of a forma l board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).

For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003).

2.

Certificate of Non - Forum Shopping:

If the petitioner is a corporation, a board resolution authorizing

(2009).

a corporate officer to execute the certification against forum

 

2 Also DBP v. Court of Appeals, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); Philippine Airlines, Inc. v. Flight Attendance and Stewards Association of the Philippines (FASAP), 479 SCRA 605 (2006); Metro Drug Distribution, Inc. v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. Commissioner of Internal Revenue, 545 SCRA 10 (2008) Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010); Cosco Philippines Shipping, Inc. v. Kemp er Insurance Company, 670 SCRA 343 (2012).

1 Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro - Indus trial Corp. v. Young, 686 SCRA 51 (2012).

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A President of a corporation, among other enumerated corporate officers and employees, can sign the verification and certification against non - forum shopping in behalf of the corporation without the benefit of a board resolution. South Cotabato Communications Corp. v. St o. Tomas, 638 SCRA 566

(2011).

3.

Service of Summons on Corporations

Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term “general manager” and unlike the old provision in the Rules of Court, it does not include the term “agent”. Consequentl y, the enumeration of persons to whom summons may be served is “restricted, limited and exclusive” following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the earlier cases that uphold service of summons upon a const ruction project manager; 1 a co rporation’s assistant manager; 2 or dinary clerk of a corporation; 3 private secr etary of corporate executives; 4 retained counsel; 5 officials who had charge or control of the operations of the corporation, like the assistant general manager; 6 or the corporation’s Chief Finan ce and Administrative Officer; 7 no longer apply since they were decided under the old

1 Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).

2 Gesulgon v. NLRC, 219 SCRA 561 (1993).

3 Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 (1992); G & G Trading Corp . v. Court of Appeals, 158 SCRA 466 (1988).

4 Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); also Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999).

5 Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966).

6 Villa Rey Transit, In c. v. Far East Motor Corp., 81 SCRA 298 (1978).

7 Far Corporation v. Francisco, 146 SCRA 197 (1986).

rule that allows service of summons upon an agent50 of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 3 12 SCRA 65 (1999).

To sue and be sued (Additional Notes)

A de facto corporation may also sue and be sued, and their status as de facto cannot be assailed collaterally unless in a case duly submitted for that purpose.

General Rule: The rule that the power of the corporation to sue and be sued in any court is lodged with the Board of Directors that exercise its corporate powers, is not well - established.

Exception: The only exception to such rule is when the circumstances allow the filing by a relator - stockh older of a derivative suit in behalf of the corporation without prior approval of the Board of Directors or Trustees. 8 Example:

Even if the counsel executed the verification and certificate of non - forum shopping before the board authorized him, the passing of the board resolution of authorization before the actual filing of the complaint, or the submission in the motion for reconsideration of the authority to sign the verification and certification constitutes substantial compliance with the procedure requi rements. 9

D. Power to Hire Employees and Appoint Agents

8 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 9 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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Except where the authority of employing servants and agents is expressly vested in the board of directors or trustees, an officer or agent who has general control and management of the corporation’s business, or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. But the contracts of employment must be reasonable. Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924).

E. Provide Gratuity Pay for Employees ( Section 36[10])

Providing gratuity pay for employees is an express power of a corporation under the Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

The underlying rationale for the express power of corporation to grant gratuities is that they engender loyalty among the corporation’s human resources and grants them motivation to remain with the corporation, and thereby increase their productivity and avoid wastage occurring through unnecessary high turn - over of personnel.

F. Power to Make Donations ( Section 36[ 9])

Doctrine of Maximization of Profits

o

Definitely this cannot be justified as beneficial for the corporation because you are parting with property.

o

Essentially, every donation made by the corporation would contravene the doctrine of “maximization of

profi ts,” and would constitute a breach by the Board of Directors of its fiduciary duties to the stockholders. 1

Doctrine of Corporate Social Responsibility 2

o

Corporations being creatures of law and receiving the protection of the State as well as profiting from society must bear certain non - profit and social responsibilities.

o

Under this theory, donations and other contributions made by the Board of Directors would not constitute ultra vires acts.

The limitation: Reasonable à “it depends”

o

The amount should not be so big of an amount such that it infringes the capacity to conduct business and the amount necessary to pay back creditors.

o

If donations constitute merely a wastage or have no reasonable means of enhancing the business enterprise (e.g. goodwill), then the y would be “unreasonable” donations and are ultra vires. 3

Donations cannot be made in aid of a political party.

o Atty. Hofileña à The Omnibus Election Code amended the provision of the Corporation Code, and states that donations can be made to political candidates .

G. Enter Into a Partnership or Joint Venture: Tuason & Co. v. Bolanos, 95 Phil. 106 (1954) ; SEC Opinion, dated 29 February 1980.

1 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

2 Villanueva, C . L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

3 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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Tuason & Co. v. Bolanos

Facts: J.M. Tuason & Co. brought an action for the recovery of possession of real property against Bolanos. Bolanos alleges ownership of the land by prescription. The case was ruled in favor of Tuason (prescription does not run against registered property).

On appeal, Bolanos alleges, among others, that the complaint by Tuason should h ave been dismissed for not having been brought by the real party in interest. This is because the action is brought in behalf of JM Tuason & Co. Inc. by Gregorio Araneta Inc., its managing partner .

Issue: Whether or not the case should have been dismissed on the ground that the case was not brought by the proper party in interest

Held: NO. What Section 2, Rule 2 of the Rules of Court provide is that the action be brought in the name of, but not necessarily by the real party in interest. While the complain t states that the plaintiff is “represented herein by its Managing Partner Gregorio Araneta, Inc.”, another corporation, there is nothing against one corporation being represented by another person, natural or juridical, in a suit in court.

The contention that Gregorio Araneta, Inc. cannot act as managing partner for plaintiff on the theory that it is illegal for two corporations to enter into a partnership is without merit. There is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as “its managing partner” is not in line with the corporate business of either of them.

Doctrine: The true rule is that “though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter.”

A joint venture is essentially a partnership arrangement, although of a special type, since it pertains to a particular project or undertaking. 1 Although Tuason does not elaborate on why a corporation may become a co - venturer or partner in a joint venture arrangement, it would seem that the policy behind the prohibition on why a corporation cannot be made a partner do not apply in a j oint venture arrangement. Being for a particular project or undertaking, when the board of directors of a corporation evaluate the risks and responsibilities involved, they can more or less exercise their own business judgment is determining the extent by which the corporation would be involved in the project and the likely liabilities to be incurred. Unlike in an ordinarily partnership arrangement which may expose the corporation to any and various liabilities and risks which cannot be evaluated and an ticipated by the board, the situation therefore in a joint venture arrangement, allows the board to fully bind the corporation to matters essentially within the boards business appreciation and anticipation. 2

1 B AUTI STA , supra, at p. 50. In Torres v. Court of Appeals , 278 SCRA 793, 86 SCAD 812 (1997), the Supreme Court held unequivocally that a joint venture agreement for the development and sale of a subdivision project would constitute a partnership pursuant to the elements thereof under Article 1767 of the Civil Code that defines when a partnership exists. 2 Villanueva, C. L., & Villanueva - Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

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The prevailing rule in the United States is t hat "unless it is expressly authorized by statute or charter, a corporation cannot ordinarily enter into partnerships with other corporations or with individuals, for, in entering into a partnership, the identity of the corporation is lost or merged with t hat of another and the direction of the affairs is placed in other hands than those provi ded by law of its creation… A corporation can act only through its duly authorized officers and agents and is not bound by the acts of anyone else, while in a partnersh ip each member binds the firm when acting within the scope of the partnership." 1

The doctrine is grounded on the theory that the stockholders of a corporation are entitled, in the absence of any notice to the contrary in the articles of incorporation, to a ssume that their directors will conduct the corporate business without sharing that duty and responsibility with others. 2

VI. ULTRA VIRES DOCTRINE

A. Types of Ultra Vires Acts ( Section 45)

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

1 F LETCHER C YC . C ORPORATIONS ( Perm. Ed.) 2520. 2 B AUTISTA , T REATISE ON P HILIPPINE P ARTNERSHIP L AW (1978 Ed.), at p. 9.

exercise of the powers so conferred. (n)

A corporation has no power except those expressly conferred on it by the Corporation Code, its charter, and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its Board of Directors and /or its duly authorized officers and agents. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).

1.

First Type Ultra Vires: Those which are outside of the express, implied and incidental powers of the corporation.

An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law. The term “ultra vires“ is “distinguished from an illegal act for the former is merely voidabl e which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.” Atrium Management Corp. v. CA, 353 SCRA 23 (2001) .

2.

Second Type Ultra Vires: Those which have been executed on behalf of the corporation wi thout proper authority from the Board of Directors.

When the President enters into speculative contracts without

without subsequent Board

ratification, nor were the transactions included in the reports of the corporation, such con tracts do not bind the corporation. It must be pointed out that the Board of Directors, not the President, exercises corporate powers . Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). Example:

prior board

approval , and

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Contracts or acts of a corporation must be made either by the Board of Directors or by a corporate agent duly authorized by the Board – absent such valid delegation/ authorization, the rule is that the declaration of an individual directors relating to the affairs of the corporation, but no t in the course of, or connected with the performance of authorized duties of such director, are held not binding on the corporation . Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).

 

Harden, a stockholder of Balatoc, as well as other stockholders filed a case against Benguet and Balatoc praying that the contract be declared unlawful, and subsequently annulled, and that the shares of stock issued to Benguet be obliterated. They based their complaint on a provis ion in the then Corporation Law (adopted from the Act of Congress of 1916) which states that it shall be “unlawful for any

member of a corporation engaged in agriculture or mining (

)

to be in

3.

Third Type Ultra Vires: Those which are per se contrary to law, morals and public policy . Example:

any wise interested in any other corporation engaged in agric ulture or in mining.”

Although the arrangement between the two mining companies was prohibited under the terms of the old Corporation Law, the Supreme Court did not declare the nullity of the agreements on the ground that only private rights and interests, as distinguished from public interests, were inv olved in the case. Harden v. Benguet Consolidated Mining Co., 58 Phil. 140

(1933).

Issue: Whether or not the contract should be annulled for illegality.

Held: NO. The provision was enacted based on public policy which dictates the need to regulate mining rights. T he penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney - General in re presentation of the Government. Moreover, Benguet Company has committed no civil wrong against the plaintiffs. In this case, Harden has no legal standing.

Doctrine: Even where corporate contracts are illegal per se, when only public or government policy i s at stake and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original contractual expectations.

 

Harden v. Benguet Consolidated Mining Co.

Facts: Benguet Consolidated, a sociedad anonima, and Balatoc Minin g Co., a corporation, were engaged in the business of mining gold. During its early years, Balatoc was underdeveloped so it entered into a contract with Benguet Consolidated wherein Benguet will erect power plants and develop a milling plant for Balatoc. In return, Balatoc gave Benguet shares with a par value of P600K. The contract was a result of a general stockholders’ meeting held by Balatoc. The project soon after turned out well, with Benguet profiting from their shares.

B. General Judicial Attitude Towards the Ultra Vires Doctrine

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The plea of “ultra vires” will not be allowed to prevail, whether interposed for or against a corporation, when it will not advance justice but, on the contrary, will accomplish a legal wrong to the prejudice of another who acted in good faith. Zomer Dev. Corp. v. Int’l Exchange Bank, 581 SCRA 115 (2009).

C. Ratification of Ultra Vires Acts:

Acts done by the Board of Directors which are ultra vires cannot be set - aside if the acts have been ratified by the stockholders . Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 (1954).

Pirovano v. De la Rama Steamship Co., Inc

Facts: The heirs of Enrico Pirovano filed before CFI of Rizal an action seeking to enforce some board resolutions which gives his children the proceeds of the insurance policies taken on the life of the deceased. Pirovano, former president of steamship corporation, was said to have contributed greatly to progress of the company by raising its paid - up capital from P240K to P15.5 M. A few years before he died in the hands of the Japanese, the company insured the life of Pirovano in various insurance companies for P1M.

The first series of resolutions was issued wherein a sum of P400k convertible to 4k shares of stock at par sha ll be set aside for his heirs. This was later changed because, it was found by the sister of Estefania de la Rama, Lourdes, that in computing the actual value of the stocks, the widow of Pirovano – as guardian of the children – would have twice as much vot ing power as her other 4 sisters.

The board adopted a resolution changing the form of the

donation of 4,000 shares of stock as originally planned into a renunciation in favor of the children of all the company’s “right, title, and interest as beneficiary in and to the proceeds of the life insurance policies subject to the express condition that said proceeds should be retained as a loan drawing interest at 5% per annum and shall be payable after the company “shall have first settled in full the balance of its present remaining bonded indebtedness to NDC. Estefania as guardian of the children then acted this donation. After a few years the stockholders formally ratified the donation stated in the resolutions.

The president of the corporation, Sergio Osmen a filed an inquiry before SEC alleging that said donation was void because the corporation acted beyond its scope of powers because a corporation can’t dispose of his assets by gift.

Issue: Whether or not the donation is valid and enforceable.

Held: YES. The resolution is not an ultra - vires act on the part of the corporation. The corporation was given broad and unlimited powers to carry out the purpose for which it was organized which includes the power to (1) invest and deal with corporate money not immediately required in such manner as from time to time may be determined (2) aid in any other manner to any person, association or corporation of which any obligation is held by this corporation. The donation undoubtedly comes within the scope of this broad power.

The grant or donation is question is remunerative in nature and was

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given in consideration of the services rendered by the heirs’ father or the corporation. The donation has already been perfected such that the corporation could no longer rescind i t. It was embodied in a Board Resolution. Representatives of the corporation and even its creditors as the NDC have given their concurrence. The donation was a corporate act carried out by the corporation not only with the sanction of the Board of Director s but also of its stockholders. The donation hasreached a stage of perfection which is valid and binding upon the corporation and cannot be rescinded unless there exists legal grounds for doing so.

Doctrine: Said donation even if ultra vires is not void a nd if voidable, its infirmity has been cured by ratification and subsequent acts of the corporation. The corporation is now estopped or prevented from contesting the validity of the donation. To allow the corporation to undo what it has done would be most unfair and contravene the well - settled doctrine that the defense of ultra vires cannot be set up or availed of in any completed transaction.

Ratification can be both express and implied.

Even when a particular corporate act does not fall within the express or implied powers of the corporation, nevertheless it will not be set aside when, not being malum prohibitum, the corporation, through its senior officers or its Board of Directors, are estopped from questioning the legality of such act , contr act or transaction. Carlos v. Mindoro S ugar Co., 57 Phil. 343 (1932). 1

1 Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. Court of Appeals, 177 SCRA 594 (1989).

o Acts done in excess of corporate officers’ scope of authority cannot bind the corporation. However, when subsequently a compromise agreement was on behalf of the corporation being repre sented by its President acting pursuant to a Board of Directors’ resolution, such constituted as a confirmatory act signifying ratification of all prior acts of its officers. NPC v. Alonzo - Legasto, 443 SCRA 342 (2004).