— Code laws down two (2) general restrictions on the power of any corporation to
Chapter VI – Corporate Powers
— Primary rule: all corporate powers shall be exercised and all corporate
businesses shall be conducted by the board of directors of the
corporation
— Exception: specific instances where the Code requires the consent and
ratification of the SHs, particularly those where the underlying
contractual relationship between the parties: the corporation, the
SHs/members, and the State, is being amended or altered
— How is consent expressed by the parties?
o Corporation= through the Board
o State= through act of the regulatory body
o SHs= through majority or 2/3 vote where applicable
 But dissenting SHs in certain instances are given the
option to withdraw from the relationship through the
exercise of his appraisal right
1. A corporation has only three (3) types of power:
a. Express (Sec 36)
b. Implied or Necessary
c. Incidental
General Powers of Corporations
a. Express Powers
General
— Sources of express powers are provided for by law and those enumerated in its
charter
— Other express powers are in its AOI
— These are exercised by the Board
— In the absence of authority from the Board, no person, not even the officers,
can validly bind the corporation in the exercise of express powers
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purchase and hold properties
o (1) property must be reasonable and necessarily required by the
transaction of its lawful business
 depends on the nature of the business
o (2) must be subject to limitations prescribed by law and the Constitution
 cannot acquire available public lands except by lease of not more
than 1000 hectares (consti Art XII Sec 3)
 exploration, development, exploitation, etc, of natural resources=
60% Filipino-owned, and only in JV with the state
— General powers in Sec 36 are to be exercised by the Board of Directors in
accordance with Sec 23 (except where otherwise provided)
Specific Powers
1. To extend or shorten the corporate term (37)
— Sec 37: extension or shortening of term of existence
o Vote required: majority of board
o Ratification: vote of at least 2/3 of OCS or members
o Amendment to AOI: YES
o Appraisal rights? YES (37 & 81)
2. To increase or decrease capital stock (38)
o Vote required: majority of board
o Ratification: vote of at least 2/3 of OCS or members
o Prior approval of SEC required to take effect
o Amendment to AOI: YES
o Appraisal rights? NO
 Dissenting SH can simply sell his shares
 A grant of appraisal rights would defeat the purpose—to
raise funds
3. To incur, create, or increase bonded indebtedness (38)
— Sec 38: incur, create, or increase bonded indebtedness
 o Bonded indebtedness: covers indebtedness of the corporation
which are secured by mortgage on real or personal property (does
not include debentures)
o Vote required: majority vote of the board
o Ratification: vote of at least 2/3 OCS or members
o Prior approval of SEC required
o Appraisal rights? NONE
4. To deny preemptive right (39)
— Sec 38: 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.
5. To sell or otherwise dispose of substantially all its assets (40)
— Sec 40: power to sell, dispose, lease, or encumber all or substantially
all assets
o Vote required: majority vote of the board
o Ratification: vote of at least 2/3 OCS or members
o Nature of transactions covered: onerous contracts
o Transactions no covered by SH vote: (does not involve the
corporate purpose, but the corporate business)
 Necessary in the usual and regular course of business, or…
 … proceeds of disposition is appropriate for the conduct
of remaining business
o “substantially all” property/assets:
 if disposition renders corporation incapable of doing
business
 if disposition renders corporation incapable of
accomplishing its purpose in the AOI
 appraisal right? YES
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6. To acquire its own shares (41)
— Sec 41: power to purchase own shares
o Corporation must first have unrestricted retained earnings
o But redeemable shares may be acquired even without unrestricted
retained earnings (Sec 8)
7. To invest in another corporation or business (42)
— Sec 42: power to invest in another corporation
o Vote required: majority of the board
o Ratification: vote of at least 2/3 OCS or members
 EXCEPT: where the investment is reasonably necessary to
accomplish its PRIMARY PURPOSE
 If secondary purpose, ratificatory vote is required
o Effect of ratification: corporation can now legally invest its funds
OUTSIDE of its primary purpose, but LIMITED to its secondary
purpose
o Coverage of “funds”—any corporate property to be used to
further its business
o No ratificatory vote: ULTRA VIRES
8. To declare dividends (43)
— Sec 43: power to declare dividends out of restricted retained earnings
o Payable in cash, property, or stock
o Cash dividends due on unpaid stock shall be applied to the unpaid
balance on the subscription plus costs and expenses
o Primary of SHs to DEMAND dividends
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members
o Cannot retain surplus profits in excess of 100% of paid up capital
stock
o Exception:
 When justified by definite corporate expansion projects
approved by the board
 When prohibited under any loan agreement
  When it is clear that the retention is necessary under
special circumstances
o Surplus profits in excess of 100%= distribute as dividends
9. To enter into management contracts (44)
— Sec 44: power to enter into a management contract
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members, but…
o Special rule: vote of SH of MANAGED corporation owning at least
2/3 of TOTAL outstanding stock or members entitled to vote, iff:
 SH(s) representing the same interest in both managed
and managing corporations own or control more than 1/3
of TOTAL outstanding capital stock, or…
 … majority of Board of directors of the MANAGING
corporation also constitute a MAJORITY of the board in
the MANAGED
o rationale for the special rule: entering into a management contract
is a deviation from the GR that the board manages the corporation
and that the board of the managing company should devote its
affairs to its own corporation
o Not covered by Sec 44:
 if managing other corporations is the primary purpose,
ratificatory vote is not required!
 If managing a partnership or individual not a corporation,
not covered!
10. To buy the shares of another corporation (36) provided:
a. Reasonably necessary for its lawful business
b. The other corporation must be engaged in an allied business or not
alien to the purposes of the purchasing corporation (42)
— This means a corporation can enter into a joint venture with
another person, partnership or another corporation
— But a corporation cannot enter into a partnership contract
11. Power to enter into a partnership
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— GR: corporation cannot enter into partnerships with other corporations
or with individuals
— Exception: expressly allowed by statute or charter
o Joint ventures
o Limited partnerships (US Law)
b. Implied or Necessary Powers
GR: all acts other than those specified in Sec 36-44 and in other special provisions
would be ultra vires
Exception: those which are:
— necessary or incidental to the exercise of the powers so conferred
(45), or
— essential or necessary to carry out its purpose or purposes as stated
in the AOI. (38)
Presumption that a corporation can act within its powers and when a contract is not
on its face necessarily beyond its authority, it will, in the absence of proof to the
contrary, presumed to be valid.
— Sec 36(11): corporations have the power and capacity to exercise such
other powers as may be essential or necessary to carry out its
purpose(s) as provided for in the AOI
o Restated: the management of a corporation has discretionary
authority, in the absence of explicit restrictions, to enter into
contracts or transactions deemed reasonably necessary or
incidental to its business purposes.
c. Incidental Powers
— Sec 2: powers, attributes, and properties expressly authorized by
law or incident to its existence
— Incidental powers: those that attach to a corporation at the
moment of its creation without regard to its express powers or
particular primary purpose, and is inherent in it as a legal entity
— Examples:
i. To sue and be sued
 ii. To grant and receive in the corporate name
iii. To purchase hold and convey real and personal property
for its purposes
iv. To have a corporate seal
v. To adopt and amend by-laws for its government
vi. To disenfranchise or remove members
— Powers that go into the very nature and extent of a corporation’s
juridical entity cannot be presumed to be incidental or inherent
powers
The Ultra Vires Doctrine
— Sec 45 embodies the ultra vires doctrine
— Based on two (2) principles:
1. Corporation is a creature of law and has only such powers and privileges as
are granted by the State
2. The doctrine upholds the duty of trust and obedience owed by the
corporation’s directors and officers to the SHs
a. Defense of ultra vires rests on the violation of trust or duty
towards SHs, and should not be entertained where its allowance will
do greater wrong to innocent 3rd parties
Three (3) types of ultra vires acts:
(1) acts beyond the powers of the corporation as stipulated in the law or AOI.
The TEST: logical relation of the act to the corporate purpose:
a. W/N the act is in direct and immediate furtherance of the
corporation’s business
b. W/N the act is fairly incident to the express powers and
reasonably necessary for its exercise
(2) acts or contracts entered in behalf of the corporation by persons without
corporate authority
a. GR: only acts of corporate officers within the scope of their
authority are binding on the corporation; acts beyond the
authority cannot bind the corporation
b. Exception: ratification by the Board or estoppel
c. Primary rule: In the absence of an authority from the board, no
person, not even the officers, can validly bind the corporation
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d. Exception:
i. Doctrine of apparent authority: in dealing with
corporations, the public at large is bound to rely upon
outward appearances, and relying on such, if it be found
that the directors permitted the agent to hold himself
out as having authority to bind or acquiesced in the
contract and accepted the benefits therefrom, the
corporation will be bound. (Ramirez v Orientalist)
1. Public is not expected to know what goes on
inside the boardroom, or cannot be required to
look beyond the officers acting for a corporation
2. If the corporation desires to set up the defense
of lack of authority, it must plead and prove it…
3. …but once it discharges that duty, then the
burden of proof shifts to the agent to proof that
by previous acts of the corporation he had been
clothed with apparent authority
(3) acts or contracts which are per se illegal
a. cannot be given effect and are void
i. but in Harden, the Court upheld a patently void contract
as between the contracting parties; a narrow exception is
made in that since the violation of the particular law
pertains to public policy concerns and may only be
proceeded through a quo warranto, not by any of the
parties
ii. thus if no civil wrong was committed, the courts will leave
the parties as they were (Harden)
b. ultra vires acts which are NOT per se illegal are merely voidable
can be ratified by the SHs (Pirovano)
i. it cures the infirmity and makes it perfectly valid and
enforceable, provided that it prejudices no creditors and
if it has been partially executed and not merely executory
1. ratification may be by express act of the SH (if
the act is by the Board) or the Board (if the act
is by the officers)…
2. …or impliedly through acceptance of benefits…
3. …or through estoppel on the part of the Board or
the officers
Corporations are now more of a product of the agreement of the incorporating
parties rather than a mere “creature of the State:”
— Sec 10 allows 5 or more persons to form a private corporation for any
lawful purpose/s
— Sec 36 par 11 allows every corporation the power to exercise such
other powers as may be essential or necessary to carry out the
purpose/s in the AOI
— The corporation’s powers depends on its purpose in the AOI
— Since parties are entirely free to insert any number of purposes in its
AOI, it follows that the extent of the corporation’s powers depends
largely on their agreement, and not merely on a direct grant from the
State, unless of course the purposes are illegal.
— Instances where an act can or cannot be reasonably implied from the
purposes due to poor draftsmanship or lack of foresight of the
drafters, the purpose clause may be reasonably stretched to
accommodate the new and unexpected situations, otherwise, a proper
amendment of the AOI would be necessary.
Legal consequences of acts clearly beyond the powers of the corporation or ultra
vires?
— On the corporation:
o if the act is illegal, involuntary dissolution under a quo warranto
proceeding by the SolGen
o revocation or suspension of the certificate of registration by the
SEC
— On the parties to the ultra vires contract:
o Parties are “left as they are” and no rescission would lie.
o Where there has been partial performance by one party, and the
other has not, the latter, having benefited from the performance,
is estopped from claiming ultra vires
— On the rights of stockholders:
o A stockholder can file an individual or derivative suit to enjoin a
threatened ultra vires act or contract or a derivative suit for
damages if the contract has been performed
o Liability would depend on whether the contracting parties acted in
GF and with reasonable diligence; an honest mistake would not give
rise to liability
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— If action is based on tort, the stockholders cannot set up the defense
of ultra vires against the injured party who had no knowledge that the
corporation was engaging in an act not included expressly or impliedly
in its purpose clause.
RP v Acoje Mining.
It should be noted that it was Acoje itself that requested for the setting up of a
post office for the convenience of its employees, which the SC held to cover a
subject which is “a reasonable and proper adjunct to the conduct of the business of
Acoje Mining.” An ultra vires act is one committed outside the object for which a
corporation is created, but there are certain corporate acts that may be
performed outside the scope of the powers expressly conferred if they are
necessary to promote the interest and welfare of the corporation.”
The term ultra vires should be distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be invalidated. It being merely voidable, an ultra
vires act can be enforced or validated if there are equitable grounds for taking
such action. In this case, it is fair that the resolution be upheld at least on the
ground of estoppel.
The defense of ultra vires rests on violation of trust or duty towards the
stockholders, and should not be entertained where its allowance will do greater
wrong to innocent parties dealing with the corporation. The acceptance of benefits
arising from the performance of the other party gives rise to an estoppel
precluding the repudiation of the contract.
Napocor v Vera.
A pier located at Calaca, Batangas, which is owned by NPC, receives the various
shipments of coal which is used exclusively to fuel the Batangas Coal-Fired Thermal
Power Plant of the NPC for the generation of electric power. The stevedoring
services which involve the unloading of the coal shipments into the NPC pier for its
eventual conveyance to the power plant are incidental and indispensable to the
operation of the plant. The Court holds that NPC is empowered under its Charter to
undertake such services, it being reasonably necessary to the operation and
maintenance of the power plant. This Court is, guided by the case of Republic of
the Philippines v. Acoje Mining Company, Inc., where the Court affirmed the rule
that a corporation is not restricted to the exercise of powers expressly conferred
upon it by its charter, but has the power to do what is reasonably necessary or
proper to promote the interest or welfare of the corporation.
Madrigal & Co v Zamora.
What clearly emerges from the recorded facts is that the petitioner, awash with
profits from its business operations but confronted with the demand of the union
for wage increases, decided to evade its responsibility towards the employees by a
devised capital reduction. While the reduction in capital stock created an apparent
need for retrenchment, it was, by all indications, just a mask for the purge of union
members, who, by then, had agitated for wage increases.
We agree with the National Labor Relations Commission that "[t]he dividends
received by the company are corporate earnings arising from corporate
investment."
Moreover, it is incorrect to say that such profits — in the form of dividends — are
beyond the reach of the petitioner's creditors since the petitioner had received
them as compensation for its management services in favor of the companies it
managed as a shareholder thereof. As such shareholder, the dividends paid to it
were its own money, which may then be available for wage increments. It is not a
case of a corporation distributing dividends in favor of its stockholders, in which
case, such dividends would be the absolute property of the stockholders and hence,
out of reach by creditors of the corporation.
Accordingly, this court is convinced that the petitioner's capital reduction efforts
were, to begin with, a subterfuge, a deception as it were, to camouflage the fact
that it had been making profits, and consequently, to justify the mass layoff in its
employee ranks, especially of union members. They were nothing but a premature
and plain distribution of corporate assets to obviate a just sharing to labor of the
vast profits obtained by its joint efforts with capital through the years. Surely, we
can neither countenance nor condone this. It is an unfair labor practice.
Gov’t of Philippines v El Hogar.
In the case, El Hogar had in GF disposed of the property at the expiration of the
period fixed by law. Under the circumstances the destruction of the corporation
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would bring irreparable loss upon thousands of innocent shareholders of the
corporation without any corresponding benefit to the public.
The law expressly declares that corporations may acquire such real estate as is
reasonably necessary to enable them to carry out the purposes for which they were
created; and we are of the opinion that the owning of a business lot upon which to
construct and maintain its offices is reasonably necessary to a building and loan
association such as the respondent was at the time this property was acquired.
If the respondent had the power to acquire the lot, construct the edifice and hold
it beneficially, as there decided, the beneficial administration by it of such parts
of the building as are let to others must necessarily be lawful.
The administration of property in the manner described is more befitting to the
business of a real estate agent or trust company than to the business of a building
and loan association.
The circumstance that the owner of the property may have been required to
subscribe to one or more shares of the association with a view to qualifying him to
receive this service is of no significance. It is a general rule of law that
corporations possess only such express powers. The management and administration
of the property of the shareholders of the corporation is not expressly authorized
by law, and we are unable to see that, upon any fair construction of the law, these
activities are necessary to the exercise of any of the granted powers. The
corporation, upon the point now under the criticism, has clearly extended itself
beyond the legitimate range of its powers. But it does not result that the
dissolution of the corporation is in order, and it will merely be enjoined from
further activities of this sort.
The Corporation Law declares that "any person" may become a stockholder in
building and loan associations. The word "person" appears to be here used in its
general sense, and there is nothing in the context to indicate that the expression is
used in the restricted sense of both natural and artificial persons, as indicated in
section 2 of the Administrative Code. The incorporators of a corporation ought to
be natural persons, although in section 6 it is said that five or more "persons",
although in section 6 it is said that five or more "persons," not exceeding fifteen,
may form a private corporation. But the context there, as well as the common sense
of the situation, suggests that natural persons are meant. When it is said, however,
in section 173, that "any person" may become a stockholder in a building and loan
association, no reason is seen why the phrase may not be taken in its proper broad rights. The violation in this case was of such a nature that it can be proceeded upon
sense of either a natural or artificial person. The result is that we find nothing in only by way of a criminal prosecution, or by action quo warranto, which can be
the allegations of the sixteenth cause of action, or in the facts developed in maintained only by the State. Insofar as the parties are concerned, no civil wrong
connection therewith, that would justify us in granting the relief. had been committed between them, and if public wrong had been committed, then
the directors of Balatoc Mining and Harden were the active inducers of that wrong.
In requiring the respondent to sell real estate which it acquires in connection with The contract has in fact been performed on both sides, and there is no possibility
the collection of its loans within five years after receiving title to the same, the of undoing what had been done. Thus even where corporate contracts are illegal per
law does not prescribe that the property must be sold for cash or that the se, when only public or government policy or interests are at stake and no private
purchaser shall be a shareholder in the corporation. Such sales can of course be wrong is committed, the courts will leave the parties as they are, in accordance
made upon terms and conditions approved by the parties; and when the association with their original contractual expectations.
takes a mortgage to secure the deferred payments, the obligation of the purchaser
cannot be fairly described as arising out of a loan. Nor does the fact that it is
carried as a loan on the books of the respondent make it a loan on the books of the — Corporate powers: WYSIWYG
respondent make it a loan in law. The contention of the Government under this head — AOI related to relevant code
is untenable. provisions
— Powers are built-in in the AOI,
limited by primary purpose
— 45: all encompassing powers
Pirovano v Dela Rama. — Necessary and incidental rule:
Under the AOI of Dela Rama Steamship it is provided under (g) that the company necessary is different from
may invest and deal with moneys of the company not immediately required, in such a incidental
manner as from time to time may be determined, and under (i)… to lend money or to — Common denominator contained in AOI
aid in any other manner any person association, or corporation of which any — Code sets parameters/requirements
(36-44)
obligation or in which any interest is held by the corporation or in the affairs of
— Statute sets parameters (i.e. banks,
prosperity of which the corporation has a lawful interest. The corporation was thus Gen Banking Act)
given broad and almost unlimited powers to carry out the purposes for which it was — Specific powers: dealing with SHs
organized. and 3rd parties
— Cannot divorce exercise of corporate
powers from control and management
An ultra vires act may either be an act performed merely outside the scope of the
— Extent of corporate powers would
powers granted to the corporation by its AOI or one which is contrary to law or limit control and management
violative of any principle which would void any contract. A distinction has to be — Unlimited discretion cannot be
made with respect to corporate acts which are illegal and those merely ultra vires. exercised for furtherance of
The former are contrary to law, morals, public order or policy, while the latter are secondary purposes in AOI
not void ab initio, but merely go beyond the scope of the powers in the AOI, and
which renders the act merely voidable and thus ratifiable by the stockholders.

Harden v Benguet.
Although the contract between the two mining companies was illegal for
contravening the old Corpo Law, the Legislature, in adopting such a provision had
the intention that public policy should be controlling in the granting of mining