CORPORATION LAW Study Guide 5

ARTS. 36-45, BP 68
1. EXPLAIN THE DOCTRINE OF LIMITED CAPACITY.
A corp. Can only exercise powers expressly granted by law, incident to its
existence or can be implied from its authorized powers.
2. WHAT ARE THE THREE (3) GENERAL CLASSES OF CORPORATE POWERS?
EXPLAIN EACH.
Powers of a corp. Provided by Secs. 36-44.
(p. 311, de Leon)
Classes of Powers:
(1) those expressly granted or authorized by law (Sec. 2), i.e. those
conferred by BP 68 and its AOI (Sec. 45);
(2) Those that are necessary to the exercise of the express or
incidental powers (Secs. 236 [11], 45) and;
(3) Those incidental to its existence. (Sec. 2, 45)
Sec. 36 lists 11 powers of a corp. Sec. 43 needs concurrence of stockholders.
EXPRESS
1. Those powers given
to a corp. either:
a. By clear and express
provision of law:
* some of the other
powers enumerated in
Sec. 36 are considered
inherent or incidental,
which even if not given
by express grant are
given so deemed to be
within the capacity of
the
foreign
entities
(such as the power to
adopt by-laws)
b. by the charter or
articles of incorporation:
* express grant of
authority from the board
of directors needed to
validly bind the corp.
* unless there is a board
resolution
authorizing
an officer to exercise
express powers given to
a corp. such as filing a
suit on its behalf, such
an action is absent
* the power of a corp. to
sue and be sued in any
court is lodged with the
BOD that exercise its
corp. powers.
*
by-laws
are
not
sources of any power

IMPLIED
Those powers that exist
as
a
necessary
consequence of:
a.
the
exercise
of
express powers of the
corp. or
b. the pursuit of its
purpose as provided for
in the AOI:
*the management of the
corp. in the absence of
express restrictions, has
discretionary authority
to enter into contracts
or transactions which
may
be
deemed
reasonably necessary or
incidental
to
the
business purpose
* sub-par. 11 of Sec. 36
provide that a corp. has
the power and capacity
to exercise such powers
as may be essential or
necessary to carry out
its purpose or purposes
as stated in the AOI.

INCIDENTAL
Those powers that:
* attach to a corp. at the
moment of its creation
* w/o regard to its
express
powers
or
particularly
primary
purposes
* is said to be inherent
in it as a legal entity or
a legal organization
* powers that go into
the very nature and
extent
of
a
corps.
juridical entity cannot
be presumed to be
incidental or inherent
powers. This juridical
entity is State-grant and
cannot be altered or
amended without State
authority.

CORPORATION LAW Study Guide 5

2. Art. 46 of the CC
expressly provides for
the powers of the corp.
as a juridical personality
possesses

Sec. 2 of the CC
provides the corp. as
having
the
powers,
attributes
and
properties
expressly
authorizes by law or
incident to its existence

* Sec. 36 of the CC
expressly
enumerates
the 10 powers which the
corp. may exercise
* Sec. 45 of the same
Code recognizes other
powers provided for in
the AOI
3. Generally exercised
by
the
BOD
with
exception
to
certain
instances where the
stockholders' assent are
needed

Generally,
purely
members of the BOD
exercise this

Generally,
purely
members of the BOD
exercise this

3. WHAT IS AN ULTRA VIRES ACT? DISTINGUISH IT FROM AN ILLEGAL ACT.

Ultra Vires are acts which is not within the express, implied, and
incidental powers of the corporation conferred by the Corporation Code or
AOI. It is an act which is not positively forbidden, but impliedly forbidden
because not expressly or impliedly authorized or necessary or incidental in
the exercise of the powers so conferred.
Intra vires are acts or transactions within the legitimate powers of a
corporation or are related to its purposes.
ULTRA VIRES
1. may not be illegal
2. may be lawful, moral, praiseworthy
3. voidable and may be enforced by
performance, ratification or estoppel

ILLEGAL ACTS
Per se illicit for being contrary to law,
ALWAYS ULTRA VIRES
Contrary to law, morals, good
customs, public order, public policy
Void and cannot be validated

ILLEGAL ACTS
Art. 5, NCC - acts executed against provisions of mandatory or prohibitory
laws are void and null
Art. 1409, NCC - enumerates the inexistent contracts, which are void ab
initio, i.d. cause, object, purpose are contrary to law, morals, customs, public
order, public policy.
Art. 1306, NCC - contracting parties may establish such stipulations, clauses,
terms & conditions they deem proper as long as not contrary to law, morals,
good customs, public order, public policy.

4. ENUMERATE THE SPECIFIC POWERS

CORPORATIONS UNDER SEC. 36, BP 68.

EXPRESSLY

GRANTED

"Corporate Powers and Capacity - Every corporation incorporated

under this Code has the power and capacity:

TO

CORPORATION LAW Study Guide 5

(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 AOI and the certificate of incorporation;
(3) To adopt and use a corporate seal;
(4) To amend its AOI 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 treasury stocks in accordance with the provisions of
this
Code; and to admit members to the corporation if it be a nonstock
corporation;
(7) To purchase, receive, take or grant, hold, convey, sell, lease,
pledge,
mortgage and otherwise deal with such real and personal
property,
including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
(8) To enter into merger or consolidation with other corporations as
provided in this Code (Sec. 76);
(9) To make reasonable donations, including those for the public
welfare or
for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or
for purposes of partisan political activity;
(10) To establish pension, retirement, and other plans for the benefit
of its directors, trustees, officers and employees, and;
(11) To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in its
AOI.
5. WHAT ARE THE LIMITATIONS ON THE POWER OF THE CORPORATION TO
EXTEND ITS TERM OF EXISTENCE?
Sec. 37, BP 68 (p. 322, de Leon)
"A private corporation may extend or shorten its term as stated
in the AOI when approved by a majority vote of the BOD/BOT's
and ratified at a meeting by the stockholders representing at least
2/3 of the OCS or by at least 2/3 of the members in case of nonstock 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."
Relate with Sec. 11.

CORPORATION LAW Study Guide 5

Extension of a corps. Life needs an amendment of its AOI and not to exceed
50 years. Sec. 37 however, does not mention amendment of the AOI.
SEC. 37 does not mention written assent of stockholders as opposed to Sec.
16.
Relate to Sec. 81 (appraisal right)
6. HOW MAY INCREASE (OR DECREASE) IN THE CAPITAL STOCK OF A
CORPORATION BE DONE?
(p. 342, de Leon)
There are three ways by which the authorized capital stock may be
increased (decreased):
(1) By increasing (decreasing) the number of shares authorized to be
issued without increasing (decreasing) the par value thereof;
(2) By increasing (decreasing) the par value of each share without
increasing (decreasing) the number thereof; and
(3) By increasing (decreasing) both the number of shares authorized to
be issued and the par value thereof.
(p. 336, de Leon)
An increase or reduction in the capital stock of the corporation is a
fundamental change in the corporation. The authority of the corporation to
take such action is not be implied but exists only when expressly conferred.
The power is expressly granted by Sec. 38.
(1) The increase or decrease is now subject to prior approval of the
SEC;
(2) Even holders of non-voting shares are entitled to vote on the
matter (Sec. 6, par. 6[5])
(3) The notice requirement is mandatory and is obviously designed to
protect the interests of minority stockholders.
N.B. BP 68 contains no prohibition for a corporation to increase or decrease
its authorized capital stock even if the same has not yet been fully
subscribed.
7. WHAT ARE THE LIMITATIONS ON THE POWER OF A CORPORATION TO
DECREASE OR INCREASE ITS CAPITAL STOCK?
(p. 337, de Leon)
(1) As a general rule, a corporation cannot lawfully decrease its capital
stock if such decrease will have the effect of relieving existing subscribers
from the obligation of paying for their unpaid subscriptions without a valuable
consideration for such release as such an act of the corporation constitutes
an attempted withdrawal of so much capital upon which corporate creditors
are entitled to rely (Phil. Trust Co. vs. Rivera, 44 Phil. 649 [1923])
(2) The corporation must submit proof to the SEC that such decrease
will not prejudice the rights of creditors. (SEC Opinion No. 05-10, 7/12/2005)
(3) A corporation cannot issue stock in excess of the amount limited by
its AOI; such issue is ultra vires and the stock so issued is void even in the
hands of a bona fide purchaser for value; and
(4) A reduction or increase of the capital stock can take place only in
the manner and under the conditions prescribed by law.

CORPORATION LAW Study Guide 5

8. EXPLAIN THE STOCKHOLDERS RIGHT OF PRE-EMPTION.

Sec. 39, BP 68 (DE LEON, p. 354)
RIGHT OF PRE-EMPTION is the right of stockholders to be offered
first new stock issuances of a corp. in proportion to their existing
shareholdings when such offer is given and on equal terms with other holders
of the original stocks before subscriptions are received from the general
public. Priority in subscribing to new stock issuances. Up to 50% of newly
issued shares.
The right of pre-emption is based on the principle that a stockholder in
subscribing to shares of stock, does so under the understanding that his
equity is fixed by the relation which the number of shares he subscribes
bears to the total authorized capital stock, issued or unissued, subscribed or
unsubscribed, at the time of his subscription as shown in the AOI and should,
therefore, not be diluted by the issuance of additional shares without giving
him the opportunity to subscribe to such shares in proportion to his
shareholdings.
Rationale is to maintain the stockholders proportionate share in the total
value of the corp. Applies only to new issue of shares, which occurs when the
capital stock of the corp. Is increased.
Power of pre-emption does not extend to shares issued to pay debts
previously incurred by the corp. (Sec. 39, BP 68).
9. WHAT IS MEANT BY BOND/BONDED INDEBTEDNESS?
Sec. 38, (de Leon, p. 347)
Bonded indebtedness is when a corporation borrows money and
hence is under an obligation to pay a definite sum of money at a future time
at fixed rate of interest. The corporation's powers to create bonded
indebtedness is both express and implied.
A corp's. indebtedness may be evidenced by notes or bonds as its
primary security.
BONDS
1. amount of money borrowed is
large, obtained from a no. of people
and extends over a period of years
2. phrasing is more formal
3. payment is usually, though not
always, secured as to both principal
and interest by certain specified
property held for the purpose under a
formal deed or trust
3. consists of a number of bonds,
may vary as to denomination, some
may
be
registered
others
unregistered, but all are of like tenor
and if secured, all are secured
4. usually but not always run to
bearer and transferable by delivery
5. issuance of which is borrowing
from the public

NOTES
Amount of money borrowed is small,
borrowed in a single sum, from a few
persons or for a short time only
Phrasing is informal
Not secured

10. GIVE THE REQUISITES IN ORDER THAT A CORPORATION MAY VALIDLY

SELL, LEASE, EXCHANGE OR OTHERWISE DISPOSE OF ALL OR SUBSTANTIALLY
ALL ITS ASSETS.

CORPORATION LAW Study Guide 5

Sec. 40, BP 68 (DE LEON, p. 364)

The requisites for the validity of such sale, etc. are as follows:
(1) the sale, etc., must be approved by the BOD or BOT;
(2) the action of the BOD or BOT must be authorized by the vote of
stockholders representing 2/3 of the OCS including holders of non-voting
shares (see Sec. 6, par. 6[3] or 2/3 of the members, as the case may be; and;
(3) the authorization must be done at a stockholders' or members'
meeting duly called for that purpose after written notice
Sec. 40 applies in case of substantial sale or disposition of corporate assets
(Sec. 39, BP 68, par. 2).
11. IN WHAT INSTANCES MAY A CORPORATION ACQUIRE ITS OWN SHARES?
Sec. 41, BP 68 (DE LEON, p. 367)
"Power to acquire own shares. - A stock corp. shall have the power
to purchase or acquire its own shares for a legitimate corp. purpose
or purposes, including but not limited to the ff. cases: Provided, that
the
corp. 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 corp., 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."
No. 2, date of payment may or may not be stated in subscription contract,
date may be fixed by BOD in a resolution called (Sec. 67, BP 68 - payment of
unpaid subscription). CALL is a resolution by BOD demanding payment or part
thereof, if no payment w/in 30 days entire subscription becomes delinquent
and sold in a delinquency sale, and sold to lowest and best bidder.
Sec. 68, BP 68 (last par.) - no bidder in delinquency sale (corp. Is the only
bidder), such delinquent sale will be credited as paid in full in the books of
corp. Title to all such shares will be vested in corp. As Treasury shares (Sec.
9).
No. 3 refers to the right of appraisal (Sec. 81, BP 68).
"OWN SHARES" refers to issued shares covered by a valid subscription
contract (hence not necessarily paid - Sec. 60,BP 68).
Committee of Appraisers determines the fair market value of shares of
dissenting stockholders, decision of which is final and to be paid within 30
days (Sec. 82, BP 68).
Sec. 82 (last par.) p. 656 - see book

FRACTIONAL SHARES
- a fractional share is a share which is less than one (1) corp. share.
Thus, if a stockholder owns 250 shares and the corp. declares 25% stock

CORPORATION LAW Study Guide 5

dividend, his total shares will be 312 and 1/2 shares. Inasmuch as fractional
shares cannot be represented at corporate meetings, the corp. may purchase
the same from the stockholder concerned or issue fractional scrip certificates
to such stockholder who may negotiate for the sale thereof with other
stockholders also owning fractional shares so as to convert them into full
shares.

OTHER CASES:
(4) under Sec. 9 (Treasury shares);
(5) with respect to redeemable shares, they may be purchased by the
corp. regardless of the existence of unrestricted retained earnings in the
books of the corp. (Sec. 8);
(6) shares may also be reaqcuired to effect a decrease in the capital
stock of a corp. (Sec. 38). where a corp. reacquires its own shares, it does not
thereby become a subscriber thereof;
(7) in closed corps., where there is a deadlock respecting the
management of its business, the SEC may order the purchase at their fair
value of shares of any stockholder by the corp. regardless of the availability
of unrestricted retained earnings in its books (Sec. 104, par. 1 [4]).
12. WHAT IS MEANT BY THE "TRUST FUND DOCTRINE"? EXPLAIN.
Sec. 41, BP 68 (DE LEON, p. 371)
TRUST FUND DOCTRINE was first enunciated by the SC in Philippine
Trust Co. vs. Rivera (144 Phil. 469, 1923), which holds that the assets of the
corp. as represented by its capital stock are "trust funds" to be maintained
unimpaired and to be used to pay corporate creditors in the sense that there
can be no distribution of such assets among the stockholders without
provision being first made for the payment of corporate debts and that any
such disposition of its assets to the prejudice of the creditors of the
corporation who extended credit to the corp. on the faith of its OCS is null
and void.
Purpose of said doctrine is to encourage corps. To lend money knowing that
their investments will be repaid. Without said doctrine banks will not for
example lend money and corps. Will have difficulty accessing credit.
When a corp. Acquires its own shares it disposes its own funds. To do that a
corp. Must have unrestricted retained earnings. Same applies in distribution
of dividends, esp. Cash dividends. Otherwise, such acts may be detrimental
to the corps. Creditors.
13. WHAT ARE DIVIDENDS? HOW ARE DIVIDENDS DISTINGUISHED FROM
PROFITS?
Sec. 43, BP 68 (DE LEON, p. 379)
DIVIDEND is that part or portion of the profits of a corp. set aside,
declared and ordered by the directors to be paid ratably to the stockholders
on demand or at a fixed time. It is payment to the stockholders of a corp. as a
return upon their investment.
It is also a sum which can be divided among stockholders without
touching the capital stock. The term has been regarded as indicating that
there must be a surplus or profits to be divided. However, the word has also
been used with no reference to surplus or net profits, e.g., to describe
distributions made to stockholders on liquidation of the corp., and to a
distribution of assets upon a reduction of the capital stock.

CORPORATION LAW Study Guide 5

DIVIDENDS
1. as applied to corporate stock, is
that portion of the profits or net
earnings which the corporation has
set aside for ratable distribution
among the stockholders - thus
dividends come from profits.
2. must be declared or set aside by
the corp.

PROFITS
Source of dividends

3. in cash or in kind

Part of the assets of the corp. and do

not belong to the stockholders
individually.
In cash or in kind

4. Income of stockholders

4. Income of corporation

If its a stock divident, need for ratification of stockholder is required.

14. WHAT CONSTITUTE THE RETAINED EARNINGS OF A CORPORATION?
Sec. 43, BP 68 (DE LEON, p. 385)
RETAINED EARNINGS of a corp. is the "difference between the total
present value of its assets after deducting losses and liabilities and the
amount of its capital stock." Capital stock in this instance should be
understood to refer to outstanding stock (Sec. 137), and not the stated or
nominal (authorized) capital stock (Secs. 12, 13, 14 [8]).
In another manner, the ordinary way of determining whether a corp.
has retained earnings or not is to compute the value of all its assets and
deduct therefrom all of its debts and liabilities, including legal capital, and
thus ascertain whether the balance exceeds the amount of its outstanding
shares of capital stock. This may be expressed in the ff. equation:
retained earnings = assets - liabilities, legal (outstanding) capital &
losses
15. WHEN ARE RETAINED EARNINGS CONSIDERED UNRESTRICTED?
Sec. 43, BP 68 (DE LEON, p. 386)
Unrestricted retained earnings (surplus profits) are dividends
declared out of actual earnings or profits realized from the business of the
corp., such retained earnings or portion thereof are said to be unrestricted,
and therefore, free for dividend distribution to stockholders, if they have not
been reserved or set aside by the board of directors for some corporate
purpose or for some other purpose in accordance with managerial, legal, or
contractual requirements.

Three provisions in CC which require unrestricted retained earnings:

Art. 41
Art, 43
Art. 82
16. WHAT ARE THE KINDS OF DIVIDENDS THAT MAY BE DECLARED BY A
CORPORATION?
Sec. 43, BP 68 (DE LEON, p. 415)
ORDINARY/REGULAR DIVIDENDS
1. payable by corp.

EXTRAORDINARY/EXTRA
DIVIDENDS
May consist of cash, property, stock
distributions

CORPORATION LAW Study Guide 5

2. paid out of current earnings of a

corp. according to some fixed plan or
scheme, usually at regular intervals
and
sometimes
limited
to
a
substantially fixed rate of return to
the shareholder.
3. generally cash dividends

Usually represent an accumulated

excess of earnings over normal return
on capital invested and constitute a
distribution or a capitalization of
surplus
profits
remaining
after
distribution of ordinary dividends.
Generally stock dividends

Dividends are given based on subscribed shares, paid or unpaid. For cash
dividends, it will be applied to unpaid subscription. Stock dividends are
withheld until full payment of subscription.
CLASSES OF DIVIDENDS [Sec. 43, BP 68 (DE LEON, p. 411)]
(1) CASH DIVIDEND. Payable in cash.
(2) PROPERTY DIVIDEND. It is dividend distributed to the stockholders
in the form of property, real or personal (or any disposable property of corp.),
such as warehouse receipts, or shares of stock of another corporation.
Actually this is a cash dividend, the stockholder can take the property, sell it,
and realize the cash. A corp. may, therefore, pay declared cash dividends in
the form of a "property."
(3) STOCK DIVIDEND. It is dividend payable in unissued or increased or
additional shares of the corp. instead of in cash or in property out of the
unrestricted retained earnings of the corp. A stock dividend may be declared
only to the extent of the minimum number of shares authorized in the AOI.
(4) OPTIONAL DIVIDEND. It is dividend which gives the stockholder an
option to receive cash or stock dividend.
(5) COMPOSITE DIVIDEND. It is dividend which is partly in cash and
partly in stocks. Here, there is no option involved.
(6) PREFERRED OR PREFERENTIAL DIVIDEND. It is dividend which is
payable, by virtue of contract, to one class of stockholders in priority to that
to be paid to another class.
(7) CUMULATIVE DIVIDEND. It is dividend which is contracted to be paid
at a certain rate at stated times and, if net earnings at any dividend period
are insufficient to pay the contract dividend, it is to be made out of
subsequent net earnings.
(8) SCRIP DIVIDEND. It is dividend which is contracted to be paid at a
certain rate at stated times and, if net earnings at any dividend period are
insufficient to pay the contract dividend, it is to be made out of subsequent
net earnings.
(9) BOND DIVIDEND. It is dividend distributed in bonds of the corp. to
the stockholders. The bondholder becomes a creditor of the corp. to the
extent of the amount of the bond. Thus, a corp. may use its retained earnings
in improvement of its plant, or purchasing machinery or other property and
issue its bonds in payment of dividends from such earnings.
(10) LIQUIDATING DIVIDENDS. They are dividends which are actually
distributions of the assets of the corp. upon dissolution or winding up of the
same. They are not paid on account of earnings or profits, but as a return of
capital invested.

Sec. 42, BP 68 - relate to Sec. 36 (7), BP 68. = investing in another corp. As

long as in line with its primary purpose.