How are corporate powers exercised?

Building homes, gyms, hospitals

1. By the shareholders – exercising their d. Acts to increase business.
right to vote, elect the directors, vote on
May conduct sponsorships, contests,
important matters that are still reserved to
promote thru fairs and gatherings
them
2. By the Board of Directors – responsible Incidental Powers (to Corp. existence)
for the governance, set the policies, elect
the officers (majority of the entire number 1. Sue and be sued
of BOD) 2. Have corporate name
3. Buy and hold real and personal property
When are Powers not exercised by BOD? 4. Adopt and use corporate name
5. To contract, make by-laws
1. Management contract
2. Delegation to EXECOMM - majority
vote of BOD Sec 35
a. Except for AFA-AD
SPCAB-SN-PPD-PO
Sue and be Sued
3. By the Officers – elected by the Board,
carry out the policies Derivative suit – brought by stockholder on behalf
of corporation against directors
Capacity to act – comes from by-laws or
authorization of the BOD either expressly or Real party – corporation
impliedly Nominal party – stockholder
Doctrine/Theory of Limited Capacity – No
corporation under the Corporation Code, shall
possess or exercise any corporate powers, except Corporate Seal
those conferred by law, its Articles of Incorporation,
Certificate of stocks are required to be sealed
those implied from express powers and those as
are necessary or incidental to the exercise of the Corp needs not a seal to EXIST
powers so conferred.

Specific Powers of a Corporation

Kinds of Power (Foreshadowing)
1. Express powers – Granted by law, 1. Power to extend or shorten corporate term.
Corporation Code, and its Articles of (Sec. 36)
Incorporation or Charter, and administrative 2. Increase or decrease corporate stock. (Sec.
regulations 37)
2. Inherent/incidental powers – Not 3. Incur, create, or increase bonded
expressly stated but are deemed to be indebtedness. (Sec. 37)
within the capacity of corporate entities. 4. Deny pre‐emptive right. (Sec. 38)
3. Implied/necessary powers – Exists as a 5. Sell, dispose, lease, encumber all or
necessary consequence of the exercise substantially all of corporate assets. (Sec.
of the express powers of the corporation 39)
or the pursuit of its purposes 6. Purchase or acquire shares. (Sec. 40)
7. Invest corporate funds in another
Implied Powers
corporation or business for other purpose
a. Acts in the usual course of business. other than primary purpose (Sec. 41)
8. Declare dividends out of unrestricted
Borrowing money, entering contracts, retained earnings. (Sec. 42)
executing promissory notes, checks, bills, 9. Enter into management contract with
buying securities, acquiring properties for another corporation (not with an individual
business, lands and buildings, SLEMPOD or a partnership – within general powers)
b. Acts to protect debts owing to a
corporation.
Sec 36
If Corp is a creditor, it may do acts to protect
its rights as a creditor, like attaching Extend or Shorten Corporate Term
property, etc. Requirements

c. Acts in part or wholly to protect or 1. Majority vote of the BOD or BOT;

aid employees. 2. Ratification by 2/3 of the SH representing
outstanding capital stock or by at least 2/3
 of the members in case of non‐stock nationalities and residences of
corporation; subscribers, capital stock or number
3. Written notice of the proposed action and of no-par stocks subscribed by each,
of the time and place of the meeting shall be and amount paid by each,
addressed to each stockholder or member
at his place of residence as shown on the Or capital stock or number of shares
books of the corporation and: of no-par stock allotted to each
a. Deposited to the addressee in the stockholder if such increase is for
post office with postage prepaid, stock dividend authorized;
b. Or served personally, d. Bonded indebtedness to be incurred
c. OR sent electronically e. Amount of stock represented at the
meeting; and
4. Copy of the amended AOI shall be f. Vote authorizing the increase or
submitted to the SEC for its approval diminution of the capital stock
(Section 15 – where approved if signed with 5. Approval of the Commission, and where
official seal or not acted on within 6 appropriate, of the Philippine Competition
months). Commission
6. Application with SEC shall be made
Note: Section 36 grants appraisal right to a within six (6) months from the date of
dissenting stockholder. approval of BOD and stockholders.
7. Copies of certificate shall be filed with SEC
and attached to OG AOI. After approval,
Sec 80 Appraisal Right MEMORIZE certificate of filing will be issued and
1. Authorizing preferences change will take effect.
2. Extending or shortening term 8. For increase of capital stock additional
3. Sale, lease, exchange, transfer, mortgage, requirement: Sworn statement of the
pledge or other disposition of all or treasurer of the corporation lawfully holding
substantially all of the corporate property office at the time of the filing of the
4. Merger or consolidation certificate, showing that:
5. Investing funds in another corporation or a. At least 25% of increase has been
business for any purpose other than its subscribed.
primary purpose. b. At least 25% of subscribed is paid
up
c. In cash or property valued at 25% of
subscription and transferred to Corp
Sec 37
Bonded Indebtedness – long-term debt secured 9. For decrease of capital stock: must not
usually by real property prejudice the right of the creditors.
10. Bonds issued should be registered with the
Increase or Decrease Authorized Capital Stock SEC.
and Incur, Create, or Increase Bonded
Indebtedness Documentation Requirement for Increase of CS:

Requirements Submission of Financial Statement by an

independent CPA (Audited FS)
1. Majority vote of the BOD;
2. Ratification by stockholders representing When Increase is for Stock Dividend:
2/3 of the outstanding capital stock;
Audited FS + detailed or long form report
(WRITTEN ASSENT ISN’T ENOUGH)
of the certifying auditor
3. Written notice of the proposed increase or
diminution of the capital stock and of the  If will result to Issuance of
time and place of the stockholder’s meeting Spurious stock – the overissue is
4. A certificate in duplicate must be signed by null and void.
a majority vote of the directors of the  Valid – if declared simultaneously
corporation and countersigned by the with increasing ACS (when ACS is
chairman and the secretary of the insufficient to cover the declaration)
stockholder’s meeting, setting forth:
a. Requirements have been complied GR: Increase in ACS or CS can’t be legally
with; accomplished without increase in corporate assets
b. Amount of increase or diminution of XPN: If such increase is for effecting STOCK
the capital stock; DIVIDENDS
c. Increase of the capital stock:
capital stock or number of shares of
no-par stock subscribed, the names,
Decreasing Capital Stock Or by Special power of attorney, individual basis
(not by majority). SH can't be forced to waive their
1. Redeeming, retiring, cancelling treasury or
right
unissued, accepting surrender of shares
(decrease in ACS) Is the pre‐emptive right of a stockholder
2. Decrease in par value transferable?
No decrease – when shares are just in the A: Yes, unless there is an express restriction in the
TREASURY AOI.

Bonded indebtedness Instances when Pre‐emptive Right is Not

Available
 Major assets are assigned as security
 Amount is large 1. Shares to be issued to comply with laws
 Period of payment is relatively long (not just requiring stock offering or minimum stock
1-2 years) ownership by the public;
 Required to pay interest Certain percentage must be owned by public
 Maintain a sinking fund
 Same requirements with I/D of CS except 2. Shares issued in good faith with the
for sworn statement of treasurer (not approval of the stockholders representing
needed) 2/3 of OCS in exchange for property
needed for corporate purposes;
Three Parties to Bond Contract/Indenture
When Corp doesn’t have assets to buy the property
1. Issuing Corporation/Borrowing Corporation and owner of such is willing to give it in exchange
2. Bond holders – creditors of shares
3. Trustee – a bank or trust company, serves
to protect bond holders; countersigns bond, 3. Shares issued in payment of previously
collects and distributes payments contracted debts with the approval of the
stockholders representing 2/3 of OCS
Secured bonds
Debt-equity swap, shares as payment for debts of
Mortgage bonds – secured by lien on corporation
properties
4. In case the right is denied in the Articles
Collateral trust bonds – pledge of stocks of Incorporation only; (not in the by-laws)
Can the AOI be amended to deny Pre-emptive
Sec 38 right? YES

Pre-emptive Right – preferential right of 5. Waiver of the right by the stockholder.

shareholders to subscribe to all issues or
disposition of shares of any class in proportion to
their present shareholdings. Sec 39 Sell, lease, exchange, mortgage, pledge
or other disposition (SLEMPO) of all or
Purpose: enable the shareholder to retain his substantially all of corporate assets
proportionate control, retain his equity in the
surplus Procedural Requirements

Is there pre‐emptive right on the re‐issuance of 1. Majority vote of the BOD or BOT
treasury shares? 2. Ratification by stockholders representing at
least 2/3 of the outstanding capital stock in
A: Yes. When a corporation reacquires its own a MEETING (WRITTEN ASSENT ISN’T
shares which thereby become treasury shares, all ENOUGH)
shareholders are entitled to pre‐emptive right. Re‐
issuance of treasury shares is not among the After such authorization or approval by the
exception provided by Sec. 38 when pre‐emptive stockholders the board may, nevertheless,
right does not exist. in its discretion, abandon such SLEMPO,
without approval of SH.

May pre‐emptive right be waived by the 3. Written notice of the proposed action
stockholder? 4. Right of appraisal is available
A: Yes, when the stockholder fails to exercise his
pre‐emptive right after being notified and given an
opportunity to avail of such right.
Substantially all of corporate assets 2. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
If the corporation would be:
subscription, in a delinquency sale and to
1. rendered incapable of continuing the purchase delinquent shares sold during
business, or said sale;
2. accomplishing the purpose for which it was
Upon delinquency, no one bid for the shares,
incorporated.
corporation buys back.
When may the corporation forgo the ratification
3. To pay dissenting or withdrawing
by SH / members?
stockholders (in the exercise of the
1. If sale is necessary in the usual and stockholder’s appraisal right);
regular course of business (inventories);
EXTRA:
2. If the proceeds of the sale or other
disposition of such property and assets are 4. To acquire treasury shares;
to be appropriated for the conduct of the 5. Redeemable shares regardless of existence
remaining business (for funding); of retained earnings;
3. If the transaction does not cover all or 6. To cause a decrease of capital stock;
substantially all of the assets. 7. In close corporations, when there is a
ONLY MAJORITY OF BOARD IS deadlock in the management of the
NEEDED. business (regardless of URE).
GR: In the absence of statutory authority, the
After selling all or substantially all of its corporation cannot acquire its own shares
properties, is a corporation still a corporation?
XPN: SEC Opinion, Oct. 12, 1992, imposed the
YES, until it is actually dissolved. Under following conditions:
suspension, until dissolution.
1. There should be URE and the capital of the
Rationale of SH approval of sale of substantially corporation must not be impaired;
all: We wouldn’t want corporate properties to be 2. Legitimate and proper corporate objective is
concentrated in the hands of major businesses. advanced;
That will kill competition and increase prices. 3. Condition of the corporate affairs warrants
it;
4. Transaction is designed and carried out in
Sec 40 Power to acquire own shares good faith
5. Interest of creditors not impaired, that is, not
Trust Fund Doctrine: violative of the trust fund doctrine.
 The subscribed capital stock of the Requisites from Sec 40
corporation is a trust fund for the payment of
debts of the corporation. 1. The acquisition should be for a legitimate
 Creditors may sue the stockholders directly corporate purpose; and
for the latter’s unpaid subscription (MAY 2. There should be unrestricted retained
HABOL). earnings [URE].
 Therefore, purchase of own shares leaving
insufficient capital to pay creditors is VOID.
Sec 41 Investment of Corporate Funds in
Three Allowed distribution of corporate capital Another Business for Secondary Purpose and
1. Amendment of the AOI to reduce in Subsidiary corporation
authorized capital stock; Requirements:
2. Purchase of redeemable shares by the
corporation regardless of existence of 1. Approval by the majority vote of the BOD
unrestricted retained earnings; or BOT
3. Dissolution and eventual liquidation of the 2. Ratification by stockholders representing at
corporation. least 2/3 of the outstanding capital stock
or by at least 2/3 of the members in case of
non‐stock corporation
What are the instances where corporation may 3. Ratification must be made at a meeting
acquire its own shares? duly called for the purposes, and
1. To eliminate fractional shares out of stock 4. Prior written notice of the proposed
dividends; investment and the time and place of the
meeting shall be made addressed to each
Fractional share – less than 1 share (1/2 share); stockholder or member by mail or by
can’t be represented in meetings personal service.
APPRAISAL RIGHT is granted to dissenting 3. The retention is necessary under special
shareholders. circumstances obtaining in the corporation,
such as when there is a need for special
Investment of Corporate Funds in Another
reserve for probable contingencies.
Business for Primary Purpose
4. Appropriation for Treasury Stock.
1. Approval by the majority vote of the BOD
Who are entitled to receive dividends?
or BOT only.
A: Stockholders of record date;
Investments – bring revenue through dividends,
market value appreciation, business advantage, if there is no record date, the stockholders at the
enabling corporation to meet requirements; time of declaration of dividends (not at the time of
different from inventories, receivables payment).
Investment in Ultra Vires cause (not primary, In case of transfer, dividends declared before the
not secondary) – VOID, can’t be ratified. transfer of shares belong to the transferor and
those declared after the transfer belongs to the
transferee.
Sec 42 (for stock corporation only)
In case of mortgaged or pledged shares,
Dividend – part of profits set aside, declared, paid mortgagor or the pledgor (stockholder).
pro rata to stockholders at a rate; return on
When the mortgage or pledge is recorded in the
investment.
books, mortgagee or pledgee (pinagsanlaan).
- Valued at amount taken from unrestricted retained
earnings
Cash Dividends
- To which DELIQUENT stockholder is still entitled,
but with qualifications:  Part of general fund
 Results in cash outlay
 Cash dividends are first applied to the
 Not subject to levy by corporate creditors
unpaid balance on the subscription.
 Declared only by the board of directors at its
 Stock dividends are withheld until his
discretion (majority of the quorum only, not
unpaid subscription is fully paid.
majority of all the board)
 Does not increase the corporate capital
 Its declaration creates a debt from the
Requirements:
corporation to each of its stockholders
1. Existence of unrestricted retained  If received by individual: Subject to tax
earnings  If received by corporation: not subject to tax
2. Resolution of the board (majority)  Cannot be revoked after announcement
3. In case of stock dividend,  Applied to the delinquent unpaid shares
a. Resolution of the board with the  Compensation can be applied
concurrence of votes representing
2/3 of outstanding capital. Stock Dividends
b. Sufficient ACS
 Part of capital
When?  No cash outlay
 Once issued, can be levied by corporate
GR: BOD has discretion to determine whether
creditors because they’re part of corporate
dividends are to be declared (they have control
capital
over assets).
 Declared by the board with the concurrence of
XPN: Stock corporations are prohibited from the stockholders representing at least 2/3 of the
retaining surplus profits in excess of 100% of outstanding capital stock at a regular/special
their paid‐in capital stock. meeting
o Because there’s a transfer from earning
XPNs to XPN (when it’s okay not to declare to capital; they’re choosing to forgo
dividends despite RE being beyond 100% of accepting cash
paid-up capital stock): MEMORIZE o “Capitalizing retained earnings”
1. Definite corporate expansion projects  Corporate capital is increased
approved by the board of directors;  No debt is created by its declaration
2. Corporation is prohibited under any loan  General Rule: Not subject to tax either
agreement with any financial institution or received by individual or a corporation
creditor from declaring dividends without  Can be revoked despite announcement but
its/his consent before issuance
 Can be withheld until payment of unpaid - One Corp can’t surrender all powers to
balance of delinquent shares another; otherwise, it will be a mere instrumentality
 Not subject to compensation or set off. of managing Corp.
 For Stockholders, exclusively. - Reasons: Managed Corp is venturing into a NEW
 Can’t be sourced from capital from No-Par business it isn’t familiar with; Condition for bond
shares because of trust fund doctrine. agreement (Creditor-managing; Debtor-managed)
NOTE: For the purposes of this distinction, property
dividends are considered as cash dividends.
Requirements
1. Contract must be approved by the majority
Classes of Dividends of the BOD or BOT of both managing and
Dividends payable to shareholders may be managed corporation
classified as follows: 2. Ratified by the stockholders owning at least
the majority of the outstanding capital
1. Cash Dividend – It is dividend payable in cash stock, or members in case of a non-stock
2. Property Dividend – It is dividend attributed to corporation, of both the managing and the
the stockholders in the form of property, real or managed corporation, at a meeting duly
personal, such as warehouse receipts, or called for the purpose
shares of stock of another corporation 3. Contract must be approved by the
3. Stock Dividend – It is dividend payable in stockholders of the managed corporation
unissued or increased or additional shares of owning at least 2/3 of the outstanding
the corporation instead of in cash or in property capital stock entitled to vote, 2/3 members
out of the unrestricted retained earnings of the when:
corporation a. Interlocking Stockholders of the
4. Optional Dividend – It is dividend which gives managing and the managed
the stockholder an option to receive cash or corporation own or control more
stock dividend than 1/3 (not exact) of the total
5. Composite Dividend – It is dividend which is outstanding capital stock entitled to
partly in cash and partly in stocks. Here, vote of the managing corporation
there is no option involved; b. Common majority (by head count)
6. Preferred or Preferential Dividend – It is of BOD
dividend, which is payable, by virtue of contract,
to one class of stockholders in priority to that to 4. For managing corporation, always
be paid to another class. MAJORITY + MAJORITY only.
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
GR: Management contract shall be entered into for
are insufficient to pay the contract dividend, it is
a period not longer than 5 years for any one term.
to be made out of subsequent net earnings.
8. Scrip Dividend – It is in the form of a XPN: In cases of service or operating agreements
promissory note or a promise to pay and may which relate to the exploitation, development,
be issued to bear interest; exploration or utilization of natural resources, it may
9. Bond Dividend – It is dividend distributed in be entered for such periods as may be provided by
bonds of the corporation to the stockholders; the pertinent laws or regulations.
10. Liquidating Dividend – They are dividends
which are actually distributions of the assets
of the corporation upon dissolution or winding ILLUSTRATION (requiring 2/3)
up of the same.
Interlocking Stockholders
If A, B, and C, stockholders in both X Corporation
Sec 43 and Y Corporation, the managing and managed
corporations, respectively, own 35% of the total
Management contract – any contract whereby a
outstanding capital stock entitled to vote of
corporation undertakes to manage or operate all
managing X Corporation, the management
or substantially all of the business of another
contract must be approved by the prescribed 2/3
corporation, whether such contracts are called
vote of the stockholders of Y Corporation
service contracts, operating agreements or
(managed Corp).
otherwise.
The same vote shall apply where A is stockholder
- Subject to superior power of the BOD
in both corporations, and he owns more than 1/3 of
the total outstanding capital stock entitled to vote of
X Corporation.
Only a majority vote is required if more than 1/3 thus, the corporation will, as against anyone who
ownership of A, B, and C, or of A refers to the has in good faith dealt with it through such agent,
outstanding capital stock of Y Corporation, the be estopped from denying the agent’s authority.
managed corporation.
Effect: Agent’s act is binding based on estoppel.
Interlocking Directors – If A, B, C, D, and E
Permitted at first, denied subsequently. Estopped
constitute the majority of the members of the BOD
from denying. (OFFICER POWER BY ESTOPPEL)
of X Corporation and also of Y Corporation, the
bigger 2/3 vote by the SH of Y Corporation 4. When the act was ratified by the Board.
(managed) is necessary. This is a case of a
contract between two corporations with interlocking
directorates (Sec. 33). The extend of the Effects of an ultra vires act:
shareholdings of A, B, C, D, and E in X Corporation
is immaterial. Ultra vires acts entered into by the board of
directors binds the corporation and the courts will
not interfere unless terms are oppressive and
Sec 44 unconscionable. (Gamboa vs. Victoriano, G.R. No.
L‐43324. May 5, 1979)
Ultra Vires acts
Effects for the specific acts:
Those powers that are not conferred to the
corporation by law, by its AOI and those that are 1. Executed contract – courts will not set
not implied or necessary or incidental to the aside or interfere with such contracts
exercise of the powers so conferred 2. Executory contracts – no enforcement
even at the suit of either party (void and
Opposite of Intra Vires unenforceable)
3. Partly executed and partly executory –
principle of “no unjust enrichment at
Types of Ultra Vires Acts (UVA) expense of another” shall apply
1. Acts done beyond the powers of the One party already benefited.
corporation [through BOD] – not express,
implied, incidental 4. Executory contracts apparently
VOID, no ratification, unless authorized but ultra vires – the principle of
amended AOI (include in the estoppel shall apply (apparent authority).
purpose)
Became UVA because no approval of SH Ultra Vires Act Illegal Acts
Cure: Subsequent ratification of SH Not necessarily Unlawful; against law,
unlawful, but outside morals, public policy,
the powers of the and public order
2. Ultra Vires Acts by corporate officers – not corporation
authorized by BOD
Can be ratified Cannot be ratified
Became UVA because no approval of BOD (lacks only SH or BOD
approval)
Cure: Subsequent ratification of BOD
Can bind the parties if Cannot bind the parties
wholly or partly
3. Acts or contracts which are per se illegal executed + apparent
as being contrary to law. authority
VOID, no ratification

Remedies in case of ultra vires act:

When does the act of the officers bind the
corporation? 1. State – has the right to invoke it.
a. Obtain a judgment of forfeiture of
A: Through the following: profits or property; or
b. The SEC may suspend or revoke
1. If it is provided in the by-laws
the certificate of registration
2. If authorized by the board
3. Under the doctrine of apparent authority
2. Stockholders – parties
If a corporation knowingly permits one of its a. Injunction; or
officers, or any other agent, to act within the scope b. Derivative suit
of an apparent authority, it holds him out to the
public possessing the power to do those acts; and
 3. Creditors – Nullification of contract in fraud
of creditors.
Effect of UVA depends on who is involved in the
UVA.

Voting Requirement for Election of Officers:

Majority of the NUMBER of directors, not
majority of quorum.
That’s the only exception. For all other acts, it’s
only majority of quorum.
Instances where Vote of Board isn’t Majority of
Quorum:
1. Election of officers – majority of the entire
membership of board
2. In corporations vested with public interest,
when validating self-dealing contracts – 2/3
of the entire membership of board
3. In filling vacancies through EMERGENCY
board – unanimous vote