CHAPTER 7: CORPORATE POWERS AND VENUE:
AUTHORITY the action filed against it must be instituted at the place of
SEC. 35. Corporate Powers and Capacity.
Every corporation incorporated under this Code has the power
and capacity:
a. To sue and be sued in its corporate name;
b. To have perpetual existence unless the certificate of
incorporation provides otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with
the provisions of this Code;
e. To adopt bylaws, not contrary to law, morals or public
policy, and to amend or repeal the same in accordance with
this Code;
f. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the
corporation if it be a nonstock corporation;
g. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage, and otherwise deal with such real
and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business
of the corporation may reasonably and necessarily require,
subject to the limitations prescribed by law and the
Constitution;
h. To enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement with
natural and juridical persons;
i. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, that no
foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan
political activity;
j. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers, and employees;
and
k. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in
the articles of incorporation.
Notes:
The statement of the objects, purposes or powers in the AOI
results practically in defining the scope of the authorized
corporate enterprise or undertaking. This statement both confers
and also limits the actual authority of the corporation.
Along with the powers indicated in the AOI, a corporation can
also exercise powers that may be granted by law, particularly
those provided under Sec. 36 and 44 of the Corporation Code
and those which may be necessary or incidental to tis existence.
In short, corporate authority may be classified as: 1. Express
powers – those expressly granted by law inclusive of the
corporate charter or AOI; 2. Implied Powers – those impliedly
granted as are essential or reasonably necessary to the carrying
out of the express powers; and 3. Incidental Powers – those
incidental to its existence.
POWER TO SUE AND BE SUED
A corporation may sue and be sued in its corporate name just
like any other person.
principal office of the corporation.
Sec. 11.
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 on the president, managing
partner, general manager, corporate secretary, treasurer, or in-
house counsel.
Service of summons upon persons other than those named
under than those named in the above provision is without force
and effect.
DELTA MOTOR SALES CORPORATION vs. HON.
JUDGE IGNACIO MANGOSING
FACTS:
Herein respondent Pamintuan initiated an action against
petitioner Delta Motors for the alleged defective Toyota car sold
to him and for failure to fulfill the warranty obligation by not
repairing the car.
The summons was served on Dionisia Miranda, employee of
the petitioner. Delta Motors failed to answer the complaint and
was declared in default and evidence was presented and a
decision was rendered against herein petitioner.
Petitioner filed a motion to lift the order of default and to set
aside the judgment and for new trial, which was denied.
ISSUE:
WON there was proper service of summons?
HELD:
No. Rule 14 of the Revised Rules of Court provides:
SEC. 13.
Service upon private domestic corporation or partnership. — If
defendant is a corporation organized under the laws of the
Philippines or a partnership duly registered, service may be
made on the president, manager, secretary, cashier, agent, or
any of its directors.
For the purpose of receiving service of summons and being
bound by it, a corporation is identified with its agent or officer
who under the rule is designated to accept service of process.
"The corporate power to receive and act on such service, so far
as to make it known to the corporation, is thus vested in such
officer or agent."
A strict compliance with the mode of service is necessary to
confer jurisdiction of the court over a corporation. The officer
upon whom service is made be one who is named in the statute;
otherwise the service is insufficient. So, where the statute
required that in the case of a domestic corporation summons
should be served on "the president or head of the corporation
secretary treasurer, cashier or managing agent thereof", service
of summons on the secretary's wife did not confer jurisdiction
over the corporation in the foreclosure proceeding against it.
Hence, the decree of foreclosure and the deficiency judgment
were void and should be vacated.
The purpose 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 other words, "to bring home to the corporation notice of
the filing of the action".
In the instant case the Manila court did not acquire jurisdiction
over Delta Motor because it was not properly served with
summons. The service of summons on Dionisia G. Miranda,
who is not among the persons mentioned in section 13 of Rule
14, was insufficient. It did not bind the Delta Motor. Courts
acquire jurisdiction over the person of a party defendant and of
the subject-matter of the action by virtue of the service of
summons in the manner required by law. Where there is no
service of summons or a voluntary general appearance by the
defendant, the court acquires no jurisdiction to pronounce a
judgment in the cause.
Consequently, the order of default, the judgment by default and
the execution in Civil Case No. 97373 are void and should be
set aside.
E. B. VILLAROSA & PARTNER CO., LTD vs. HON.
HERMINIO I. BENITO
FACTS:
Petitioner is a limited partnership with principal office address
at Davao City and with branch offices at Parañaque, Metro
Manila and Lapasan, Cagayan de Oro City.
Petitioner and private respondent executed a Deed of Sale with
Development Agreement wherein the former agreed to develop
certain parcels of land located at Cagayan de Oro belonging to
the latter into a housing subdivision for the construction of low
cost housing units. They further agreed that in case of litigation
regarding any dispute arising therefrom, the venue shall be in
the proper courts of Makati.
Private respondent, as plaintiff, filed a Complaint for Breach of
Contract and Damages against petitioner, as defendant, before
the RTC Makati for failure of the latter to comply with its
contractual obligation in that, other than a few unfinished low
cost houses, there were no substantial developments therein.
Summons, together with the complaint, were served upon the
defendant, through its Branch Manager at the stated address at
Cagayan de Oro City but the Sheriff's Return of Service stated
that the summons was duly served "upon defendant E.B.
Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. at
their new office Villa Gonzalo, Nazareth, Cagayan de Oro City,
and evidenced by the signature on the face of the original copy
of the summons.
Defendant filed a motion to dismiss on the ground of improper
service of summons which was denied.
ISSUE:
WON the court acquired jurisdiction?
HELD:
No. Earlier cases have upheld service of summons upon a
construction project manager; a corporation's assistant
manager; ordinary clerk of a corporation; private secretary of
corporate executives; retained counsel; officials who had
charge or control of the operations of the corporation, like the
assistant general manager; or the corporation's Chief Finance
and Administrative Officer. In these cases, these persons were
considered as "agent" within the contemplation of the old rule.
Notably, under the new Rules, service of summons upon an
agent of the corporation is no longer authorized.
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 1997 Rules of Civil Procedure. The rule now states
"general manager" instead of only "manager"; "corporate
secretary" instead of "secretary"; and "treasurer" instead of
"cashier." The phrase "agent, or any of its directors" is
conspicuously deleted in the new rule.
The particular revision under Section 11 of Rule 14 was
explained by retired Supreme Court Justice Florenz Regalado,
thus: . . . the then Sec. 13 of this Rule allowed service upon a
defendant corporation to "be made on the president, manager,
secretary, cashier, agent or any of its directors." The aforesaid
terms were obviously ambiguous and susceptible of broad and
sometimes illogical interpretations, especially the word "agent"
of the corporation. The Filoil case, involving the litigation
lawyer of the corporation who precisely appeared to challenge
the validity of service of summons but whose very appearance
for that purpose was seized upon to validate the defective
service, is an illustration of the need for this revised sect ion
with limited scope and specific terminology . Thus the absurd
result in the Filoil case necessitated the amendment permitting
service only on the in-house counsel of the corporation who is
in effect an employee of the corporation, as distinguished from
an independent practitioner. (emphasis supplied).
Retired Justice Oscar Herrera, who is also a consultant of the
Rules of Court Revision Committee, stated that "(T)he rule
must be strictly observed. Service must be made to one named
in (the) statute . . .
It should be noted that even prior to the effectivity of the 1997
Rules of Civil Procedure, strict compliance with the rules has
been enjoined. In the case of Delta Motor Sales Corporation vs.
Mangosing, the Court held:
A strict compliance with the mode of service 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 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 other words, "to bring home to the corporation notice of
the filing of the action." . . . .
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 corporation.
Accordingly, we rule that the service of summons upon the
branch manager of petitioner at its branch office at Cagayan de
Oro, instead of upon the general manager at its principal office
at Davao City is improper. Consequently, the trial court did not
acquire jurisdiction over the person of the petitioner.
POWER TO HAVE PERPETUAL EXISTENCE UNLESS
THE AOI PROVIDES OTHERWISE
SEC. 11. Corporate Term.
A corporation shall have perpetual existence unless its articles
of incorporation provides otherwise.
Corporations with certificates of incorporation issued prior to
the effectivity of this Code, and which continue to exist shall
have perpetual existence, unless the corporation, upon a vote of
its stockholders representing a majority of its outstanding
capital stock, notifies the Commission that it elects to retain its
specific corporate term pursuant to its articles of incorporation:
Provided, that any change in the corporate term under this
section is without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code.
A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation: Provided,
That no extension may be made earlier than three (3) years prior
to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined
by the Commission: Provided, further, That such extension of
the corporate term shall take effect only on the day following
the original or subsequent expiry date(s).
A corporation whose term has expired may, at any time, apply
for a revival of its corporate existence, together with all the
rights and privileges under its certificate of incorporation and
subject to all of its duties, debts and liabilities existing prior to
revival. Upon approval by the Commission, the corporation
shall be deemed revived and a certificate of revival of corporate
existence shall be issued, giving it perpetual existence, unless
its application for revival provides otherwise.
No application for revival of certificate of incorporation of
banks, banking and quasibanking institutions, preneed,
insurance and trust companies, non-stock savings and loan
associations (NSSLAs), pawnshops, corporations engaged in
money service business, and other financial intermediaries shall
be approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government
agency
POWER TO ADOPT AND USE A COMMON SEAL
This right has been expressly granted by law. However, it is not
mandatory but merely permissive. This is because the corporate
seal 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.
POWER TO AMEND ITS ARTICLES OF
INCORPORATION
SEC. 15. Amendment of Articles of Incorporation.
Unless otherwise prescribed by this Code or by special law, and
for legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote of
the board of directors or trustees and the vote or written assent
of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the
provisions of this Code. The articles of incorporation of a
nonstock corporation may be amended by the vote or written
assent of majority of the trustees and at least two-thirds (2/3) of
the members.
The original and amended articles together shall contain all
provisions required by law to be set out in the articles of
incorporation. Amendments to the articles shall be indicated by
underscoring the change or changes made, and a copy thereof
duly certified under oath by the corporate secretary and a
majority of the directors or trustees, with a statement that the
amendments have been duly approved by the required vote of
the stockholders or members, shall be submitted to the
Commission.
The amendments shall take effect upon their approval by the
Commission or from the date of filing with the said
Commission if not acted upon within six (6) months from the
date of filing for a cause not attributable to the corporation.
Note:
As far as corporations created by special law are concerned,
amendment may NOT be considered as a matter of right. The
law creating it may or may not authorize or empower the
corporation to make any changes in its AOI or charter.
However, whether empowered or not, Congress may amend or
repeal a corporate charter by virtue of its inherent authority to
amend or repeal laws under the Consitution.
POWER TO ADOPT BY-LAWS
SEC. 45. Adoption of Bylaws.
For the adoption of bylaws by the corporation, the affirmative
vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the
members in case of nonstock corporations, shall be necessary.
The bylaws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or
members during office hours. A copy thereof, duly certified by
a majority of the directors or trustees and countersigned by the
secretary of the corporation, shall be filed with the Commission
and attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Commission, together with
the articles of incorporation.
In all cases, bylaws shall be effective only upon the issuance by
the Commission of a certification that the bylaws are in
accordance with this Code.
The Commission shall not accept for filing the bylaws or any
amendment thereto of any bank, banking institution, building
and loan association, trust company, insurance company, public
utility, educational institution, or other special corporations
governed by special laws, unless accompanied by a certificate
of the appropriate government agency to the effect that such
bylaws or amendments are in accordance with law.
Notes:
The Corporation Code actually REQUIRES a corporation to
adopt by-laws, not contrary to law, morals, or public policy,
within 1 month from receipt of official notice of the issuance of
the certificate of incorporation or registration.
Amendment of the by-laws are allowed subject to the procedure
and requirement provided under Sec. 47.
SEC. 47. Amendment to Bylaws.
A majority of the board of directors or trustees, and the owners
of at least a majority of the outstanding capital stock, or at least
a majority of the members of a nonstock corporation, at a
regular or special meeting duly called for the purpose, may
amend or repeal the bylaws or adopt new bylaws. The owners
of two thirds (2/3) of the outstanding capital stock or two thirds
(2/3) of the members in a non-stock corporation may delegate
to the board of directors or trustees the power to amend or repeal
the bylaws or adopt new bylaws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal
the bylaws or adopt new bylaws shall be considered as revoked
whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so
vote at a regular or special meeting.
Whenever the bylaws are amended or new by-laws are adopted,
the corporation shall file with the Commission such amended
or new bylaws and, if applicable, the stockholders’ or members’
resolution authorizing the delegation of the power to amend
and/or adopt new bylaws, duly certified under oath by the
corporate secretary and a majority of the directors or trustees.
The amended or new bylaws shall only be effective upon the
issuance by the Commission of a certification that the same is
in accordance with this Code and other relevant laws.
POWER TO ISSUE OR SELL STOCKS AND TO ADMIT
MEMBERS
The power of a corporation to issue or sell its stocks is an
inherent right of any stock corporation except only as it may be
regulated by law or by the AOI.
Admission, as well as termination of members is a prerogative
granted by law to non-stock corporations and the manner,
requirements or procedures for such admission or termination
may be contained in the AOI or by-laws.
POWER TO ACQUIRE OR ALIENATE REAL OR
PERSONAL PROPERTY
When a corporation is expressly empowered by law to acquire
or alienate real and/or personal properties, the limitations
imposed by Sec. 35 (g) are as follows:
To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage, and otherwise deal with such real and
personal property, including securities and bonds of other
corporations,
1. as the transaction of the lawful business of the corporation
may reasonably and necessarily require,
2. subject to the limitations prescribed by law and the
Constitution;
The first limitation practically sets the limit of the corporate
authority to acquire, own, hold or alienate property. As it has
been said the purpose clause in the AOI grants as well as limits
the powers which a corporation may exercise. Verily, WON the
acquisition of such property is within the corporate powers or
authority may reasonably be determined from the purpose or
purposes indicated in the AOI.
LUNETA MOTOR COMPANY, petitioner, vs. A.D.
SANTOS, INC., ET AL.
FACTS:
Nicolas Concepcion executed a chattel mortgage covering a
certificate of public convenience grnted to him to operate
taxicab service of 27 units in Manila, in favor of petitioner, to
secure a loan evidenced by a promissory note guaranteed by
Concepcion and one Placido Esteban.
Concepcion mortgaged the same certificate to cover a second
loan with Rehabilitation Finance.
Petitioner filed an action to foreclose the mortgage. While it was
pending, RF also foreclosed the second chattel mortgage where
the certificate was sold at a public auction in favor of AD Santos
who applied for the approval of the sale which was granted by
the Public Service Commission.
Later on, the CFI rendered a judgment in favor of petitioner,
where the certificate was sold at a public auction in favor of the
petitioner who immediately filed for approval with the
Commission. AD Santos Inc., recipient of the certificate from
AD Santos, opposed the application for approval.
ISSUE:
WON Petitioner may acquire the certificate of public
convenience?
HELD:
No. Petitioner claims in this regard that its corporate purposes
are to carry on a general mercantile and commercial business,
etc., and that it is authorized in its articles of incorporation to
operate and otherwise deal in and concerning automobiles and
automobile accessories' business in all its multifarious
ramification (petitioner's brief p. 7) and to operate, etc., and
otherwise dispose of vessels and boats, etc., and to own and
operate steamship and sailing ships and other floating craft and
deal in the same and engage in the Philippine Islands and
elsewhere in the transportation of persons, merchandise and
chattels by water; all this incidental to the transportation of
automobiles ( id . pp. 7-8 and Exhibit B).
We find nothing in the legal provision and the provisions of
petitioner's articles of incorporation relied upon that could
justify petitioner's contention in this case. To the contrary, they
are precisely the best evidence that it has no authority at all to
engage in the business of land transportation and operate a
taxicab service. That it may operate and otherwise deal in
automobiles and automobile accessories; that it may engage in
the transportation of persons by water does not mean that it may
engage in the business of land transportation — an entirely
different line of business. If it could not thus engage in the line
of business, it follows that it may not acquire an certificate of
public convenience to operate a taxicab service, such as the one
in question, because such acquisition would be without purpose
and would have no necessary connection with petitioner's
legitimate business.
THE DIRECTOR OF LANDS, petitioner, vs. THE
HONORABLE COURT OF APPEALS and IGLESIA NI
CRISTO
FACTS:
Private respondent Iglesia Ni Cristo applied with the CFI of
Cavite for registration of a parcel of land which it claimed to
have acquired by virtue of a Deed of Absolute Sale from
Aquelina de la Cruz, alleging that the applicant and its
predecessors-in-interest have been in actual, continuous, public,
peaceful and adverse possession and occupation of the said land
for more than 30 years, which was opposed by the Government
as represented by the Director of Lands. The CFI and the CA
ruled in favor of INC.
ISSUE:
WON the corporation may acquire the land in question?
HELD
Yes. As observed at the outset, had this case been resolved
immediately after it was submitted for decision, the result may
have been quite adverse to private respondent. For the rule then
prevailing under the case of Manila Electric Company v. Castro
- Bartolome et al., 114 SCRA 799, reiterated in R e p u blic v .
Villa n u e v a , 114 SCRA 875 as well as the other subsequent
cases involving private respondent adverted to above', is that a
juridical person, private respondent in particular, is disqualified
under the 1973 Constitution from applying for registration in its
name alienable public land, as such land ceases to be public land
"only upon the issuance of title to any Filipino citizen claiming
it under section 48[b]" of Commonwealth Act No. 141, as
amended. These are precisely the cases cited by petitioner in
support of its theory of disqualification.
Since then, however, this Court had occasion to re-examine the
rulings in these cases vis-a-vis the earlier cases of Carino v.
Insular Government, 41 Phil. 935, Susi v. Razon, 48 Phil. 424
and Herico v. Dar, 95 SCRA 437, among others. Thus, in the
recent case of Dir e c t o r o f L a n d s v . I n t e r m e dia t e
Appellate Court , 146 SCRA 509, We categorically stated that
the majority ruling in Meralco is "no longer deemed to be
binding precedent", and that "[T]he correct rule, ... is that
alienable public land held by a possessor, personally or through
his predecessors-in-interest, openly, continuously and
exclusively for the prescribed statutory period [30 years under
the Public Land Act, as amended] is converted to private
property by mere lapse or completion of said period, ip s o j u r
e ." We further reiterated therein the timehonored principle of
non-impairment of vested rights.
The crucial factor to be determined therefore is the length of
time private respondent and its predecessors-in-interest had
been in possession of the land in question prior to the institution
of the instant registration proceedings. The land under
consideration was acquired by private respondent from
Aquelina de la Cruz in 1947, who, in turn, acquired by same by
purchase from the Ramos brothers and sisters, namely: Eusebia,
Eulalia, Mercedes, Santos and Agapito, in 1936. Under section
48[b] of Commonwealth Act No. 141, as amended, "those who
by themselves or through their predecessorsin-interest have
been in open, continuous, exclusive and notorious possession
and occupation of agricultural lands of the public domain, under
a bona fide claim of acquisition or ownership, for at least thirty
years immediately preceding the filing of the application for
confirmation of title except when prevented by war or force
majeure" may apply to the Court of First Instance of the
province where the land is located for confirmation of their
claims, and the issuance of a certificate of title therefor, under
the Land Registration Act. Said paragraph [b] further provides
that "these shall be conclusively presumed to have performed
all the conditions essential to a Government grant and shall be
entitled to a certificate of title under the provisions of this
chapter." Taking the year 1936 as the reckoning point, there
being no showing as to when the Ramoses first took possession
and occupation of the land in question, the 30-year period of
open, continuous, exclusive and notorious possession and
occupation required by law was completed in 1966.
The completion by private respondent of this statutory 30-year
period has dual significance in the light of Section 48[b] of
Commonwealth Act No. 141, as amended and prevailing
jurisprudence: [1] at this point, the land in question ceased by
operation of law to be part of the public domain; and [2] private
respondent could have its title thereto confirmed through the
appropriate proceedings as under the Constitution then in force,
private corporations or associations were not prohibited from
acquiring public lands, but merely prohibited from acquiring,
holding or leasing such type of land in excess of 1,024 hectares.
If in 1966, the land in question was converted ipso jure into
private land, it remained so in 1974 when the registration
proceedings were commenced. This being the case, the
prohibition under the 1973 Constitution would have no
application. Otherwise construed, if in 1966, private respondent
could have its title to the land confirmed, then it had acquired a
vested right thereto, which the 1973 Constitution can neither
impair nor defeat.
POWER TO ENTER INTO A PARTNERSHIP, JOINT
VENTURE, MERGER, CONSOLIDATION, OR ANY
OTHER COMMERCIAL AGREEMENT
This is an express power granted by the law under the Code,
particularly Title IX thereof.
SEC. 75. Plan of Merger or Consolidation.
Two (2) or more corporations may merge into a single
corporation which shall be one of the constituent corporations
or may consolidate into a new single corporation which shall be
the consolidated corporation.
The board of directors or trustees of each corporation, party to
the merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
a. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent
corporations;
b. The terms of the merger or consolidation and the mode of
carrying the same into effect;
c. A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of
merger; and, in case of consolidation, all the statements
required to be set forth in the articles of incorporation for
corporations organized under this Code; and
d. Such other provisions with respect to the proposed merger
or consolidation as are deemed necessary or desirable.
SEC. 10. Number and Qualifications of Incorporators.
Any person, partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in number,
may organize a corporation for any lawful purpose or purposes:
Provided, That natural persons who are licensed to practice a
profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to
organize as a corporation unless otherwise provided under
special laws. Incorporators who are natural persons must be of
legal age. Each incorporator of a stock corporation must own or
be a subscriber to at least one (1) share of the capital stock.
A corporation with a single stockholder is considered a One
Person Corporation as described in Title XIII, Chapter III of this
Code.
POWER TO MAKE REASONABLE DONATIONS
Ordinarily, a pure gift of funds or property 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 to it benefit as
a means of increasing its business or promoting patronage.
Thus, Sec. 35 (9) expressly authorizes a corporation to make
donations, subject to the following limitations:
1. The donation must be reasonable;
2. It must be for public welfare, or for hospital, charitable,
scientific, cultural or similar purpose; and
3. In case of a foreign corporation, it 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
It is now generally recognized in almost all jurisdiction to
empower a corporation to establish pension plans, pension trust,
profit sharing plans, stock bonus or stock option plans and other
incentive plans to directors, officers and employees. In fact, the
power may include any act to promote convenience, welfare
and benefit of the employees or officers.
REPUBLIC VS. ACOJE MINING COMPANY INC.
FACTS:
A post office branch was opened in herein respondent’s mining
camp at Sta. Cruz Zambales, at its request, where Hilario M.
Sanchez, an employee of such company, was the postmaster.
Prior to the opening the company, at the request of the Bureau
of Posts, adopted a resolution that the former would assume full
responsibility for all cash received by the postmaster. On May
11, 1954, the postmaster went on a three day leave but never
returned. As a result, an action was brought by the government
to recover P13,867.24, the amount of shortage in the accounts
of the postmaster, from the company.
ISSUE:
WON the subject resolution is within the powers of the
company to adopt?
HELD:
Yes. The opening of the post office branch was undertaken
because of a request submitted by respondent company to
promote the convenience and benefit of its employees. The idea
did not come from the government and the Director of Posts
was prevailed upon to agree to the request only after studying
the necessity for its establishment and after imposing upon the
company certain requirements intended to safeguard and
protect the interest of the government. Accordingly, the
company cannot now be heard to complain of its liability upon
the technical plea that the resolution is ultra vires. The least that
can be said is that it cannot now go back on its plighted word
on the ground of estoppel.
The resolution covers a subject which concerns the benefit,
convenience and welfare of the company’s employees and their
families. There are certain corporate acts that may be performed
outside of the scope of the powers expressly conferred if they
are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that “although not expressly
authorized to do so a corporation may become a surety where
the particular transaction is reasonably necessary or proper to
the conduct of its business”, and here it is undisputed that the
establishment of the local post office is a vital improvement in
the living condition of its employees and laborers who
came to settle in it mining camp which is far removed from the
postal facilities or means of communication accorded to people
living in a city or municipality.
IMPLIED POWERS
Art 35 (k)
To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of
incorporation
It is a question, in each case, of the logical relation of the act to
the corporate purpose expressed in the charter. For 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 those ends in a
substantial and not in a remote and fanciful sense, it may be
fairly considered within the corporation’s charter powers
(Montelibano vs. Bacolod - Murcia Milling Co., Inc. as cited in
NPC vs. VERA)
CLASSIFICATIONS:
1. Acts in the usual course of business;
2. Acts to protect debts owing to the corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid employees; and,
5. Acts to increase business
6. Examined the articles of incorporation to arrive at its
decision (Teresa)
7. For purpose of prohibiting NAPOCOR (National
Power)
TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C
FACTS:
Respondent Filipinas Cement Corporation filed an application
with herein respondent PSC for a certificate of public
convenience to install, maintain and operate an electric plant in
Teresa, Rizal for the purpose of supplying electric power and
light to its cement factory and its employees living within its
compound. Herein petitioner, operating an electric plant in
Teresa Rizal filed an opposition claiming that Filipinas is not
authorized to operate the proposed electric plant under its
articles of incorporation. PSC decided in favor of Filipinas.
ISSUE:
WON under its articles of incorporation, Filipinas is authorized
to operate and maintain an electric plant
HELD:
Yes. Paragraph 7 of the AOI of Filipinas provides for authority
to secure from any governmental, state, municipality, or
provincial, city or other authority, and to utilize and dispose of
in any lawful manner, rights, powers, privileges, franchises and
concessions – obviously necessary or at least related to the
operation of its cement factory. Moreover, said AOI also
provide that the corporation may generally perform any and all
acts connected with the business of manufacturing portland
cement or arising therefrom or incidental thereto.
It cannot be denied that the operation of an electric light, heat
and power plant is necessarily connected with the business of
manufacturing cement. If in the modern world where we live
today electricity is virtually a necessity for our daily needs, it is
more so in the case of industries like the manufacture of cement.
NATIONAL POWER CORP VS. VERA
FACTS:
Private Respondent Sea Lion International Port Terminal
Services Inc. filed a complaint for prohibition and mandamus
with damages against petitioner NPC and Philippine Ports
Authority after NPC did not renew its Contract for Stevedoring
Services for coal-handling of NPC’s plant and in taking over its
stevedoring services.
ISSUE:
WON NPC may embark in stevedoring and arrastre services
HELD:
Yes. The NPC was created and empowered not only to
construct, operate and maintain power plants, reservois,
transmission lines and other works, but also:
To exercise such other powers as may be essential or 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, incidental or auxiliary to
accomplish said purpose.
To determine whether or not the NPC act falls within the
purview of the above provision, the Court must decide whether
or not a logical and necessary relation exists between the act
questioned and the corporate purpose expressed in the NPC
charter. For 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
those ends in a substantial and not in a remote and fanciful
sense, it may be fairly considered within the corporation’s
charter powers (Montelibano vs. Bacolod - Murcia Milling Co.,
Inc.)
In the instant case, it is an undisputed fact that the pier owned
by NPC, receives various shipment 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.
POWER TO EXTEND OR SHORTEN CORPORATE
TERM
SEC. 36. 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 or members representing at least
two-thirds (2/3) of the outstanding capital stock or of its
members. Written notice of the proposed action and the time
and place of the meeting shall be sent to stockholders or
members at their respective place of residence as shown in the
books of the corporation, and must either be deposited to the
addressee in the post office with postage prepaid, served
personally, or when allowed in the by-laws or done with the
consent of the stockholder, sent electronically in accordance
with the rules and regulations of the Commission on the use of
electronic data messages. In case of extension of corporate term,
a dissenting stockholder may exercise the right of appraisal
under the conditions provided in this Code.
Notes:
From the above-provision and jurisprudence, the requirements
and procedure for extending or shortening the corporate term
are as follows:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of
the outstanding capital stock (including non-voting shares)
or 2/3 of the members in case of non-stock corporations;
3. The ratification must be made at a meeting duly called for
that purpose;
4. Prior written notice of the proposal to extend or shorten the
corporate term must be made stating the time and place of
meeting addressed to each stockholder or member at his
place of residence, either by mail or personal service;
5. In case of extension, the same cannot be made earlier than
5 years prior to the original or subsequent expiry date
unless there are justifiable reasons for an earlier extension;
6. In case of extension, the same must be made during the
lifetime of the corporation;
7. Any dissenting stockholder may exercise his appraisal
right;
8. Submission of the amended articles with the SEC; and
9. Approval thereof by the SEC (as required under Sec. 37 for
extension, and Sec. 120 for shortening the term with the
effect of dissolution)
POWER TO INCREASE OR DECREASE CAPITAL
STOCK; INCUR, CREATE OR INCREASE BONDED
INDEBTEDNESS
SEC. 37. 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 by two-thirds (2/3) of the outstanding
capital stock at a stockholders’ meeting duly called for the
purpose. Written notice of the time and place of the
stockholders’ meeting and the purpose for said meeting must be
sent to the stockholders at their places of residence as shown in
the books of the corporation and served on the stockholders
personally, or through electronic means recognized in the
corporation’s bylaws and/or the Commission’s rules as a valid
mode for service of notices.
A certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary
of the stockholders’ meeting, setting forth:
a. That the requirements of this section have been complied
with;
b. The amount of the increase or decrease of the capital stock;
c. In case of an increase of the capital stock, the amount of
capital stock or number of shares of nopar stock thereof
actually subscribed, the names, nationalities and addresses
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 the subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock
allotted to each stockholder if such increase is for the
purpose of making effective stock dividend therefor
authorized;
d. Any bonded indebtedness to be incurred, created or
increased;
e. The amount of stock represented at the meeting; and
f. The vote authorizing the increase or decrease 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 Commission, and where appropriate, of
the Philippine Competition Commission. The application with
the Commission shall be made within six (6) months from the
date of approval of the board of directors and stockholders,
which period may be extended for justifiable reasons.
Copies of the certificate shall be kept on file in the office of the
corporation and filed with the Commission and attached to the
original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall be deemed increased
or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Commission shall not accept for
filing any certificate of increase of capital stock unless
accompanied by a 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 percent (25%)
of the increase in capital stock has been subscribed and that at
least twenty-five percent (25%) of the amount subscribed has
been paid in actual cash to the corporation or that property, the
valuation of which is equal to twenty-five percent (25%) of the
subscription, has been transferred to the corporation: Provided
further, That no decrease in capital stock shall be approved by
the Commission if its effect shall prejudice the rights of
corporate creditors.
Nonstock corporations may incur, create or increase bonded
indebtedness when approved by a majority 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
Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
The following requirements or procedure should be complied
with:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of
the outstanding capital stock (including non-voting shares)
or 2/3 of the members in case of non-stock corporations at
a meeting duly called for that purpose;
3. Prior written notice of the proposal to extend or shorten the
corporate term must be made stating the time and place of
meeting addressed to each stockholder or member at his
place of residence, either by mail or personal service;
4. A certificaate in duplicate must be signed by a majority of
the directors of the corporation, countersigned by the
chairman and the secretary of the stockholders meeting,
setting forth the matters contained in subsection 1 to 7 of
Sec. 38;
5. In case of increase in capital stock, 25% of such increased
capital must be subscribed and that at least 25% of the
amount subscribed must be paid either in cash or property;
6. In case of decrease of capital stock, the same must not
prejudice the right of the creditors;
7. Filing of the certificate of increase and amended AOI with
the SEC; and 8. Approval thereof by the SEC.
METHODS OF INCREASING CAPITAL STOCK:
1. Increase the par value of the existing number of shares
without increasing the number of shares;
2. Increase the number of existing shares without increasing
the par value thereof;
3. Increasing the number of shares and at the same time
increasing the par value of the shares
REASONS/PURPOSE FOR THE INCREASE:
1. Expansion;
2. Payment of Debt Obligations;
3. To acquire additional assets such as providing cars to
employees to distribute the goods;
Nothing in law prohibits increase of capital stock
REASONS FOR DECREASE:
1. To reduce or wipe out existing deficit where no creditors
would thereby by affected;
2. When the capital is more than what is necessary to
procreate the business or reduction of capital surplus;
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.
TRUST FUND DOCTRINE:
The subscriptions to capital stock of the corporation constitute
a fund which the creditors have a right to look up for the
satisfaction of their claims. Accordingly, if the decrease would
affect the rights of creditors, the same would not be approved
by the SEC.
PHILIPPINE TRUST COMPANY VS. RIVERA
FACTS:
Shortly after its incorporation, the stockholders of Cooperativa
Naval Filipina, adopted a resolution to the effect that the capital
should be reduced
by 50% and the subscribers be released from the obligation to
pay their unpaid balance.
In the course of time, the company became insolvent and went
into the hands of Philippine Trust Company (Philtrust), as
assignee in bankruptcy, and by it this action was instituted to
recover ½ of the stock subscription of herein defendant who
subscribed to 450 of the 1,000 authorized capital stock.
It does not appear that the formalities under the Corporation
Code for the reduction of capital stock were observed and in
particular it does not appear that any certificate was at any time
filed in the Bureau of Commerce and Industry, showing such
reduction.
Respondent judge ruled in favor of Philtrust and directed
respondent to pay ½ of the subscription price of his shares.
ISSUE:
WON the reduction is valid and proper?
HELD:
No. A corporation has no power to release an original subscriber
to its capital stock from the obligation of paying for his shares,
without a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in
the manner and under the conditions prescribed by the statute
or the charter or the AOI. Moreover, strict compliance with the
statutory regulations is necessary. In the case before us, the
resolution releasing the shareholders from their obligation to
pay 50% of their respective subscriptions was an attempted
withdrawal of so much capital from the fund upon which the
company’s creditors were entitled ultimately to rely and, having
been effected without compliance with the statutory
requirements, was wholly ineffectual.
MADRIGAL & COMPANY VS. ZAMORA
FACTS:
The Madrigal Central Office Employees Union sought for the
renewal of its CBA, proposing a P200 wage increase and an
allowance of P100 a month. Petitioner company requested for
the deferment of its negotiation.
Meanwhile, the company effected two reductions of its capital
stock by issuing marketable securities owned by petitioner in
exchange for shareholders’ shares.
After the petitioner’s failure to sit down with the respondent
union, the latter commenced a case with the NLRC for unfair
labor practice. In due time, petitioner filed its position paper,
alleging operating losses.
The Labor Arbiter rendered a decision in favor of respondent
Union.
ISSUE:
WON the decrease in capital stock is valid and binding?
HELD:
No. 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 increase,
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. In the face of the
petitioner company’s piling profits, the unionists had the right
to demand for such salary adjustments.
That the petitioner made quite handsome profits is clear from
the records.
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 it employee ranks,
especially the 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.
POWER TO DENY PRE-EMPTIVE RIGHT
PRE-EMPTIVE RIGHT is a right granted by law to all
existing stockholders of a stock corporation to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective holdings, subject only to the limitation imposed
under Sec. 38, which provides:
SEC. 38. Power to Deny Preemptive Right.
All stockholders of a stock corporation shall enjoy preemptive
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 preemptive right shall
not extend to shares issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or
to shares 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.
BASIS OF RIGHT:
The grant of this right is for the preservation, unimpaired and
undiluted, of the old stockholders’ relative and proportionate
voting strength and control, that is, the existing ratio of their
property interest and voting power in the corporation.
EXCEPTIONS (Under Sec. 38):
1. When shares to be issued is in compliance with laws
requiring stock offerings or minimum stock ownership by
the public; or
2. Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital
stock either:
a. In exchange for property needed for corporate
purpose; or
b. In payment of a previously contracted debt.
The exceptions will not apply to stockholders of close
corporation whose preemptive right, is broader if not absolute.
See Sec. 102.
The right may likewise be lost by waiver, express or implied or
inability or failure to exercise it having been notified of the
proposed disposition of shares.
BENITO VS. SEC
FACTS:
Respondent Jamiatul Philippines – Al Islamia, Inc. was
incorporated with P2,000,000 authorized capital stock divided
into 20,000 shares, of which 460 belong to herein petitioner. In
a stockholders meeting, an increase of the authorized capital
stock to P1,000,000 was approved, where the previously
unissued shares were all issued.
Petitioner Datu Tagoranao Benito filed a petition with herein
respondent SEC alleging that the additional issue of previously
unissued shares was made in violation of his pre-emptive right
and that the increase of capital stock was illegal considering that
the stockholders on record were not notified, and that such
issuance be cancelled.
SEC Ruling: Benito is not entitled to pre-emptive right with
respect to the original unsubscribed shares, but can exercise
such right with regards the increase capitalization.
ISSUE:
WON the above ruling is correct?
HELD:
Yes. The issuance of the unsubscribed portion of the capital
stock or P110,980 is valid even if assuming that it was made
without notice to the stockholders as claimed by petitioner. The
power to issue shares of stocks in a corporation is lodged in the
board of directors and no stockholders’ meeting is necessary to
consider it because such issuance does not need approval of
stockholders.
The general rule is that pre-emptive right is recognized only
with respect to new issue of shares, and not with respect to
additional issues of originally authorized shares. This is on
theory that when a corporation, at its inception offers its first
shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have
taken his shares knowing that they form a definite proportionate
part of the whole number of authorized shares. When the shares
left unsubscribed are reoffered, he cannot therefore claim a
dilution of interest.
With respect to the claim that the increase in the authorized
capital stock was without consent, expressed or implied, of the
stockholder, it was the finding of the Commission that a
meeting was called for the purpose. The petitioner had not
sufficiently overcome the evidence of respondent that such
meeting was in fact held. What petitioner successfully proved,
however, was the fact that he was not notified of said meeting
and that he never attended the same as he was out of the country
at the time, attending the Mecca pilgrimage. Another thing that
petitioner was able to disprove was the allegation that all
stockholders who did not subscribe to the increase have waived
their pre-emptive right. As far as petitioner is concerned, he had
not waived his pre-emptive right to subscribe as he could not
have done so for the reason that he was not present at the
meeting and had not executed a waiver, thereof. Not having
waived such right and for reasons of equity, he may still be
allowed to subscribe to the increased capital stock proportionate
to his present shareholdings.
POWER TO SELL OR DISPOSE OF ASSETS
SEC. 39. Sale or Other Disposition of Assets.
Subject to the provisions of Republic Act No. 10667, otherwise
known as “Philippine Competition Act”, and other related laws,
a corporation may, by a majority vote of its board of directors
or trustees, sell, lease, exchange, mortgage, pledge, or otherwise
dispose of its property and assets, 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.
A sale of all or substantially all of the corporation’s properties
and assets, including its goodwill must be authorized by the vote
of the stockholders representing at least twothirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly called
for the purpose.
In nonstock 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.
The determination of whether or not the sale involves all or
substantially all of the corporation’s properties and assets must
be computed based on its net asset value, as shown in its latest
financial statements. 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.
Written notice of the proposed action and of the time and place
for the meeting shall be addressed to stockholders or members
at their places of residence as shown in the books of the
corporation and deposited to the addressee in the post office
with postage prepaid, served personally, or when allowed by the
by-laws or done with the consent of the stockholder, sent
electronically: Provided, That any dissenting stockholder may
exercise the right of appraisal under the conditions provided in
this Code.
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 the
corporation or if the proceeds of the sale or other disposition of
such property and assets shall be appropriated for the conduct
of its remaining business.
The conditions for the valid exercise of this power are thus
as follows:
1. Resolution by a majority of the BOD/T;
2. Authorization from the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the members;
3. The ratification of the stockholders or member must be
made at a meeting duly called for that purpose;
4. Prior written notice of the proposed action and of the time
and place of meeting must be made addressed to all
stockholders of record, either by mail or personal service;
5. The sale of the assets shall be subject to the provisions of
existing laws on illegal combinations and monopolies; and
6. Any dissenting stockholder shall have the option to
exercise his appraisal right.
The above requirements will not apply:
1. In case the sale is NOT covering all or substantially all of
the assets of a corporation as to render it incapable of
continuing the business or accomplishing the purpose for
which it was incorporated; or if the proceeds are to be used
to continue the conduct of the remaining business of the
company;
2. If the sale is in the usual and regular course of business of
the company.
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS.
CA
FACTS:
The Islamic Directorate of the Philippines received two parcels
of land from the Libyan government for the purpose of putting
up a Mosque, Madrasah (arabic school) and other religious
infrastructures. In 1972, Martial Law was declared, most of the
members of the Board of Trustees, together with petitioner Sen.
Mamintal Tamano, fled to the middleeast to escape political
prosecution.
Thereafter, two Muslim groups sprung claiming to be the
legitimate IDP. One headed by Engr. Farouk Caprizo, not
having been properly elected as new members of the Board of
Trustees caused to be sold, through a resolution of IDP, the two
lots to respondent Iglesia Ni Cristo.
The 1971 Board of Trustees now filed a petition to declare the
sale null and void.
ISSUE:
WON the sale is valid?
HELD:
No. The Caprizo Group is a fake board of trustees. IDP never
gave its consent through a legitimate Board of Trustees.
Therefore, this is not a case of vitiated consent, but one where
consent on the part of one of the contracting parties is totally
wanting. Ineluctably, the subject sale is void and produces no
effect whatsoever.
The Caprizo group-INC sale is further deemed null and void ab
initio because of the Caprizo Group’s failure to comply with
Sec. 40 of the Corporation Code pertaining to the disposition of
all or substantially all assets of the corporation.
The Tandang Sora property, it appears from the records,
constitutes the only property of the IDP. Hence, its sale to a
third-party is a sale or disposition of all the corporate property
and assets of IDP falling squarely within the contemplation of
Sec. 40. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by vote of at least
2/3 of the bona fide members of the corporation should have
been obtained. These twin requirements were not met as the
Caprizo Groups which voted to sell the property was a fake
Board and those whose names and signatures were affixed by
the Caprizo Group together with the sham Board Resolution
authorizing negotiation for the sale were, from all indications,
not bona fide members of the IDP as they were made to appear
to be.
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC.
(NELL DOCTRINE)
FACTS:
The appellant secured in a civil case against Insular Famrs, Inc.
a judgment for the balance of the price of a pump sold by the
former to the latter. A writ of execution was issued but was
returned unsatisfied, saying that Insular Farms had no leviable
property. Soon after appelant filed with the same Municipal
Court the present action against Pacific Farms claiming it to be
an alter ego of Insular Farms, which the court denied. On
appeal, the CFI and CA also denied the petition.
ISSUE:
WON Pacific Farms should answer for the liability of Insular
Farms?
HELD:
No. It appears on record that the appellee purchase 1,000 shares
of stock of Insular Farms, and thereupon sold said shares of
stock to certain individuals, who forthwith reorganized said
corporation and that the board of directors thereof, as
reorganized, then caused its assets, including its leasehold right
over a public land in Pangasinan to be sold to herein appellee.
These facts do not prove that the appellee is an alter ego of
Insular Farms, or is liable for its debts.
Generally where on corporation sells or otherwise transfers all
o its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor, except:
a. where the purchaser expressly or impliedly agrees to
assumes such debts;
b. where the transaction amounts to a consolidation or merger
of the corporations;
c. where the purchasing corporation is merely a continuation
of the selling corporation; and
d. where the transaction is entered into fraudulently in order
to escape liability for such debts.
In the case at bar, there is neither proof nor allegation of the
foregoing exceptions. In fact, these sales took place not only
over 6 months before the rendition of the judgment sought to be
collected in the present action, but also, appellee purchase the
shares of stock of Insular Farms as the highest bidder at an
auction sale held at the instance of a bank to which said shares
had been pledged as security for the obligation of Insular Farms
in favor of said bank.
POWER TO ACQUIRE OWN SHARES
SEC. 40. Power to Acquire Own Shares.
Provided that the corporation has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired, a
stock corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or purposes,
including the following cases:
a. To eliminate fractional shares arising out of stock
dividends;
b. 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
c. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
The limitation that the corporation must at all times have
“unrestricted retained earnings” is a condition for the exercise
of this power,
EXCEPT:
1. Redemption of redeemable shares under Sec. 8;
2. Exercise of stockholders right to compel a close
corporation to purchase his shares for any reason under
Sec. 105 when the corporation has sufficient assets in its
book to cover its debts and liabilities exclusive of capital
stock;
3. In case of deadlocks under Sec. 104.
Once purchased, the shares are considered as treasury shares
and while they remain so, they have no voting rights and
dividend rights. The corporation may:
1. re-issue them even below par;
2. issue them as stock dividends;
3. retire or cancel them and thereby remove from issue
effectively reducing the number of shares issued stated in
the AOI.
STEINBERG VS. VELASCO
FACTS:
The Board of Directors of Trading Company approved and
authorized the purchases of the capital stock of the company
from its various stockholder, herein respondents, at par value
amounting to P3,300. Petitioner assails the recovery of the
amount paid to such stockholders and the P3,000 dividends
declared which were claimed to be made to the injury and in
fraud of its creditors. The complaint was dismissed.
ISSUE:
WON recovery can be made?
HELD:
Yes. The Board of Directors acted on the assumption that it had
accounts receivable of the face value of P19,126.02 but there
was no stipulation as to the value of such accounts and
P12,512.47 of which had but little, if any value. The purchase
of the stocks and the dividend declaration further decreased the
assets of the corporation. The profits amounted only to
P3,314.72. In other words, that the corporation did not then
have actual bona fide surplus from which the dividends could
be paid, and that the payment of them in full at the time would
“affect the financial condition of the corporation”.
It is indeed peculiar that the action of the board in the assailed
acts was all done at the same meeting of the board of directors,
and it appears that the stockholders, whose shares were
purchased, were former directors and resigned before the board
approved the purchase and declaration of dividends. In other
words, the directors were permitted to resign so that they could
sell their stock to the corporation. In this situation and upon this
state of facts, it is very apparent that the directors did not act in
good faith or that they were grossly ignorant of their duties.
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.
The amount involved in this case is not large, but the legal
principles are important and we have given them consideration
which they deserve.
POWER TO INVEST FUNDS
SEC. 41. 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, 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 nonstock corporations, at a meeting duly called for the
purpose. Notice of the proposed investment and the time and
place of the meeting shall be addressed to each stockholder or
member at the place of residence as shown in the books of the
corporation and deposited to the addressee in the post office
with postage prepaid, served personally, or sent electronically
in accordance with the rules and regulations of the Commission
on the use of electronic data message, when allowed by the
bylaws or done with the consent of the stockholders: 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.
Notes:
“MAY INVEST FUNDS” has been held by the SEC to mean
an investment in the form of money, stock, bonds and other
liquid assets and does not include real properties or other fixed
assets, otherwise the law would have phrased Sec. 41 to include
“assets” rather than “to invest funds”.
SECONDARY PURPOSE:
The law uses the phrase “for any purpose other than the primary
purpose” signifying that even if the business or undertaking is
allowed or authorized in the secondary purpose or purposes of
the corporation, the provision of Sec. 41 would apply.
REQUIREMENTS FOR A VALID INVESTMENT OF
CORPORATE FUNDS:
1. Resolution by a majority of the BOD/T;
2. Ratification by the stockholders representing 2/3 of the
outstanding capital stock (or 2/3 of members);
3. The ratification must be made at a meeting duly called for
that purpose;
4. Prior written notice of the proposed investment and the
time and place of the meeting shall be made, addressed to
each stockholder or member by mail or by personal service;
and
5. Any dissenting stockholder shall have the option to
exercise his appraisal right.
RATIFICATION:
As a requirement, applies only to investments that are beyond
the corporation’s primary purpose, or outside the express or
implied powers of the investing corporation. Thus, if the
investment is reasonably necessary to accomplish its primary
purpose, the approval of the stockholders or members is not
required.
DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC.
FACTS:
Defendant Ma-ao Sugar Central Co, Inc., engaged in the
manufacture of sugar, invested P655,000 in shares of stock of
Philippine Fiber Processing Co., Inc., which is engaged in the
manufacture of sugar bags. The sale, though not previously
authorized, was ratified by the 2/3 vote of the stockholders.
Claiming the business of defendant is not related to that of
Philippine Fiber, such sale was attacked but the trial court
decided on its legality.
ISSUE:
WON the investment by Ma-ao Sugar constitutes a violation of
Sec. 17-1/2 of the Corporation Law?
HELD:
Yes. In his work entitled “The Philippine Corporation Law”,
Professor Sulpicio S. Guevarra of the UP College of Law,
reconciled par. (9) and (10) of Sec. 13, as follows:
“j. Power to acquire or dispose of shares or securities. – A
private corporation, in order to accomplish it purpose as stated
in its articles of incorporation, and imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidences of
indebtedness of any domestic or foreign corporation. Such 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 purpose of its incorporation, the vote of
approval of the stockholders is necessary”
“40. Power to invest corporate funds. – A private corporation
has the power to invest its corporate funds in any other
corporation or business, or for any other purpose other than the
main purpose for which it was organized, provided that its board
of directors has been authorized in a resolution by the
affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the
voting power on such a proposal at a stockholders’ meeting
called for that purpose. When the investment is necessary to
accomplish its purpose or purposes as stated in its articles of
incorporation, the approval of the stockholders is not
necessary”
We agree with Professor Guevarra. We therefore agree with the
finding of the lower court that the investment in question does
not fall under the purview of Sec. 17 ½ fo the Corporation Law.
JOHN GOKONGWEI, JR., VS SEC
FACTS:
Petitioner John Gokongwei alleged that the respondent
corporation has been investing corporate funds in other
corporations or business outside of its primary purpose in
violation of Sec. 17 ½ of the Corporation Law.
Respondents sent notices of the annual stockholders’ meeting
including in the agenda thereof the re-affirmation of the
authorization of the BOD by the stockholders at the meeting to
invest corporate funds in other companies or businesses or for
purposes other than the main purpose. An injunction was prayed
for by petitioner, but the date of hearing originally set was
cancelled. No action was taken up to the date of the filing of the
instant petition.
ISSUE:
WON respondent SEC committed grave abuse of discretion in
allowing the above agenda to be taken up in the stockholders’
meeting?
HELD:
No. Section 17-1/2 of the Corporation Law allows a corporation
to "invest its funds in any other corporation or business or for
any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding
shares entitling them to exercise at least two-thirds of the voting
power. If the investment is made in pursuance of the corporate
purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment
and not to accomplish the purpose of its incorporation that the
vote of approval of the stockholders holding shares entitling
them to exercise at least two-thirds of the voting power is
necessary.
As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer
brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.)
for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 19701971 thru the
organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao
Sugar Central Co., Inc., supra, appears relevant. In said case,
one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders'
voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The lower
court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is
important to the investing corporation and would aid it in its
purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors.”
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no question
that a corporation, like an individual, may ratify and thereby
render binding upon it the originally unauthorized acts of its
officers or other agents. This is true because the questioned
investment is neither contrary to law, morals, public order or
public policy. It is a corporate transaction or contract which is
within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of
the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the
voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment
and its ratification by said stockholders obliterates any defect
which it may have had at the outset. "Mere ultra vires acts", said
this Court in Pirovano, "or those which are not illegal and void
ab initio , but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding
and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that respondent
corporation submitted the assailed investment to the
stockholders for ratification at the annual meeting of May 10,
1977 cannot be construed as an admission that respondent
corporation had committed an ult r a vir e s act, considering the
common practice of corporations of periodically submitting for
the gratification of their stockholders the acts of their directors,
officers and managers.
POWER TO DECLARE DIVIDENDS
DIVIDENDS are corporate profits set aside, declared and
ordered by the BOD to be paid to the stockholders. It is a fruit
of investment, the recurrent return, analogous to interest and
rent upon other forms of invested capital.
SEC. 42. 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, 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
stockholders until their unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing at least two-
thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits
in excess of one hundred percent (100%) of their paid-in capital
stock, except: (a) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (b)
when the corporation is prohibited under any loan agreement
with financial institutions or creditors, whether local or foreign,
from declaring dividends without their consent, and such
consent has not yet been secured; or (c) 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.
UNRESTRICTED RETAINED EARNINGS:
the undistributed earnings of the corporation which have not
been allocated for any managerial, contractual or legal purposes
and which are free for distribution to the stockholders as
dividends.
TYPES OF DIVIDENDS:
1. Cash dividends – payable in lawful money or currency;
2. Property dividends - those paid in the form property (e.g.,
bonds, notes, shares in another corporation);
3. Stock dividends – corporation’s own shares of stock out of
the remaining unissued shares which would require the
approval of the stockholders representing 2/3 of the
outstanding capital stock at a regular or special meeting
duly called for that purpose. This is to be valued at par
value or issue price.
Cash and property dividends have the effect of reducing
corporate assets to the extent of the dividends declared. In stock
dividends, it would generally not increase the proportionate
interest of the stockholders of the corporation although it will
have the effect of increasing the subscribed and paid-up capital
(exception is when the stock dividend declaration would result
in fractional shares like when 1 share is declared as dividend for
every 9 shares held)
OVERISSUANCE OF SHARES:
happens when a corporation issues shares beyond its authorized
capital stock, even in the form of stock dividends.
DELINQUENCY:
is a requirement for the application of the second part of the first
paragraph of Sec. 42. Such that, cash dividends declared are
first applied on the unpaid balance on the subscription plus costs
and expenses and stock dividends are withheld until the
subscription is fully paid.
WHO CAN DECLARE DIVIDENDS?
The BOD. They cannot be compelled to declare dividends,
except:
1. When the unrestricted retained earnings is in excess of
100% of the paid-up capital; and
2. In the case of Mandatory If Earned Preference Shares.
The judgment of the BOD is conclusive, EXCEPT:
1. when they act in bad faith;
2. for a dishonest purpose;
3. they act fraudulently, oppressively, unreasonably or
unjustly; or
4. abuse of discretion can be shown as to impair the rights of
the complaining shareholders. The TEST of bad faith is to
determine if the policy of the directors is dictated by their
personal interest rather than the corporate welfare.
WHEN DIVIDENDS RIGHTS VEST:
It has been succinctly said that the right of the stockholders to
be paid dividends vest as soon as they have been lawfully and
finally declared by the BOD. It is not revocable unless:
1. it has not been officially communicated to the
stockholders; or
2. it is in the form of stock dividends which is revocable any
time prior to distribution because this does not result in the
distribution of assets but merely the division of existing
shares of a stockholder into smaller units or integers.
TRANSFER OF SHARES:
The dividends already declared belong to the owner at the time
of declaration. Usually, however, the dividends are payable to
stockholders of record on a specific future date and as far as the
corporation is concerned, the registered owner is the one
entitled to dividends. As against his transferor, however, the
transferee has presumably the right to such dividends and is
oftentimes taken into account in entering effecting the transfer
of shares.
NIELSON & COMPANY, INC., plaintiff-appellant, vs.
LEPANTO CONSOLIDATED MINING COMPANY,
defendant-appellee
FACTS:
This is a motion for reconsideration filed by respondent
Lepanto contending that the order of the SC to pay Nielson 10%
of the stock dividends, declared by Lepanto during the
extension of the contract, as compensation for services under a
management contract is in violation of the Corporation Law and
that it could not be the intention of the parties that the services
of Nielson should be paid in stock dividends.
ISSUE:
WON Nielson & Co. is entitled to receive stock dividends?
HELD:
No. The consideration for which shares of stock may be issued
are: (1) cash; (2) property; and (3) undistributed profits. Shares
of stock are given the special name "stock dividends" only if
they are issued in lieu of undistributed profits. If shares of
stocks are issued in exchange of cash or property, then those
shares do not fall under the category of "stock dividends". A
corporation may legally issue shares of stock in consideration
of services rendered to it by a person not a stockholder, or in
payment of its indebtedness. A share of stock issued to pay for
services rendered is equivalent to a stock issued in exchange of
property, because services is equivalent to property. Likewise,
a share of stock issued in payment of indebtedness is equivalent
to issuing a stock in exchange for cash. But a share of stock thus
issued should be part of the original capital stock of the
corporation upon its organization, or part of the stocks issued
when the increase of the capitalization of a corporation is
properly authorized. In other words, it is the shares of stock that
are originally issued by the corporation and forming part of the
capital that can be exchanged for cash or services rendered, or
property; that is, if the corporation has original shares of stock
unsold or unsubscribed, either coming from the original
capitalization or from the increased capitalization. Those shares
of stock may be issued to a person who is not a stockholder, or
to a person already a stockholder in exchange for services
rendered or for cash or property. But a share of stock coming
from stock dividends declared cannot be issued to one who is
not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock
of the corporation declaring or authorizing such dividend. It is,
what the term itself implies, a distribution of the shares of stock
of the corporation among the stockholders as dividends. A stock
dividend of a corporation is a dividend paid in shares of stock
instead of cash, and is properly payable only out of surplus
profits. So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to
purchase additional shares of stock at par. When a corporation
issues stock dividends, it shows that the corporation's
accumulated profits have been capitalized instead of distributed
to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far
from being a realization of profits for the stockholder, it tends
rather to postpone said realization, in that the fund represented
by the new stock has been transferred from surplus to assets and
no longer available for actual distribution. Thus, it is apparent
that stock dividends are issued only to stockholders. This is so
because only stockholders are entitled to dividends. They are
the only ones who have a right to a proportional share in that
part of the surplus which is declared as dividends. A stock
dividend really adds nothing to the interest of the stockholder;
the proportional interest of each stockholder remains the same.
If a stockholder is deprived of his stock dividends - and this
happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder — then the proportion
of the stockholder's interest changes radically. Stock dividends
are civil fruits of the original investment, and to the owners of
the shares belong the civil fruits.
The term "dividend" both in the technical sense and its ordinary
acceptation, is that part or portion of the profits of the enterprise
which the corporation, by its governing agents, sets apart for
ratable division among the holders of the capital stock. It means
the fund actually set aside, and declared by the directors of the
corporation as dividends and duly ordered by the director, or by
the stockholders at a corporate meeting, to be divided or
distributed among the stockholders according to their respective
interests.
It is Our considered view, therefore, that under Section 16 of
the Corporation Law stock dividends cannot be issued to a
person who is not a stockholder in payment of services
rendered. And so, in the case at bar Nielson cannot be paid in
shares of stock which form part of the stock dividends of
Lepanto for services it rendered under the management
contract. We sustain the contention of Lepanto that the
understanding between Lepanto and Nielson was simply to
make the cash value of the stock dividends declared as the basis
for determining the amount of compensation that should be paid
to Nielson, in the proportion of 10% of the cash value of the
stock dividends declared. And this conclusion of Ours finds
support in the record.
POWER TO ENTER INTO MANAGEMENT
CONTRACT
SEC. 43. Power to Enter into Management Contract.
No corporation shall conclude a management contract with
another corporation unless such contract is 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 nonstock corporation,
of both the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (a) 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 (b) 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.
These 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. No management contract shall be entered into
for a period longer than five (5) years for any one (1) term.
Notes:
This provision was inserted to assure not only technical
competence but continuity in management policy in running
corporate affairs which can be achieved through a management
contract.
REQUIREMENTS OF A VALID MANAGEMENT
CONTRACT:
1. Resolution of the BOD;
2. Approval by the stockholders representing a majority of the
outstanding capital stock or majority of the members of
both the managing and the managed corporation;
3. The approval of the stockholders or members must be made
at the meeting called for that purpose; and
4. The contract shall not be for a period longer than 5 years
for any one term, except those which relate to exploration,
development or utilization of natural resources which may
be entered into for such periods as may be provided by
pertinent laws and regulations;
5. 2/3 of the stockholders or members would be required,
where:
a. The stockholders representing the same interest of
both the managing and the managed corporation own
or control more than 1/3 of the total outstanding capital
stock of the managing corporation;
b. A majority f the members of the BOD of the managing
corporation also constitute a majority of the directors
of the managed corporation;
c. The contract would constitute the management or
operation of all or substantially all of the business of
another corporation, whether such contracts are called
service contracts. If it will not constitute the
management of all or substantially all of the business
of another corporation, the first paragraph of Sec. 44
will apply and not that of the second, that is, only the
vote of the majority is required.
ULTRA VIRES ACTS
SEC. 44. Ultra Vires Acts of Corporations.
No corporation shall possess or exercise corporate powers other
than those conferred by this Code or by its articles of
incorporation and except as necessary or incidental to the
exercise of the powers conferred.
ULTRA VIRES ACTS
are those which cannot be executed or performed by a
corporation because they are not within its express, inherent, or
implied powers as defined by its charter or AOI. Accordingly,
it may be subject to a collateral attack questioning the authority
of the corporation to engage in such particular endeavor.
CONSEQUENCES:
1. On the Corporation itself: The proper forum may suspend
or revoke, after proper notice and hearing, the franchise or
certificate of registration of the corporation for serious
misrepresentation as to what the corporation can do or is
doing to the great damage or prejudice of the general
public.
2. On the rights of the Stockholders: A stockholder may bring
either an individual or derivative suit to enjoin a threatened
ultra-vires act or contract. If already performed, a
derivative suit against the directors may be filed, but their
liability will depend on whether they acted in good faith
and with reasonable diligence in entering into the contract.
3. On the immediate parties:
a. If the contract is fully executed in both sides, the
contract is effective and the courts will not interfere to
deprive either party of what has been acquired under
it;
b. If the contract is executory on both sides,, as a rule,
neither party can maintain an action for its non-
performance; and
c. Where the contract is executory on one side only, and
has been fully performed on the other, the courts differ
as to whether an action will lie on the contract against
the party who has received benefits of performance
under it. Majority of the courts, however, hold that the
party who has received benefits from the performance
is “estopped” to set up that the contract is ultra vires to
defeat an action on the contract.
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO.
FACTS:
The Board of directors of defendant company adopted a
resolution wherein the proceeds of the insurance taken on the
life of its previous President and General Manager Enrico
Privano be set aside and used to purchase 4,000 shares to be
given to Privano’s heirs, which was approved by the
stockholders in a meeting duly called for the purpose.
The donation of the shares was later on modified to transfer all
the proceeds directly to the heirs which would become a loan of
the company with 5% interest per annum and payable after the
settlement of its bonded indebtedness, and still later, modified
to be payable “whenever the company is in a position to meet
said obligation”.
On an opinion by the SEC, sought by the President of the
corporation, Sergio Osmena, Jr., it was opined by the SEC that
the donation was void for being ultra vires. The Board planned
to adopt a different resolution to effect the donation but failed
to act on it. The heirs, through Mrs. Estefania R. Privano, acting
as guardian, demanded the settlement of the obligation.
ISSUE:
WON the donation was an ultra vires act?
HELD:
No. After a careful perusal of the AOI, we find that the
corporation was given broad and almost unlimited powers to
carry out the purposes for which it was organized among them,
(1) “to invest and deal with the money of the company not
immediately required, in such manner as fro time to time may
be determined” and (2) “to aid in any manner any person
association, or corporation or in the affairs of the property of
which this corporation has lawful interest”. The donation in
question undoubtedly comes within the scope of this broad
power for it is a fact appearing in the evidence that the insurance
proceeds were not immediately required when they were given
away.
We don’t see much distinction between the acts of generosity
of the benevolence extended to some employees of the
corporation, and even to some in whom the corporation was
merely interested because of certain moral or political
consideration, and the donations which the corporation has seen
fit to give the children of the late Enrico Privano from the point
of view of the power of the corporation as expressed in the AOI.
And if the former had been sanctioned and had been valid and
intra-vires, we see no plausible reaons why the latter should
now be deemed ultra-vires. It may perhaps be argued that the
donation given to the children of the late Enrico Privano is so
large and disproportionate that it can hardly be considered a
pension or gratuity that can be placed ona par with the instances
above-mentioned, but this argument overlooks one
consideration: the gratuity here given was not merely motivated
by pure liberality or act of generosity, but by a deep sense of
recognition of the valuable services rendered by the late Enrico
Privano which had immensely contributed to the growth of the
corporation to the extent that from its humble capitalization it
blossomed into a multi-million corporation that it is today.
Granting that it was ultra-vires, it may be said that the same
cannot be invalidated, or declared legally ineffective for that
reason alone, it appearing that the donation represents not only
the act of the BOD but of the stockholders themselves as shown
by the fact the same has been expressly ratified in a resolution
duly approved by the latter. By this ratification, the infirmity of
the corporate act, if any has been obliterated thereby making the
act perfectly valid and enforceable. This is specially so if the
donation is not merely executory but executed and
consummated and no creditors are prejudiced, or if there are
creditors affected, the latter has expressly given their
conformity.
ISSUE2:
What is the difference between an illegal act and that which is
ultra-vires?
HELD:
The former contemplates the doing of an act which is contrary
to law, morals, or public order or contravene some rules of
public policy or public duty, and are, like similar transactions
between the individuals, void. They cannot serve as basis of a
court action, nor acquire validity by performance, ratification or
estoppel. Mere ultra-vires acts, on the other hand, or those
which are not illegal and void ab initio, but are merely beyond
the scope of the AOI, are merely voidable and may become
binding and enforceable when ratified by the stockholders.
Since it is not contended that the donation under consideration
is illegal, or contrary to any of the express provisions of the
AOI, nor prejudicial to the creditors of the defendant
corporation, we cannot but logically conclude that said
donation, even if ultra vires in the supposition we have adverted
to, is not void, and if voidable its infirmity has been cured by
ratification and subsequent acts of the defendant corporation.
The corporation is now prevented or estopped from contesting
the validity of the donation.
IRINEO CARLOS, plaintiff-appellant VS. MINDORO
SUGAR CO., ET AL., defendant-appellees (57 Phil. 343;
Oct. 26, 1932)
FACTS:
Mindoro Sugar Company (MSC) transferred all of its property
to Philippine Trust Company (PTC) in consideration of the
bonds it had issued to the value of P3,000,000, each bond being
$1,000, which par value, with interest at 8% per annum, PTC
guaranteed to the holders.
PTC paid Ramon Diaz upon presentation of the coupons, the
stipulated interest from the date of maturity until July 1, 1928,
when its stopped payments, alleging that it did not deem itself
bound to pay such interest or to redeem the obligation because
the guarantee given for the bonds was illegal and void.
The CFI of Manila absolved the defendants from the complaint
except MSC which was sentenced to pay the value of the bond.
ISSUE:
WON PTC’s act was ultra-vires?
HELD:
No. Firstly, PTC although secondarily engaged in banking, was
primarily organized as a trust corporation with full power to
acquire personal property such as the bonds in question
according to both sec. 13 (par. 5) of the Corporation Law and
its duly registered by-laws and AOI; Secondly, that being thus
authoriezd to acquire the bonds, it was given implied power to
guarantee them in order to place them upon the market under
better, more advantageous conditions, and thereby secure the
profit derived from their sale.
“It is not, however, ultra vires for a corporation to enter into
contracts of guaranty where it does so in the legitimate
furtherance of its purposes and business. And it is well settled
that where a corporation acquires commercial papers or bonds
in the legitimate transaction of its business it may sell them, and
in furtherance of such a sale, it may in order to make them more
readily marketable, indorse or guarantee their payment.”
Even if PTC did not acquire the bonds in question, but only
guaranteed them, it would at any rate, be valid and the said
corporation is bound to pay the appellant their value with the
accrued interest in view of the fact that they become due on
account of the lapse of 60 days, without the accrued interest due
having been paid; and the reason is that it is estopped from
denying the validity of its guarantee.
The doctrine of ultra vires as a defense, is by some courts
regarded as an ungracious and odious one, to be sustained only
where the most persuasive consideration of public policy are
involved, and there are numerous decisions and dicta to the
effect that the plea should not as a general rule prevail whether
interposed for or against the corporation, where it will not
advance justice but on the contrary will accomplish a legal
wrong.
When a contract is not on its face necessarily beyond the scope
of the power of the corporation by which it was made, it will, in
the absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of untra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would
defeat the ends of justice or work a legal wrong.
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC.
VS. SEC
FACTS:
The SEC issued an order requiring petitioner herein and its
President Alfredo Abcede to show cause why it should not be
proceeded against for making misrepresentations to the public
about the need of registering and depositing war notes, with a
view of probable redemption as contemplated in Senate Bill No.
163 and in Senate Concurrent Resolution No. 14, for otherwise
they would be valueless.
Petitioner contended that the statement was made in good faith
as President Magsaysay would soon make representations to the
US to have the war notes redeemed.
Respondent SEC found that according to its AOI, the petitioner
has the privilege to work for the redemption of the war notes of
its members alone, but that it cannot offer its services to the
public for a valuable consideration, because there is nothing
definite and tangible about the redemption of the war notes and
its success is speculative that any authority given to offer
services can easily degenerate into a racket; that under its AOI
the petitioner is a civic and non-stock corporation and upon
should not engage in business for profit; that it has received war
notes for deposit, upon payment of fees, without authority in its
articles to do so; that it had previously been rendered to desist
from collecting from those registering the war notes, but
notwithstanding this prohibition it has done so in the guise of
service fees. Hence the Commission ordered to stop receiving
war notes, receiving same for deposit and chargin fees
therefore.

ISSUE:
WON the SEC erred in issuing the questioned order?

HELD:
No. The articles authorize collection of fees from members; but
they do not authorize the corporation to engage in the business
of registering and accepting war notes for deposit and collecting
fees from such services. This was the ruling of the Commission
and this we find to be correct.

Neither do we find any merit in the third contention that the

association has authority to accept and collect fees for
reparation claims for civilian casualties and other injuries. This
is beyond any of the powers of the association as embodied in
its articles and have absolutely no relation to the avowed
purpose of the association to work for the redemption of war
notes.

ERNESTINA CRISOLOGO-JOSE VS. CA

FACTS:
The Vice-president of Mover Enterprises, Inc. issued a check
drawn against Traders Royal Bank, payable to petitioner
Ernestina Crisologo-Jose, for the accommodation of his client.
Petitioner-payee was charged with the knowledge that the check
was issued at the instance and for the personal account of the
President who merely prevailed upon respondent vicepresident
to act as co-signatory in accordance with the arrangement of the
corporation with its depository bank. While it was the
corporation's check which was issued to petitioner for the
amount involved, petitioner actually had no transaction directly
with said corporation.

ISSUE:
WON private respondent, one of the signatories of the check
issued under the account of Mover Enterprises, Inc., is an
accommodation party
under NIL and a debtor of petitioner to the extent of the amount
of said check?

HELD:
Yes. The liability of an accommodation party to a holder for
value, although such holder does not include nor apply to
corporations which are accommodation parties. This is because
the issue or indorsement of negotiable paper by a corporation
without consideration and for the accommodation of another is
ultra vires. One who has taken the instrument with knowledge
of the accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. By way
of exception, an officer or agent of a corporation shall have the
power to execute or indorse a negotiable paper in the name of
the corporation for the accommodation of a third person only if
specifically authorized to do so. Corollarily, corporate officers,
such as the president and vice-president, have no power to
execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising
from or in relation to matters in which the corporation has no
legitimate concern. Since such accommodation paper cannot
thus be enforced against the corporation, especially since it is
not involved in any aspect of the corporate business or
operations, the signatories thereof (president and vice-
president) shall be personally liable therefor, as well as the
consequences arising from their acts in connection therewith.