Questions asked during recitation:

1. What’s the rationale behind the rule that a corporation cannot enter into a contract of
partnership?
2. What if a corporation enter into a contract of partnership? A corporation cannot enter into
a contract of partnership. BUT a partnership can become a partner in the corporation.
3. Is it possible that a corporation be represented by juridical persons? (JM Tuason vs.
Quirino Bolaños)
4. What are the requirements for purposing increasing the authorized capital stock of a
corporation? Section 38
- Approved by majority vote of the BOD
- Ratified by 2/3 (check)
- Approved by the SEC
5. Central Textile

 From and after the approval by the SEC and the issuance by the Commission of
its certificate filing, the capital stock shall stand increased or decreased.
 Ratification of the stockholders, it is needed?
 Can the SEC deny?
 When is the effectivity of the increase of capital stock? Citing to SEC Opinions
interpreting Section 38 of the Corporation Code, it claims that the capital
stock of a corporation stands increased or decreased ONLY FROM AND
AFTER the issuance of the certificate of filing of increase of capital stock.

6. AFP Realty vs. Dieselman

7. If a corporation to be represented by a natural person when it enters into a contract, what
document should the corporation present that would prove that it authorizes that natural
person to enter into a contract?
8. Ultra vires act vs. Intra vires act (Section 45; Montelibano Case)
 An act which is beyond the conferred powers of a corporation or the purposes or
objects for which it is created as defined by the law of its organization.
 An act done by a corporation outside of the express and implied powers vested in it
by its charter and by the law.
9. Different Kinds of Powers of the Corporation
10. Ratification of ultra vires act (p. 430)
 SEMI-FINALS DISCUSSION: Powers of the Corporation

1. Powers of the Corporation

- According to Section 2 of the Corporation Code, a corporation is an artificial being
created by operation of law xxx
- From the definition of a corporation, we can imply that there are therefore 3 kinds of
powers of a corporation: 1) express power; 2) incidental power; and 3) implied
power.
- Aside from Section 2, we have Section 45 – corporation cannot exercise power xxx
- With respect to Concession Theory, it tells us that a corporation is a mere creature of
the State. It owns its existence from the State and its birth depends on the consent
given by the State given to the corporation. In other words, the authority of the State
is defined by the law authorizing its creation. (Tayad vs. Benguet).
- Primary Franchise
- Secondary Franchise
2. Express Powers include those which are set forth under Section 36-44.
I. The Power of the Corporation to sue and to be sued. (Tuason Case – A
corporation can be represented by another juridical authority.) Who shall give
the authority if it is the corporation which institutes the case or the corporation
which is sued? Board Resolution.
If a case is BP 22 and Estafa – require prior demand. Is the corporation
required to given an authority to give to the signatory of the demand letter?
Ans. Yes. Prior to an institution of a criminal case, if prior demand is
necessary as an element of a commission of the crime, even if there is no
criminal case filed yet at the Prosecutor’s Level, Omictin vs. CA, it is required
that prior demand is made the corporation has already authorized its officer or
representative in signing and serving such demand letter.
In civil cases and labor cases, who should verification against non-forum
shopping? Can the President can? It depends, if he is duly authorized. The
President on his own cannot on his own represent the corporation in the
absence of board resolution.
II. Succession. The existence of the corporation is existence on authority or
consent granted by the State conferred upon the corporation such that its
existence is limited to the consent or authority given by the State.
III. The power to obtain loans. Is it a right that can be done by the corporation
even if not stated in the Corporation Code? It could be implied in a sense that
it is essential or necessary for the purpose of conducting business. In other
words, there are powers listed in Section 36-44 which may be considered as
express powers or implied or incidental powers.
 3. Specific Powers (Section 37-44)

Section 37.

Power to extend or shorten corporate term. – A private corporation may

extend or shorten its term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or trustees and
ratified at a meeting by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That
in case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this code. (n)

According to the SC, the power to extend corporate terms is NOT inherent in the existence of the
corporation. In other words, without an express provision of law, a corporation cannot extend its
corporate term, by virtue of Concession Theory. The power to shorten is inherent in the sense
that if it fixes its period of existence for 50 years, it can amend and shorten its term. In other
words, it is incidental or it could be treated as an implied power.
 If implied power which is essential or necessary for the purpose of achieving the purpose
of the corporation, what is an Incidental Power?
 What are the requirements if the corporation decides to extend/short
- There must be approval of BOD
- There has to be ratification by the stockholders representing 2/3 of the outstanding
capital stock. (Do not commit the mistake of saying that ratification should come
from 2/3 of the stockholders. If you say 2/3 of the stockholders, it means numerical
majority. You say you have 100 stockholders, 67 persons ang 2/3. That is not what is
being referred to by the law. We are talking about equity majority. The shareholders
holding the 2/3 outstanding capital stock. Regardless of the number of the
stockholders, as long as they constitute 2/3 of the outstanding capital stock, then
ratification is deemed valid.
- What happens if the there is no ratification on the stockholders? The act is considered
as ultra vires –acts outside the authority or power of the corporation. What kind of
ultra vires is this?

Types of Ultra Vires

- Fist Type – Outside the authority or the powers expressly or impliedly granted or
conferred by the corporation. (can be subject of ratification)
- Second Type – Acts which are within the authority of the corporation but done by
persons not duly authorized (AF Realty vs. Dieselman – it can’t be ratified because of
civil law).
- Third Type - Illegal in nature and necessarily these are void ab initio (cannot be
subject of ratification).
Montelibano Case re: ultra vires

1. If the acts are considered as direct and immediate in the furtherance of corporate acts.
2. Fairly necessary for the purpose of pursuing the business affairs of the
3. Reasonable necessary for the pursuit of the business.

Section 38

Power to increase or decrease capital stock; incur, create or increase bonded

indebtedness. – No corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless approved by a majority
vote of the board of directors and, at a stockholder’s meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the proposed increase or diminution of the
capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder’s meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing
of any bonded indebtedness is to be considered, must be addressed to each
stockholder at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally.

A certificate in duplicate must be signed by a majority of the directors of the

corporation and countersigned by the chairman and the secretary of the
stockholders’ meeting, setting forth:

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

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

(3) If an increase of the capital stock, the amount of capital stock or

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

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

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

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

(7) The vote authorizing the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness.
 Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.

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

Non-stock corporations may incur or create bonded indebtedness, or

increase the same, with the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and

Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)

- In both situations, the SC requires two things: 1) approval of the BOD; 2) ratification
by the stockholders representing 2/3 of the outstanding capital stock.
- Are there any requirements for increasing the capital stock? The third requirement is
approval by the SEC and 4) approval of the amendment of the articles of
incorporation. The SEC is not just required to approve the increase of the ACS, it
must approve the amendment of the AoI as well (Central Textile Case). To simply in
that case, the requirements for purposing of increasing/decreasing ACS are as
follows: 1) approval of the BOD; 2) by the stockholders representing 2/3 of the
outstanding capital stock; 3) approval of the increase/decrease of the ACS from the
SEC; 4) the AoI must be duly amended for that purpose.
- Question: If a corporation increases it ACS, can the shareholders who oppose
exercise their appraisal right? Appraisal right applies to both extending and
shortening corporate term (Section 81). No: Such right is not available either in
increase or decrease in ACS. Two reasons: 1) those dissenting stockholders can opt to
withdraw their shareholdings; and 2) exercise of appraisal right would defeat the
purpose of increasing the ACS.
 - In like manner, appraisal right is not available to dissenting stockholders if
corporation would decrease its ACS. The same reasons with increasing the ACS.

What are the ways to increase the ACS of a corporation?

1. Increasing or splitting number of shares
2. Increasing the Par value
3. Increasing the number of shares and at the same time increasing the par value of the
shares.

How do you decrease the ACS?

1. Reducing the number of shares
2. Reducing the par value of the shares
3. Reducing both the number of shares of stock and the par value of the shares

Section 39

Power to deny pre-emptive right. – All stockholders of a stock corporation

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

- Pre-emptive right definition

- The corporation has the power to deny this right. But again it is subject to certain
limitations.

Section 40

Sale or other disposition of assets. – Subject to the provisions of existing laws on

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

After such authorization or approval by the stockholders or members, the board of

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

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

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

- In general requirements include: 1) approval of the BOD majority; 2) ratification by

the stockholders representing 2/3 of the outstanding capital stock
- Is appraisal right available to dissenting stockholders? Yes, because of the possibility
that the BOD may no longer pursue for which the corporation is created. If that
happens, dissenting stockholders exercise their appraisal right.

Sale of Assets of the Corporation

- Are there instances ratification by the stockholders representing 2/3 of the

outstanding capital stock not required? Two instances under Section 40 whereby the
corporation is allowed to proceed with the sale of its assents without ratification: 1) If
it is necessary in the ordinary course of business of the corporation [if a corporation
sells of its assets, does that fall under the necessary or ordinary course of business of
the corporation? No. Hence, if the sale involves all of the assets, there has to be
ratification]; 2) If the proceeds of the sale or other disposition of such property and
assets be apportioned for the conduct of remaining business.

Sale of Substantially All of the Assets of the Corporation

Two things to remember: 1) assets are considered substantial if without which, the
corporation is incapable of conducting its ordinary course of business. If a corporation is
engaged in real estate business and sells its only parcel of land it owns, corporation is incapable
of conducting its xx]; 2) without which it renders a corporation incapable of pursuing its purpose.

The Corporation must conduct of a Quantitative Test to determine what assets are
substantial. If an asset it does not affect the day to day operation of the corporation, then that can
be considered as sale in the ordinary course of business of the corporation and therefore will not
require ratification.

Is appraisal right available in the sale of the assets or substantially all of the assets of the
corporation? Yes, for the possibility that the corporation may not be able to perform for which it
is created.

Lease or Encumbrance

- Requires ratification because the possibility that the corporation may not be able to
perform for which it is created.

Section 41

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

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

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

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

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

under the provisions of this Code. (a)

Instances where a corporation may acquire its own shares: 1) to eliminate fractional shares;
2) to collect or compromise unpaid subscription during delinquency sale; and 3) to pay its
dissenting or withdrawing its stockholders (this makes reference to stockholders exercising their
appraisal rights). Are these instances exclusive? Redeemable Shares, Treasury Shares. In other
words, the aforementioned instances are NOT exclusive. In fact, the corporation may decrease its
ACS (authorized capital stock) or may buy back the preferred shares (see cumulative preferred
shares) for the purpose of minimizing shares.
Section 42

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

Is the right of appraisal necessary or applicable in the event that a corporation would invest
its funds to another corporation? YES, for the same reason of the possibility that the corporation
may not be able to perform for which it is created. What is the requirement? 1) Approval of BOD;
2) ratification xxx.

Section 43

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

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

What are the kinds of dividends that a corporation can issue? 1) Case; 2) property; and 3)
stock dividends. Dividends are taken from the surplus profits to be declared by a stock corporation
to the stockholders in proportion to their shareholding in the corporation. These dividends are part,
earmarked to be distributed to the shareholders.
Why should the corporation declare and issue this dividends to the stockholders? 1) Section
43 itself prohibits the corporation to retain surplus profits in excess of its paid-up capital; 2) the
corporation will have improperly accumulated earnings tax unless the corporation: (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.
What is the requirement if the corporation issues case and property dividends? The only
requirement is approval of the majority of the BOD.
If what is to be issued are stock dividends, it requires: 1) approval of the majority of the
BOD; and 2) ratification.
Can a corporation issue stock dividends to person not classified as shareholders? Stock
dividends definition. To simplify, these are dividends that can be issued only to stockholders.
(Nielson vs. Lepanto)
What are the limitations when a corporation issues cash and stock dividends? If a
corporation issues cash dividends but find out that stockholders have unpaid subscription, then the
dividends should first be applied to unpaid subscriptions. It is different when what is being declared
is stock dividends. What is then the rule? Can the corporation apply stock dividends to unpaid
subscriptions? The corporation shall withhold the release of stock dividends to delinquent
shareholders.
Who are delinquent shareholders [not allowed to exercise their appraisal right]? 1) There
is failure to pay the subscription on the day (check)

Section 44

Power to enter into management contract. – No corporation shall conclude a management

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

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating agreements or otherwise: Provided,
however, That such service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered into for such periods
as may be provided by the pertinent laws or regulations.
 What are management contract? An agreement or a contract for the management or
operation by one corporation of another corporation. The management may include all or
substantially all of the business affairs of another corporation.
The one to manage is the managing corporation. The one subject of management is called
the managed corporation.
What are the requirements? 1) Approval by majority of the BOD; 2) ratification of the
stockholders representing majority of the outstanding capital stock of both the managed and
the managing corporation. Why should both give their consent? Management is in effect
abdication which is somehow a violation of Section 23.
Assuming that a corporation authorizes an individual? Page 425. But there is
authorization from the board for the person in consonance to Section 23.
What if a corporation enters into a management contract with a partnership? NO because
a corporation cannot even enter into a contract with a partnership because it violates the central
management rule (record).
Corporation can enter into joint venture agreements. But the thing is, the SC has not
given a clear cut definition of joint venture as compared to partnership. If a partnership is for a
particular undertaking, then what makes it different from a joint venture? (record)