CORPORATE POWERS AND AUTHORITY Power of succession:
-Right of succession means that the corporation persists to exist despite
-A corporation cannot do all things that a natural person or ordinary
partnership might do for the corporation has no natural rights. A
corporation merely exists by virtue of grant by the State and may,
therefore, only exercise such powers, authority or functions that the
State allows it to do (Doctrine of Limited Capacity).
-Corporate authority may be classified into three classes:
(1) Those expressly granted or authorized by law inclusive of the
corporate charter or articles of incorporation;
(2) Those impliedly granted as are essential or reasonably necessary to
the carrying out of the express powers; and
(3) Those that are incidental to its existence.
[Express powers of the corporation are enumerated from Sec. 36 to Sec.
44]
Power to sue and be sued:
-As to venue of actions filed against a corporation, the rule is that the
same must be instituted at its residence which is the place of the
principal office of the corporation.
-As to service of summons, Section 11 Rule 14 of the Revised Rules of
Civil Procedure provides: Service upon domestic private juridical
entity when the defendant is a corporation, partnership or association
organized under the laws of the Philippines with a juridical personality,
service may be made upon the president, managing partner, general
manager, corporate secretary, treasurer, or in house counsel. The
service of summons upon persons other than those named would render
the same without force and effect.
Delta Motor Sales Corp. v. Mangosing (1976)
Facts: Pamintuan sued Delta Motor for the recovery of damages after
the latter as seller failed to fulfill it warranty. The summons for the
corporation was served on April 19 on its employee Dionisia Miranda,
who acknowledged its receipt. The corporation, however, did not
answer the complaint until it was declared in default, and judgment by
default was rendered against it.
Held: A strict compliance with the mode of service of summons is
necessary to confer jurisdiction of the court over a corporation. The
officer upon whom service is made must be one who is named in the
statute, otherwise the service is insufficient. The purpose of the rule is
to render it reasonably certain that the corporation will receive prompt
and proper notice in an action against it or to insure that the summons
be served on a representative so integrated with the corporation that
such person will know what to do with the legal papers served on him.
In the instant case, the court did not acquire jurisdiction over the
corporation because it was not properly served with summons, Dionisia
Miranda is not one of those mentioned in Section 11 Rule 14.
Consequently, the default judgment is void and should be set aside.
E.B. Villarosa and Partner Co., Ltd. v. Benito (1999)
Facts: Petitioner (limited partnership) and private respondent executed
a deed of sale with development agreement of parcels of land. Private
respondent, however, filed a complaint against petitioner for breach of
contract and damages after the latter failed to comply with its
obligation. Summons was served upon the partnership through its
branch manager. Petitioner filed a motion to dismiss on the ground of
improper service of summons and lack of jurisdiction over the person
of the defendant.
Held: The designation of persons or officers who are authorized to
accept summons for a domestic corporation or partnership is now
limited and more clearly specified in Section 11 Rule 14 of the Revised
Rules of Civil Procedure. The liberal construction rule cannot be
invoked and utilized as a substitute for the plain legal requirements as
to the manner in which summons should be served on a domestic
private juridical entity. Accordingly, the service of summons upon the
branch manager instead of the general manager is improper.
Consequently, the trial court did not acquire jurisdiction over the person
of the petitioner.
the death, incapacity, civil interdiction or withdrawal of the
stockholders or members thereof.
Power to adopt and use a common seal:
-The use of common seal is not mandatory but merely permissive. A
corporation may exist without a seal because it performs no further or
greater function than to impart prima facie evidence of the due
execution by the corporation of a written document or obligation,
which, however, may be proven by evidences other than the corporate
seal.
Power to amend articles of incorporation:
-Amendment of articles of incorporation is a matter of right granted to
corporations created under the Corporation Code. On the other hand,
corporations created by special law may or may not be authorized by
the law creating them to make any changes on its charter. The Congress
may even amend or repeal its corporate charter by virtue of its inherent
authority to amend or repeal laws.
Power to adopt by-laws:
-The Corporation Code not only authorizes but in fact requires a
corporation formed or organized under its provisions to adopt its by-
laws, which must not be contrary to law, morals, or public policy,
within one (1) month from receipt of official notice of the issuance of
certificate of incorporation or registration. (see Sec. 46)
-The amendment or repeal of by-laws is specially allowed subject to the
procedure and requirement provided for in Section 48 of the Code.
Power to issue or sell stocks and to admit members:
-The power of the corporation to issue or sell its stock is governed by
the provisions of Title VII of the Corporation Code. With respect to the
issuance or sale of stocks belonging to other corporations, the
Securities Regulation Code and the SEC rules relative to the sale of
securities may be made to apply.
-Admission and termination of members are prerogatives granted by
law to non-stock corporations and the manner, requirements or
procedure for such admission or termination may be contained in its
articles of incorporation or by-laws.
Power to acquire or alienate real or personal property:
-The power to acquire, own, hold or alienate property is subject to
express limitations under Section 36 to the effect that it must be so
acquired, held or conveyed as the transaction of the lawful business of
the corporation may reasonably and necessarily require, and it shall be
subject to the limitations imposed by law and the Constitution. The
purpose clause in the articles of incorporation likewise practically sets
the limit of the corporate authority with respect to the exercise of this
power.
Luneta Motors Company v. A.D. Santos, Inc. (1962)
Facts: Concepcion executed a chattel mortgage over his certificate of
public convenience to operate a taxicab, in order to secure a loan, in
favor of petitioner. Concepcion obtained another loan from
Rehabilitation Finance Corporation (RFC) and executed a second
chattel mortgage on the same certificate. In view of the failure of
Concepcion to pay their overdue account, petitioner filed an action to
foreclose the chattel mortgage. While the case was pending, RFC also
instituted foreclosure of the second mortgage, which was decided in its
favor. The certificate was sold at public auction in favor of Amador D.
Santos which was approved subject to mortgage lien in favor of
petitioner. Amador transferred all his right in the certificate to A.D.
Santos Inc. (private respondent) When the first mortgage was finally
foreclosed and the certificate of public convenience sold to petitioner,
the latters application for the approval of the sale was opposed by
private respondent.
Held: Petitioners corporate purpose (to engage in the transportation of
persons by water) as indicated in its articles of incorporation serves as
best evidence that it has no authority to engage in the business of land
1
transportation and operate a taxicab. The two are entirely different line
of business. If the corporation could not engage in land transportation
business, it follows that it may not acquire a certificate of public
convenience to operate a taxicab service, because such acquisition
would be without purpose and would have no necessary connection
with petitioners legitimate business.
Government v. El Hogar Filipino (50 Phil 399)
Facts: Respondent purchased a land where its new office building was
constructed. It was, however, contested that the acquisition of the land,
the construction of the new office building, and the subsequent renting
of the same to third persons are ultra vires acts on the part of the
corporation.
Held: Every corporation has the power to purchase, hold and lease such
property as the transaction of the lawful business of the corporation
may reasonably require (Section 13 [5]). In the present case, it cannot
be said that the area of the lot (1,413 sqm) was in excess of its
reasonable requirements. The law expressly provides that corporation
may acquire such real estate as is reasonably necessary to enable
themto carry out the purposes for which they were created, and owning
a business lot upon which to construct and maintain its main offices is
reasonably necessary. A different rulin on this point would compel
enterprises to conduct heir business excluysively in leased offices.
Director of Lands v. CA (1988)
Facts: Iglesia ni Cristo filed an application with the CFI for the
registration in its name of a parcel of land having acquired title thereto
by virtue of a deed of sale executed in 1947 by Aquelina de la Cruz.
The Director of Lands opposed the application on the ground that the
subject parcel of land is an alienable public land, which ceases to be
public only upon issuance of title to any Filipino citizen claiming it
under Section 48[b] of CA 141. This rule, according to petitioner is
consistent with the courts ruling in Meralco v. Castro-Bartolome.
Held: The ruling in Meralco is no longer a binding precedent. The
correct rule is that alienable public land held by a possessor, personally
or through his predecessor-in-interest, openly, continuously, and
exclusively for the prescribed statutory period of 30 years is converted
to private property by mere lapse or completion of said period. The said
period was completed in 1966 and hence converted ipso jure into
private land and remained so in 1974 when registration proceedings
were commenced. This being the case, the prohibition under the 1973
Constitution disqualifying corporation from acquiring and registering
alienable public lands in their name, would have no application. Iglesia
ni Cristo have acquired a vested right, which cannot be impaired or
defeated by the 1973 Constitution.
Power to enter into merger and consolidation:
-This is an express power granted by law (Sec. 38[8]). Merger and
consolidation, as early as the Corporation Law, has been allowed under
Philippine Jurisprudence (see Reyes v. Blouse 91 Phil 305).
Power to make reasonable donations:
-A business corporation is carried on primarily for profit, and a
donation by a corporation not created for charitable purpose is not
authorized and would constitute a violation of the rights of its
stockholders, unless it is empowered by statute. There are
circumstances, however, under which a donation by a corporation may
be made as a means of increasing its business or promoting patronage,
subjec to limitations imposed by Sec. 36[9], to wit:
(a) donation must be reasonable; (b) donation must be for public
welfare, or for hospital, charitable, scientific, cultural or similar
purpose; and (c) donation shall not be in aid of political party or
candidate, or for purposes of partisan political activity.
Power to establish pension, retirement and other plans:
-The directors/trustees, officers and employees are the very persons
responsible for the success of any business undertaking and granting
them certain benefits and privileges would necessarily be to the
advantage of the corporation. In fact, the power may include any act to
promote the convenience, welfare and banefit of the employees or
officers.
Republic v. Acoje Mining Co. Inc. (1963)
Facts: Respondent corporation requested the Director of Posts the
opening of a post, telegraph and money order offices at its minng camp
to service its employees and their families. As a requirement imposed
by the Bureau, respondent corporation passed a board resolution that it
will accept full responsibility for pecuniary loss that may be suffered by
the Bureau of Posts by reason of dishonesty or carelessness on the part
of its employee assigned to take charge of the office. The post office
branch was opened and Hilario Sanchez (employee of Acoje) was
assigned as postmaster, who diappeared and never returned; and when
the accounts of the postmaster was checked, a shortage was found. The
company denied liability on the ground that the board resolution is ultra
vires, and that it only acted as a guarantor entitled to the benefit of
excussion.
Held: It is important to note that the request for the opening of the post
office branch came from the respondent corporation in order to promote
the convenience and wlefare of its employees. The claim that the
resolution adopted by the board is ultra vires has no merit. As a rule, an
ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization or those
beyond the powers conferred upon it by law. However, certain
corporate acts may be performed outside the scope of the powers
expressly conferred if they are necessary to promte the interest, welfare,
benefit and convenience of its employees and their families or is
reasonably neceaary or proper to the conduct of its business.
Implied powers:
-The corporation is granted the power to exercise such other powers
essential or necessary to carry out its purposes (Sec. 36[11]) or those
necessary or incidental powers (Sec. 45).
-Incidental powers are those attach to the corporation from the date of
its incorporation or inherent to its corporate existence.
-Powers essential or necessary to carry out the corporate purpose
depends upon the particular facts/circumstances and upon the nature of
the power granted. The test to be applied is whether or not the act in
question is in direct and immediate furtherance of the corporations
business, fairly incident to the express powers and resonable necessary
to their exercise.
-Classification of implied powers: (a) acts in the usual course of
business; (b) acts to protect debts owing to the corporation; (c)
embarking in a different business (if part of regular business, it is not an
implied power); (d) acts in part or wholly toprotect or aid employees;
and (e) acts to increase business.
Teresa Electric and Power Co. Inc v. PSC (1967)
Facts: Filipinas Cement Corporation (FCC) filed an application with
the PSC for a certificate of public convenience and necessity to install,
maintain and operate an electric plant for the purpose of supplying
electricity and light to its cement factory and its employees living
within its compound. Petitioner opposed the application on the grounds
that it is the duly authorized operator in the locality; that FCC is not
authorized by its articles of incorporation or by the municipal council to
operate an electric plant.
Held: A municipal legislative franchise is a condition precedent for a
corporation who desires a franchise to operate and maintain an electric
plant and render service to the general public at such rat eof
compensation approved by the government. This requirement, however,
cannot apply to FCC who desires to operate and maintain electric plant
exclusively for its own use in coonection with the operation of its
cement factory and for the use of its employees, the latter to receive
service free of charge. Furthermore, the articles of incorporation of
FCC grant it the authority to secure, utilize and dispose of in any lawful
manner privileges, franchises and concessions, and that it may perform
any and all acts connected or incidental with the business of
manufacturing cement.
2
Napocor v. Vera (1989)
Facts: Private respondent (Sea Lion International Port Terminal
Services Inc.) filed a complaint for prohibition and mandamus against
petitioner NPC in not renewing its contract for stevedoring services and
taking over the said services. Public respondent judge ruled in favor of
Sea Lion after finding that NPC was not empowered by its charter to
engage in stevedoring and arrastre services.
Held: Respondent judges finding is erroneous. In fact, NPCs charter
grants it the authority to exercise powers and do such things as may be
reasonably necessary to carry out the business and purposes for which
it was organized, or which from time to time, may be declared by the
Board to be necessary, useful and incidental or auxiliary to accomplish
said purpose. In the present a logical and necessary relation exists
between the act questioned and the corporate purpose expressed in the
NPCs charter. The stevedoring services which involve the unloading of
coal shipments into the NPC pier for its eventual conveyance to the
power plant are incidental and indispensable to the operation of the
plant. It is a settled rule that if the act is one which is lawful in itself
and not otherwise prohibited and is done for the purpose of serving
corporate ends, and reasonably contributes to the promotion of thos
eends in a substantial and not in a remote and fanciful sense, it may be
fairly considered within the corporations charter powers.
Powers v. Marshall (1988)
Facts: The Board of Trustees of International School Inc. decided to
construct new buildings and remodel existing ones in order to
accommodate the increasing enrollment in the school. One of the
sources of the needed funds is by collecting the so called development
fee in an amount of Php 2,625 per student which was vehemently
opposed by the members of the corporation.
Held: The by-laws of the corporation provides that the Board of
Trustees shall have the powers which may be lawfully exercised or
performed by the corporation subject to applicable laws and to the
provisions of the articles of incorporation and the by-laws. Under Sec.
2 of PD 732, the Board of Trustees of the school, upon consulation with
the Secretary of Education, may determine the amount of fees and
assessments which may be reasonably imposed upon its students, to
maintain or conform to the schools standard of education. In the
present case, such consultation had been made and the collection of
development fee had been approved by the Board of Trustees as a valid
exercise of corporate powers. Moreover, the expansio of school
facilities by improving old buildings and constructing new ones is an
ordinary business transaction well within the competence of the Board
to act upon, being directly related to the purpose of elevating and
maintaining the schools standard of instruction.
Power to extend or shrten corporate term:
-The exercise of this power involves special amendment of the articles
of incorporation by complying the requirements in Sec. 37 and Section
11. In case of extension, the same must be made during the lifetime of
the corporation. A dissenting sockholder may exercise his appraisal
right (Sec. 81[1]).
Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness (see Sec. 38):
-It partakes the nature of a special amemdment.
-There are three (3) ways of increasing the capital stock which may
vary depending on the purpose or need of the corporation:
(a) increasing the par value of the existing number of shares
without increasing the number of shares;
(b) increasing the number of existing shares without increasing
the par value thereof; and
(c) increasing the number of existing shares and at the same
time increasing the par value of the shares.
-The existence of unissued or unsubscribed shares out of the original
authorized capital stock will not prohibit the corporation from
increasing its capital stock. As in the case of original subscription,
increase in capital stock requires that at least 25% of such increased
capital must be subscribed and that at least 25% of the subscriptions
must be paid either in cashor property.
-In decreasing capital stock, any reduction shall not be approved by the
SEC if its effect shall prejudice the rights of corporate creditors. This is
consistent with the trust fund doctrine which states that subscription
to capital stock of the corporation constitute a fund which the creditors
have a right to look up to for the satisfaction of their claim (see PNB v.
Bitulok Sawmill 23 SCRA 136 and Veloso v. Poizat 37 Phil 802).
-Reasons for decrease of capital stock include: (1) to reduce
or wipe out existing deficit where no creditors would thereby be
affected; (2) to reduce capital surplus or when the capital is more than
what is necessary to procreate the business; and (3) to write down the
value of its fixed assets to reflect their present actual value in case
where there is a decline in the value of the fixed assets of the
corporation.
Philippine Trust Company v. Rivera (1923)
Facts: Petitioner, as assignee in bankruptcy of the insolvent corporation
Cooperative Naval Filipina, instituted an action to recover one-half of
the stock subscription of defendant Mariano Rivera (incorporator of
Naval Filipina), which admittedly has never been paid. Rivera argued
that prior to insolvency, the Board adopted a resolution reducing the
capital stock by 50%, thus releasing the subscribers from the obligation
to pay any unpaid balance of their subscription in excess of 50%.
Held: Formalities prescribed for reduction of capital stock was not
complied with and no certficate to that effect was filed in the Bureau of
Commerce and Industry. Thus, the withdrawal of so much capital from
the fund effected without compliance with the statutory requirement
was wholly ineffectual. It is a established doctrine that subscription to
the capital stock of a corporation constitute a fund to which the
creditors have a right to look upon for satisfaction of their claims and
that the assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its debts.
Furthermore, a corporation has no power to release an original
subscriber to its capital stock from the obligation of paying his shares,
without a valuable consideration for such release; and as against
creditors, a reduction of the capital stock can only take place in the
manner and conditions prescribed by law, and strict compliance
therewith is necessary.
Madrigal and Company v. Zamora (1987)
Facts: The Union demanded from petitioner wage increase after the
latter made large profits. The corporation, however, denied the request
on grounds of operational losses. It was found out that the corporation
passed resolution reducing its capital stock through the distribution of
marketable securities owned by the corporation to its stockholders in
exchange for their shares in the corporation. A complaint for unfair
labor practice was filed by the Union which was decided by the labor
arbiter in favor of the Union.
Held: The records reveal that the corporation decided to evade its
responsibility towards the employees by reducing its capital. The
reduction created an apparent need for retrenchment, which by all
indications, just a mask to purge membership in the Union, who
agitated for wage increases. It is clear from the records also that the
corporation made huge profits, which gives the unionists the right to
demand salary adjustments. There is no merit in the corporations claim
that the profits were in the nature of dividends (hence an absolute
property of the stockholders) which the employees had no participation
whatsoever. The profits are in fact corporate earnings arising from
corporate investment, where the petitioner was acting as stockholder
itself, and in that case, the right to share in such dividends, by way of
salary increases, may not be denied its employees.
[As regards increasing, creating or incurring bonded indebtedness, the
authority is that a corporation may need additional funds to carry its
purpose such that it may source its funds by borrowing evidenced by
bonds, notes or debentures. The absence of statutory authority will not
bar the corporation from incurring or creating bonded indebtedness.
This is because whenever a corporation has the power to borrow in
3
pursuit of its business, it has the implied or incident power to issue
bonds in payment or as security provided it violates no prohibition or
restriction in its charter or any other statutes.]
Power to deny pre-emptive rights:
-All stockholders shall enjoy pre-emptive right to subscribe to all issues
or disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto (Sec. 39)
-The basis for the grant of this right is to preserve and maintain
unimpaired or undiluted the relative and proportionate voting strength
and control of all stockholders. Absent this right, a controlling
stockholder may easily strengthen his hold and control of the corporate
affairs by simply arrogating unto himself all subsequent issuance or
disposition of corporate shares.
-The right of preemption may be lost by waiver of the stockholder,
expressly or impliedly by his inability or failure to exercise it after
having been notified of the proposed issuance or disposition of shares.
-The right of preemption may be denied or does not extend to:
(a) shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the
public; and
(b) shares to be issued in good faith with the approval of
the stockholders representing 2/3 of the outstanding
capital stock, either in exchange for property needed
for corporate purposes or in payment of a previously
contracted debt.
-The aforesaid exceptions do not apply to close corporations where the
pre-emptive right of a stockholder in a close corporation shall extend
to all stock to be issued, including reissuance of treasury shares,
whether for money, property or personal services or in payment of a
corporate debt, unless the articles of incorporation provides otherwise
(Sec. 102). Hence, the preemptive right of stockholders in close
corporations is broader in that it extends to all issuance and dispositions
of shares.
Benito v. SEC (1983)
Facts: The corporation issues the unsubscribed portion of its original
capital stock as well as shares of the increased capital stock. Benito
(stockholder) filed a petition before the SEC on the ground that the said
issuances were made in violation of his pre-emptive right considering
that he was not notified. The SEC ruled that petitioner is not entitled to
pre-emptive rights with respect to the unsubscribed portion of the
original authorized capital stock, but nevertheless can exercise his pre-
emptive right to subscribe to the increase capitalization.
Held: Pre-emptive right is recognized only with respect to new issue of
shares, and not with respect to additional issues of originally authorized
shares. In the latter, when the shares left unsubscribed are reoffered, the
stockholder cannot therefore claim a dilution of interest. Petitioner,
however, was able to establish that he was not notified of the said
meeting where the proposed increase in capital was one of the agenda.
Hence, petitioner had not waived his pre-emptive right and may be
allowed to subscribe to the increased capital stock proportionate to his
present shareholdings.
[Note: This case arose when the Corporation Code was not yet in force,
and thus the above ruling may no longer hold true. By virtue of Sec. 39
of the Code, the coverage of pre-emptive right was broadened to
include all issues or dispositions of shares of any class which is
construed to include not only new shares to be issued pursuant to an
increase in capital stock but also unissued shares which form part of the
original authorized capital stock as well as treasury shares (see SEC
Opinion dated January 14, 1993 addressed to Ms. Imelda P. Marquez).]
Power to sell or dispose of assets (see Sec. 40):
-The procedure and requirements in Sec. 40 will not apply if the sale or
disposition does not involve all or substantially all of the assets of the
corporation as to render it incapable of continuing the business or
accomplishing the purpose for which it was incorporated. Thus, if the
same is necessary in the usual and regular course of business of the
corporation or if the proceeds of the sale and other disposition will be
appropriated for the conduct of its remaining business Sec. 40 will not
apply.
[e.g. The normal business of a realty company would be the acquisition
and sale of real properties, the board of directors in this case may
validly sell the asset of the corporation (lands and other realties)
without the consent of its stockholders since this is the very purpose of
its existence]
-Despite authorization from stockholders, the Code allows the Board to
abandon the sale or disposition, without further action or approval of
the stockholders or members, subject only to the rights of third parties
under the contract.
-The sale or disposition of all or substantially all of the corporate assets
may have the effect of merger or ocnsolidation, and creation of a parent
or holding company (e.g. the selling corporation having become a
subsidiary of the purchasing corporation). In merger and consolidation,
however, it is a general rule that the transferee of all the assets of
another corporation is not liable for the debts and liabilities of the latter
(transferor).
Islamic Directorate of the Philippines v. CA (1997)
Facts: After martial law was declared, IDP was divided in to two
groups each claiming to be the legitimate board of directors after
holding their own separate elections. Petitioner IDP-Abbas Group now
filed a petition before the SEC seeking the nullification of the sale by
IDP-Carpizo Group of the only asset (land) of the corporation to INC.
Held: In previous ruling of the SEC, it declared that the election of the
Carpizo Group as well as the Abbas Group is null and void, thus it
becomes more settled that IDP-Carpizo is a fake board. IDP which is
the owner of the land, therefore, never gave its consent rendering the
sale between Carpizo Group and INC void ab initio. It appears also
from the records that the object of the sale was the only property of
IDP, hence, equivalent to a disposition of all or substantially all of the
corporate assets governed by Sec. 40 of the Corporation Code. For the
sale to be valid, Sec. 40 requires majority vote of the legitimate Board
of Trustees concurred by the vote of at least 2/3 of the bona fide
members of the corporation. Failure of the IDP-Carpizo Group to
comply with the procedures under the said section deems the
transaction null and void.
Edward J. Nell Co. v. Pacific Farms, Inc. (1965)
Facts: Appellant after obtaining favorable judgment, in an action to
collect the unpaid price of articles sold to Insular Farms Inc., sought the
execution of the same. The writ of execution was returned unsatisfied
by reason that the judgment debtor has no leviable property. Appellant
now filed an action against Pacific Farms Inc. upon the theory that the
appellee is an alter ego of Insular Farms Inc, after it purcahsed all the
shares of stock and properties of the latter.
Held: Generally, where one corporation sells or otherwise transfers all
of its assets to another corporation, the latter is no tliable for the debts
and liabilities of the transferor, except: (1) when the purchaser
expressly or impliedly agrees to assume such debts; (2) where the
transaction amounts to a consolidation or merger of the corporations;
(3) where the purchasing corporation is merely a continuation of the
selling corporation; and (4) where the transaction is entered into
fraudulently in order to escape liability for such debts. In the case at
bar, none of the exceptions are present, worse, the appellants theory
that the appellee is an alter ego of Insular Farms Inc. negates
consolidation or merger, for a corporation cannot be its own alter ego.
Power to acquire own shares (see Sec. 41):
-The corporation may acquire its own shares, provided that it is for a
legitimate corporate purpose and that the corporation has unrestricted
retained earnings, in the following instances:
(1) To eliminate fractional shares arising out of stock dividends;
(2) To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale;
4
 (3) To pay dissenting or withdrawing stockholders entitled to
payment for their shares (in the exercise of their appraisal
rights under Section 105)
(4) To redeedm redeemeable shares under section 8 of the Code.
-The phrase unrestricted retained earnings is used in a sense that the
corporation cannot use its capital stock to purchase its own shares, that
is, corporate assets below the legal or stated capital, but only from
surplus profits. Except: (1) redeemable shares, which the corporation
may acquire regardless of the existence of unrestricted retained earning
and (2) in the exercise of stockholders right to compel a close
corporation to purchase his shares, for any reason, under Section 105,
when the corporation has sufficient assets in the book to cover its
debts and liabilities exclusive of capital stock.
-The reacquired shares may be reissued, they are not extinguished
unless it is acquired with that intention. Reacquired shares while in the
possession of the corporation is considered as treasury shares which do
not have voting and dividend right. If the corporation has no intention
of reissuing the reacquired shares, the same may be retired and
cancelled or removed effectively reducing the number of shares stated
in the articles of incorporation.
-Th underlying reason for limiting reacquisition of shares is to prevent
depletion and impairment of corporate assets and capital, because under
the Trust Fund Doctrine, subscriptions to the capital stock of a
corporation, including any unpaid portion thereof, constitute a fund
which the creditors have the right to look up to for the satisfaction of
their claims. Thus the reacquisition of shares of stock by the
corporation must be made in good faith, that the corporation is not
insolvent, and that the rights of the creditors and other stockholders are
in no way prejudiced or injuriously affected
Steinberg v. Velasco (1929)
Facts: The Board of Directors of Sibuguey Trading Company approved
and authorized the purchase of large portion of the capital stock from
various stockholders. The plaintiff is now questioning the validity of
the said sales:
Held: The corporation has an authorized capital stock of 20,000php and
only 10,030php were subscribed and paid. The corporation spent
3,300php of the outstanding capital for the above purchase of shares of
stock The corporation likewise distributed divedends in the amount of
3,000php likewise deducted from the outstanding capital. In this
situation, it is very apparent that the directors did not act in good faith
or that they were grossly ignorant of their duties. Prevailing
jurisprudence held that directors are bound to care for the property of
the corporation and manage its affairs in good faith, and for a violation
of these duties resulting in wastage of its assents or injury to its
property, they are liable as trustees and will be required to make good
the loss out of their private assets. Creditors of a corporation have the
right to assume that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
subscription/investment was ratified. The plaintiff are now questioning
the legality of the said investment since the same was not approve by
2/3 votes of the stockholders.
Held: The investment made is reasonably necessary to accomplish the
primary purpose of the corporation, and to require the approval of the
stockholders would be to unduly curtail the power of the Board. An act
if done in pursuance of the corporate purpose does not need the
approval of the stockholders, but when the purchase of shares of
another corporation is done solely for investment and not to accomplish
the corporate purpose (the primary purpose or the reason for which the
corporation was incorporated), the vote or approval of the stockholders
is necessary.
Gokongwei Jr. v. SEC (1979)
Facts: SMC invested corporate funds in SMI (a tax free reorganization
in Bermuda) and purchased beer manufacturing facilities. Petitioner is
now questioning the validity of the said investment for having been
made without the stockholders approval and imputes grave avuse of
discretion to SEC when it allowed the stockholders meeting where the
questioned acts of investing corporate funds was ratified.
Held: The investment was for the purchase of beer manufacturing
facilities which is apparently relevant to the corporate purpose, hence
requires no approval from the stockholders. Assuming that
authorization is necessary and that the Board was not authorized by the
stockholders, there is no question that a corporation like an individual
may ratify and thereby render binding upon it the previously
unauthorized acts of its officers. This is true because the questioned
investment is neither contrary to law, morals, public order or public
policy. Furthermore, mere ultra vires acts are not void ab initio but are
viodable subject to ratification. Lastly, the mere fact that SMC
submitted the assailed investment to the stockholders for their
ratification cannot be construed as an admission that the Board had
committed an ultra vires act. Again, it must be noted that the questioned
investment is in pursuance of the corporate purpose, and to require the
stockholders vote would be to unduly curtail the power of the Board of
Directors.

Power to invest funds (see Sec. 42):

-The phrase may invest its funds has been held to mean as an
investment in the form of money, stock, bonds, and other liquid assets
and does not include real properties or other fixed assets.
-The phrase for any purpose other than the primary purpose signify
that even if the business is allowed in the secondary purpose of the
corporation, the provision of Section 42 must be complied with (take
note of the requirements). Except: investment which is reasonably
necessary to accomplish its pimary purpose, where the ratification or
approval of the stockholders is not required.

Dela Rama v. Ma-Ao Sugar Central Co. Inc. (1969)

Facts: Ma-Ao Sugar Co. Inc (engage in the manufacture of sugar)
subscribed 300,000php worth of capital stock of Philippine Fiber
Processing Co. Inc (engage in the manufacture of sugar bags). The
investment/subscription, however, was not authorized by the board and
it was only after several months that the said act of