LAW ON CORPORATIONS an agent of the

WEEK 1 partnership.
SUMMARY OF TITLE I – TITLE IV Right of No right of Possesses right
Succession succession of succession
TITLE I - GENERAL PROVISIONS DEFINITIONS Extent of Partners Stockholders
AND CLASSIFICATIONS Liability to Third (except limited are liable only
Persons partners) are to the extent of
Sec. 1. Title of the Code. – This Code shall be known as liable their
“The Corporation Coder of the Philippines”. personally and investments as
subsidiarity represented by
Sec. 2. Corporation defined. - A corporation is an for partnership the shares
artificial being created by operation of law having the debts to third subscribed by
right of succession and the powers, attributes and persons. them.
properties expressly authorized by law or incident to its Transferability of A partner A stockholder
existence. interest cannot transfer has the right to
Definition interest to transfer his
A corporation is an artificial being created by operation of make a partner shares without
law having the right of succession and the powers, without the the prior
attributes and properties expressly authorized by law or consent of all consent of the
incident to its existence. other existing other
Attributes partners. stockholders.
1. It is an artificial being. Term of existence May be May not be
2. It is created by operation of law. established for formed for a
3. It has the right of succession. any period of term in excess
4. It has only the powers, attributes and properties time stipulated of 50 years
expressly authorized by law or incident to its existence. by the extendible to
Similarities between a partnership and a corporation partners. not more than
1. Juridical personality separate and distinct from the 50 years.
individuals composing it. Firm name A limited A corporation
2. Act only through its agents. partnership is may adopt a
3. Composed of an aggregate of individuals. required to add firm name
4. Distribute profits to those who contribute to capital. the word ‘Ltd.’ provided it is
5. May be organized only when there is a law authorizing to its name. not identical or
it. deceptively
6. Subject to income tax. similar to any
Distinctions between a partnership and a corporation registered firm
Point of Partnership Corporation name or
Comparison contrary to
Manner of By mere By law or existing laws.
Creation agreement of operation of Dissolution May be May only be
the parties law dissolved at dissolved with
Number of By a minimum Requires at any time by the the consent of
Parties of two (2) least five (5) will of any or the state.
persons incorporators all partners.
Commencement Generally, From the date Governing Laws Civil Code Corporation
of Juridical from the of the issuance Code
Personality moment of of the Advantages of a corporate form of business
execution of certificate of organizations
the contract incorporation 1. The capacity to hold property, to contract, to sue and be
of the sued as a legal unit or distinct entity.
Securities and 2. Exemption of shareholders from individual liability.
Exchange 3. Continuity of existence in spite of death or changes of
Commission members.
(SEC) 4. Transferability of shares.
Powers May exercise Can exercise 5. Centralized management under a board of directors.
powers only the powers 6. Standardized methods of organization, management
authorized by expressly and finance for the protection of shareholders and
partners granted by law creditors under statutory regulations.
provided the or incident to Disadvantages of a corporate form of business
same are not its existence. organizations
contrary to 1. The limited liability of the stockholders serves to limit
law, morals, the credit available to the corporation.
good customs, 2. The transferability of shares permits the uniting of
public policy incompatible and conflicting interests in one enterprise.
or public 3. The minority stockholders are usually subservient to
order. the wishes of the majority.
Management When it is not It is vested in 4. In big corporations, the stockholders’ voting rights
agreed upon, the board of have become largely theoretical because of widespread
each partner is directors or
trustees.
ownership, luke warmness and disinterest in
management, inertia, and inaccessible meeting places.
5. In large corporations, management and control has
been separated from ownership.
6. By and large corporations are subject to governmental
restrictions, controls, and report requirements not
imposed on other forms of business organizations.
7. Corporate sphere of activity is limited in the transaction
of its business to the state of the organization.
8. The corporate form involves “double taxation” on
corporation income.
Sec. 3. Classes of corporations. – Corporations formed
or organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to the
holders of such shares dividends or allotments of the
surplus profits on the basis of shares held are stock
corporations. All other corporations are non-stock
corporations.
Other kinds of corporations
1. Quasi-corporations – from the word “quasi”,
meaning “as if”, are entities that are not
absolutely corporations but are considered as if
they were. Eg. Public boards created by law
2. Quasi-public – are entities engaged in rendering
basic services of such public importance as to
entitle them to certain privileges like eminent
domain or use of public property. Eg. Electric,
gas, water and telephone companies.
3. Government-owned or controlled – are entities
organized by the government or corporations of
which the government is a majority stockholder.
Eg. Philippine Air Lines
4. Domestic – one incorporated under Philippine
laws.
5. Foreign – one formed, organized, or existing
under any laws other than those of the
Philippines.
6. Corporation aggregate – one composed of more
than one member or corporator.
7. Corporation sole – consists of one member or
corporator and his successors.
8. Religious corporations, sole or aggregate –
organized, either as sole or aggregate, to
administer properties of the church.
9. Ecclesiastical – organized for religious purposes.
10. Lay – organized for a purpose other than religious
11. Eleemosynary – organized for charitable
purposes.
12. Civil – are those than ecclesiastical and
eleemosynary, whether public or private.
13. Close – one wherein all the outstanding stock is
owned by the persons who are active in
management and conduct of the business.
14. Open – one in which all the members or
corporations have a vote in the election of the
directors and other officers.
15. Multi-national – one having been created or
organized in one state conducts business or
activities across national boundaries and but
subject to the legal sanctions of the countries in
which they operate.
16. Non-profit – organized without contemplation of
gains, profits or dividends to their members on
invested capital.
17. De Jure – one created in strict or substantial
conformity with the statutory requirements for
incorporation and whose right to exist as a
corporation cannot be successfully attacked even
in a direct proceeding for that purpose by the
State.
Sec. 4. Corporations created by special laws or
charters. – Corporations created by special laws or
charters shall be governed primarily by the provisions of
the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code,
insofar as they are applicable.
Sec. 5. Corporators and incorporators, stockholders,
and members. – Corporators are those who compose a
corporation, whether as stockholders or members.
Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-stock
corporation are called members.
Components of a Corporation
1. Corporators – are those who composed a corporation,
whether as stockholders of members. The term includes
incorporators, stockholders or members.
2. Incorporators – are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories thereof.
3. Stockholders or shareholders – are those corporators in
a stock corporation.
4. Members – are those corporators in a non-stock
corporation.
5. Promoters – is a self-constituted organizer who finds an
enterprise or venture and helps to attract investors, form a
corporation and launch it in business, all with a view to
promotion profits.
Promotion – is the act of procuring the initial finances
and the making of all preparations necessary to launch a
corporation.
Activities of a promoter
1. The discovery and investigation of a promising
business opportunity.
2. The formulation of business and financial plans.
3. Assembling the enterprise by negotiations and
obtaining some control over the subject matter by option
or contracts made on behalf of the proposed corporation
or on his own credit.
4. The making of arrangements for financing the
enterprise and the floatation of securities.
5. Arrange tactful and painless methods for getting his
own reward for the task of promotion out of the
prospective investors and for reimbursement for his
expenses, contracts, and services without frightening
away those who are expected to provide the funds.
General rule: A corporation is not bound by any
agreement made by a promoter.
Exception to the rule: Unless and until the corporation
approves the agreement.
Sec. 6. Classification of shares. – The shares of stock of
stock corporations may be divided into classes or series
of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no
share may be deprived of voting rights except those
classified and issued as “preferred” or “redeemable”
shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of
the shares or series of shares may have a par value or
have no par value as may be provided for in the articles
of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the distribution of
the assets of the corporation in case of liquidation and in
the distribution of dividends, or such other preferences as
may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a
stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any
series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.
Shares of capital stock issued without par value
shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be
issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its
no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of
incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for
non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation.
2. Adoption and amendment of by-laws.
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property.
4. Incurring, creating or increasing bonded indebtedness.
5. Increase or decrease of capital stock.
6. Merger or consolidation of the corporation with
another corporation or other corporations.
7. Investment of corporate funds in another corporation
or business in accordance with this Code.
8. Dissolution of the corporation.
Except as provided in the immediately preceding
paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights.
Definition
A “stock” or share of stock is one of the units into which
the capital stock has been divided. It represents the
interest or right that the holder of the stock or stockholder
has in the corporation.
A stock certificate certifies that one is a holder or owner
of a certain number of shares of stock in the corporation.
It is a mere documentary evidence of the holder’s
ownership of shares and a convenient instrument for the
transfer of title.
Classes or series of shares of stock subject to
restrictions
1. Shares shall not be deprived of voting rights except
preferred or redeemable shares but non-voting shares
must still be entitles to vote on matters specified in the last
paragraph of Section 6 like matters relating to amendment
of the articles of incorporation and dissolution of the
corporation.
2. Where non-voting shares are provided for there must
always be a class or series of shares with complete voting
rights.
3. Banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
4. Preferred shares of stock which may be given
preference in the distribution of assets in case of
liquidation and distribution of dividends or other
preferences may be issued only with stated par value.
5. The terms and conditions of preferred shares or series
thereof may be fixed by the board of directors only when
authorized by the articles of incorporation the effectivity
thereof shall be reckoned from the filing of certificate
with the SEC.
6. Shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per
share.
7. Unless otherwise provided by law the rights, privileges
or restrictions on classes or series of shares must be stated
in the articles of incorporation and in the stock
certificates.
Classes or series of shares
1. Voting and Non-Voting Shares;
General rule: Every member of a non-stock corporation
and every legal owner of shares in a stock corporation, has
a right to be present and vote at all corporate meetings.
Exception to the rule: Unless there is a stipulation in
contrary.
2. Par Value and No-Par Value Shares
Par value is the given fixed or definite value of a share in
the articles of incorporation.
3. Common and Preferred Shares. Preferred shares of
stock may be: (a) preferred as to assets; (b) preferred as to
dividends. Preferred as to dividends may either be
cumulative or non-cumulative, or participating or non-
participating
4. Promotion Shares – are such stocks issued to those who
may originally own the mining ground or valuable rights
connected therewith, in consideration of their deeding the
same to the mining company when the company is
incorporated, or it may mean such stock as is issued to
promoters.
5. Shares of Escrow – are shares subject to an escrow
agreement, that is, an agreement under which the shares
are deposited by the grantor or his agent with a third
person, to be delivered by the depositary to the vendee or
subscriber only upon the happening of certain conditions.
6. Founder’s Shares.
7. Redeemable “Callable” Shares.
8. Treasury Shares.
9. Other shares classified to comply with constitutional or
legal requirements.
Instances when non-voting shares may vote
1. Amendment of the articles of incorporation.
2. Adoption and amendment of by-laws.
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property.
4. Incurring, creating or increasing bonded indebtedness.
5. Increase or decrease of capital stock.
6. Merger or consolidation of the corporation with another
corporation or other corporations.
7. Investment of corporate funds in another corporation of
business in accordance with the Corporation Code; and
8. Dissolution of the corporation.
Sec. 7. Founders’ shares. – Founders' shares classified
as such in the articles of incorporation may be given
certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to
vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five
(5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the
Securities and Exchange Commission.
Definition
Founders’ shares, generally common stock, are given to
the founders or promoters of a corporation in payment of
money expended or services rendered in the promotion of
it.
Sec. 8. Redeemable shares. – Redeemable shares may be
issued by the corporation when expressly so provided in
the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and
upon such other terms and conditions as may be stated in
the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing
said shares.
Definition
Redeemable (“Callable”) shares of stock which are
usually preferred are frequently issued subject to
redemption at the option of either the corporation, the
stockholder, or both, at a definite price representing
premium above the amount originally paid.
Sinking fund refers to a fund set-up by the corporation
where cash is gradually set aside in order to accumulate
the amount necessary to meet the redemption price of
redeemable shares of specified dates in the future.
Sec. 9. Treasury shares. - Treasury shares are shares of
stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other
lawful means. Such shares may again be disposed of for
a reasonable price fixed by the board of directors. (n)
Definition
Treasury shares are owned by the corporation having been
reacquired by the issuing corporation by “purchase,
redemption, donation or through some other lawful
means.” It has no voting rights or rights as to dividends or
distributions.
TITLE II - INCORPORATION AND
ORGANIZATION OF PRIVATE CORPORATIONS
Definition
Incorporation is the act of creating a corporation.
Sec. 10. Number and qualifications of incorporators. –
Any number of natural persons not less than five (5) but
not more than fifteen (15), all of legal age and a majority
of whom are residents of the Philippines, may form a
private corporation for any lawful purpose or purposes.
Each of the incorporators of s stock corporation must own
or be a subscriber to at least one (1) share of the capital
stock of the corporation.
Qualifications of incorporators
1. Must be a natural person.
2. Must be of legal age.
Sec. 11. Corporate term. – A corporation shall exist for
a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said
period is extended. The corporate term as originally
stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single
instance by an amendment of the articles of
incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) 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 Securities and Exchange
Commission.
Sec. 12. Minimum capital stock required of stock
corporations. – Stock corporations incorporated under
this Code shall not be required to have any minimum
authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions
of the following section.
Sec.13. Amount of capital stock to be subscribed and
paid for purpose of incorporation. – At least twenty-five
percent (25%) of the authorized capital stock as stated in
the articles of incorporation must be subscribed at the
time of incorporation, and at least twenty-five percent
(25%) of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates
fixed in the contract of subscription without need of call,
or in the absence of fixed date or dates, upon call for
payment by the board of directors: Provided, however,
that in no case shall the paid-up capital be less than five
thousand (P5,0000) pesos.
Amount to be subscribed and paid
Illustration:
If X, Inc. has authorized capital stock of P100, 000
divided into 1,000 shares with par value of P100.00 per
share, it must be shown that at least P25, 000 or 250 shares
of the authorized capital stock must be subscribed. Of the
total subscription of P25, 000, at least P6, 250.00 or 25%
of total subscription must be paid. It is not necessary that
each subscriber pay Twenty-five percent (25%) on his
subscription. On the other hand, where the authorized
capital stock is stated at 2,000 no par value shares, it must
be shown that at least 500- no par value share has been
subscribed. The basis of computation is on the number of
shares.
Securities and Exchange Commission (SEC) may conduct
compliance with paid-up capital requirements because it
has come to the knowledge of the Commission that some
corporation have been organized merely as fronts for
some hidden objectives with no real intention of carrying
out the purported purposes in their articles of
incorporation. If a bigger capital stock is required, the
abuse of the privileges of a corporation would be
minimized.
Capital stock requirements under the special laws
1. In case of mining and agricultural incorporation, or
corporation organized for the purpose of the disposition,
exploitation, development or utilization of natural
resources of the Philippines, as well as corporation
organized for the operations of public utilities, the
Constitution provides that at least 60 % of the capital
stock of such corporation must be owned by citizens of
the Philippines.
2. The Insurance Code provide that “no domestic
insurance company shall, if a stock corporation, engage in
business in the Philippines unless posses of a paid up
capital stock equal to at least two million pesos”. Where
the insurance company is to engage in insurance business
it must have a “paid-up capital stock of at least five
million pesos” to be invested in securities specified by
law, which securities are to be deposited with the
Insurance Commissioner.
3. The Financing Company Act requires that “at least
sixty per centum of the capital of financing companies
must be owned by citizens of the Philippines and shall
have a paid-up capital of not less than five hundred
thousand pesos”.
4. Commercial banks are required to have a paid-up
capital of 100 million pesos. When a commercial bank
having licence to operate an expanded foreign currency
deposit system it must have a paid-up capital of at least
150 million pesos and when a commercial bank is
authorized to engage in universal banking it must have a
paid up capital of at least 500 million pesos.
5. The New Constitution provides that: “The ownership
and management of mass media shall be limited to
citizens of the Philippines or to corporations or
association wholly-owned and manage by such citizen”.
6. Under the Retail Trade Nationalization law “no person
who is not a citizen of the Philippines, and no association,
partnership, or corporation the capital of which is not
wholly owned by citizens of the Philippines, shall engage
directly or indirectly in the retail trade business.
7. Only vessels of domestic ownership are authorized to
engage in coastwise shipping in the Philippines. Vessels
are considered of domestic ownership when such
ownership is vested in some one or more of the following:
(1) Citizens of the Philippines; (2) any corporation or any
company composed wholly of the citizens of the
Philippines; (3) any corporation or company created
under the laws of the Philippines, provided at least 75%
of the capital stock thereof or of any interested in said
capital is wholly owned by the citizens of the Philippines.
Sec.14. Contents of articles of the incorporations. – All
corporation organized under this Code shall file with the
Securities and Exchange Commission articles of
incorporation in any of the official languages, duly signed
and acknowledged by all of the incorporators containing
substantially the following matters, except as otherwise
prescribed by this Code or by special laws:
1. The name of the corporation.
2. The specific purpose or purposes for which the
corporation is being incorporated. Where the corporation
have more than one stated purpose, the article of
incorporation shall state which the primary is and which
is/are the secondary purpose or purposes: Provided, That
a non-stock corporation may not include a purpose which
would change or contradict its nature as such.
3. The place where the principal office of the corporation
is to be located, which must be within the Philippines.
4. The term for which the corporation is to exist.
5. The names, nationalities and residences of the
incorporators.
6. The number of directors or trustees which shall not be
less than five (5) nor more than fifteen (15).
7. The names, nationalities and residences of the person
who shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified
accordance with this Code.
8. If it be a stock corporation, the amount of its authorized
capital stock in lawful money of the Philippines, the
number of shares which it is divided, and in case the
shares are par value shares, the par value of each, the
names, nationalities and residences of the original
subscriber, and the amount subscribed and paid by each
on his subscription, and if some or all of the shares are
without par value, such fact must be stated.
9. If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of the
contributors and the amount, contributed by each.
10. Such other matters are not inconsistent with law and
which the incorporators may deem necessary and
convenient.
The Securities and Exchange Commission shall not
accept the articles of incorporation of any stock
corporation unless accompanied by a sworn statement of
the Treasurer elected by the subscriber showing that at
least 25% of the authorized capital stock of the
corporation has been subscribed, and at least 25% of the
total subscription has been fully paid to him in actual cash
and/or in property the fair valuation of which are equal
to at least 25% of the said subscription , such paid up
capital being not less than five-thousand pesos (P5,000).
Sec.15. Forms of Articles of Incorporation. – Unless
otherwise prescribed by special law, articles of
incorporation of all domestic corporations shall supply
substantially the following requirements in the form as
provided for by the SEC:
1. The name of the corporation.
Incorporators may choose any name they see fit ,
however strange, uneuphonious, or unrhetorical it may be
, provided it is one not identical with or prejudicially
similar to a name which has previously been adopted by
and is being use by another corporation as its corporate
name.
Change of Corporate name
The change of the corporate name doesn’t mean a new
corporation, nor the successor of the original corporation.
It is the same corporation with a different name having its
character with no respect change. The corporation
continues, as before, responsible in its new name for all
debts or other liabilities it had previously contracted or
incurred.
2. Specific purpose or purposes.
The statement of the purpose has its principal function the
affirmative authorization of the management to enter into
those contracts and business transactions which may be
considered as incidental to its attainment of the purposes.
It also imposes implied limitations of their authority by
the exclusion of lines of activity which are not covered.
3. Principal office of the Corporation.
The principal office of the corporation must be within the
Philippines. It is where the books of the corporation are
kept and its officers usually and ordinarily meet for the
purpose of managing the affairs and transactions of the
business of the corporation.
4. Terms of Existence of the Corporation.
The corporation shall exist for a period not exceeding fifty
(50) years from the date of incorporation unless sooner
dissolved or unless said period is extended.
5. Names, Nationalities and residences of incorporators.
The names, nationalities and residences of the
incorporators must be stated in the articles of the
corporation for the purpose of complying with legal
requirement that majority of the incorporators must be
residents of the Philippines and complying with the
statutory requirement on share ownership and in other
instances where Filipino Citizens are required.
6. Number of directors and trustees.
The number of the director and trustees must not be less
than five (5) nor more than fifteen (15).
7. Names, nationalities and residences of directors.
A majority of the directors or trustees of all corporation
organized under this Code must be a residents citizens of
the Philippines.
8. Amount of authorized capital stock.
A stock corporation must state the “amount of its
authorized capital stock in lawful money of the
Philippines, the number of shares into which it is divided,
and in case the shares are par value shares, the par value
of each, the names, nationalities, and residences of the
original subscribers, and the amount subscribed and paid
by each on his subscription, and if some or all the shares
are without par value, such fact must be stated”.
9. Non-stock Corporation.
The Corporation Code requires the articles of the non-
stock corporation to states: the amount of its capital, the
names, nationalities and residences of its contributors and
the amount contributed by each. A non-stock corporation
may have capital but it has no authorized capital stock.
10. Inclusion of other matters.
The articles of incorporation “may include other matters
that is not inconsistent with law and which the
incorporators may deem necessary and convenient”.
Sworn Statement of the Treasurer
The Securities and Exchange Commission shall not
accept the articles of incorporation of any stock
corporation unless accompanied by a sworn statement of
the Treasurer elected by the subscribers showing that at
least:
1. 25% of the authorized capital stock has been
subscribed.
2. 25% of the subscription has been fully paid in actual
cash or property.
3. The paid-up capital being not less than P5,000.00.
SEC Policy
Property as subscription payment – Generally, all forms
of tangible properties are acceptable for purposes of
payment to subscription provided that the three test of
paid-up capital determination are complied with, i.e.,
ownership, existence and valuable, subject to certain
restrictions as may be imposed by law.
SEC adopted the policy that discourages the inclusion of
intangible assets as goodwill, lease-hold rights, or timber
concession rights, payment of such properties Motor
vehicle, real estate properties and navigable vessels in
payment of pre-incorporation subscription, increases of
capital stock or in exchange for additional issuance of
shares are allowed only by the SEC provided that:
1. There has been a proof of valid transfer.
2. All taxes due from the properties has been paid; and
3. Such properties have been reasonably valued.
Papers to accompany articles with SEC
The SEC requires the following papers to be submitted to
it with the articles of incorporation:
1. A verification slip executed by the Chief of the Record
Section states that the proposed name of the corporation
has been verified and found to be distinct/ not similar to
the names of already existing corporation or those
pending registration.
2. Written undertaking to change corporate name in case
there is a person, firm or entity with a prior right to the
use of said name or one similar to it.
3. Sworn statement of assets and liabilities, duly executed
under oath by the corporate treasurer together with the
amount P50.00 to defray publication expenses.
4. Bank certificate of deposit, issued under oath by the
bank manager or any authorized bank officer, that there is
a deposit of the stated amount representing the paid-up
capital of the corporation either in the name of the
treasurer in trust for the corporation or in the name of the
corporation itself.
5. Written authority to verify bank deposit signed by the
corporate treasurer empowering the SEC and /or the
Central bank to check and inspect the existence of the
bank deposit of the corporate paid-up capital.
6. Taxpayer account number of the incorporators pursuant
to Executive order No. 213.
7. Registration Data Sheet, a statement in statistical data
form, signed by an authorized representative of the
corporation regarding important information about the
corporate seal, corporate name, principal office, capital
structure, their subscription and TAN (SEC Bulletin, Oct.
1982).
Sec. 16. 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 rights of dissenting
stockholders in accordance with the provision of this
Code, or the vote or written assent of two-thirds (2/3) of
the members if it be a non-stock corporation.
The original and amended articles altogether
shall contain all provision required by law to be set out in
the articles of incorporation. Such articles, as amended
shall be indicated by underscoring the change or changes
made, and the copy thereof duly certified under oath by
the corporate secretary and the majority of the directors
or trustees stating the fact that said amendments have
been duly approved by the required vote of the
stockholders or members, shall be submitted to the
Securities and Exchange Commission.
The amendment shall take effect upon its
approval by the Securities and Exchange 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.
Law reserves the rights to modify the charter
The constitution and the Corporation Code reserved the
right to amend the charter of a private corporation. The
constitution provides that “no franchise or right be
granted except under the condition that it shall be subject
to amendment, alteration, or repeal by the National
Assembly when public interest so requires.
Amendment of Articles of Incorporation
The articles of incorporation may be amended for
legitimate purposes that refer to any matter stated in the
articles of incorporation. It may refer to:
1. Change of corporate name;
2. Extension of term of corporation;
3. Change in classes or series of shares;
4. Change in rights, privileges or restrictions in share
ownership;
5. Increase or decrease in the number of directors; and
6. Change in purpose or purposes and other necessary
changes.
Vote or recent assent required in amendment of the
articles of incorporation shall be as follows:
Stock Corporation – A majority vote of the directors or
trustees and the vote or written assent of the stockholders
representing at least two- thirds (2/3) of the outstanding
capital stock. Under section 81 of the Code, a dissenting
stockholder may exercise his appraisal right if he is
against the amendment to be made and demand payment
of the fair value of his shares.
Non-stock Corporation – A majority vote of board of
directors and the vote or written assent of 2/3 of the
members.
The amendments to the articles of incorporation
shall take effect upon its approval by the Securities and
Exchange Commission or from the filing with the said
Commission if not acted upon within six months from the
date of filing for a cause not attributable to the
corporation.
Sec. 17. Grounds when articles of incorporation or
amendment may be rejected or disapproved. – The
Securities and Exchange Commission may reject the
articles of incorporation or disapproved any amendment
thereto if the same is not in compliance with the
requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable
time within which to correct or modify the objectionable
portions of the articles or amendment. The following are
grounds for such amendment or disapproval:
1. That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein.
2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary to
government rules and regulation.
3. That the Treasurer’s Affidavit concerning the amount
of capital stock subscribed and/or paid is false.
4. That the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws
of the constitution.
No articles of incorporation or amendment to articles of
incorporation of banks, banking and quasi-banking
institutions, building and loan association, trust
companies, public utilities, educational institution, and
other corporations governed by special laws shall be
accepted or approved by the Commission unless
accompanied by a favourable recommendation of the
appropriate government agency to the effect that such
articles or amendment is in accordance with law.
Sec. 18. Corporate name. – No corporate name may be
allowed by the Securities and Exchange Commission if
the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or
to any other name already protected by law or its patently
deceptive, confusing or contrary to existing laws. When
the change in a corporate name is approved, the
commission shall issue an amended certificate of
incorporation under the amended name.
Necessity of Corporate name
It is necessary that a corporation should have a name
because that is the only way by which the corporation can
be identified and distinguished from other corporation,
firms or entities.
Change of corporate name
A corporation may change its name by merely amending
its charter in the manner prescribed by law. The change of
name of the corporation does not result in dissolution. The
changing of the name of a corporation is no more the
creation of a corporation than the changing of the name of
a natural person.
Restriction in use in certain names of words
There are special laws prohibiting the use of certain
names and/or words. Thus, under the General Banking
Act, no person or entity not conducting the business of
commercial banking shall use the words “bank”,
“banking”, “banker”, “building and loan association”,
“trust corporation”, etc. or words of similar import. The
word “National” under Act 2612 may not be use by those
doing business as bankers, brokers, or savings
institutions. “United Nations” both in its full and
abbreviated forms, for commercial and business purposes.
There are other names or words which pursuant to other
special laws may not be used.
Sec. 19. Commencement of Corporate Existence. – A
private corporation formed or organized under this Code
commences to have corporate existence and juridical
personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate
of incorporation under its official seal; and thereupon the
incorporators, stockholders/members, and their
successors shall constitute a body politic and corporate
under the name stated in the articles of incorporation for
the period of time mentioned therein, unless said period
is extended or the corporation is sooner dissolved in
accordance with law.
Sec. 20. De Facto corporation. – The due incorporation
any corporation claiming in good faith to be a
corporation under this Code, and its right to exercise
corporate powers, shall not be inquired into collaterally
in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General
in a quo warranto proceeding.
De facto corporation – generally refer to organizations
exercising corporate power under colour of a more or less
legally constituted corporation.
Elements of De facto corporation
1. Existence of a valid law under which a corporation can
be organized.
2. An attempt in good faith to incorporate.
3. Actual exercise of incorporate powers.
Quo warranto – an inquiry made into the right of a
corporation to conduct business.
Illustration
Seven competent individual organized a corporation by
filing the articles of incorporation and securing a
certificate of incorporation with the SEC. However, the
addresses of two of the original subscribers were omitted
in the articles of incorporation. In suit filed by X, a
creditor, against the corporation he alleged that the
corporation has no valid existence and sought to hold the
seven incorporators (also directors) liable personally on
the obligation. X’s allegation that the corporation had no
valid existence would constitute a collateral (side) attack
in a private suit. Only the Solicitor General as government
lawyer may raise the question by quo warranto
proceeding. (Literally by “what right”).
Sec. 21. Corporation by estoppel. – All persons who
assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for
all debts, liabilities and damages incurred or arising as a
result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on
the ground that there was in fact no corporation.
Estoppel – It is preclusion, which prevent a man from
denying a fact in consequences of his own previous act,
allegations, or denial of a contrary tenor. The object of the
principle of estoppel is to prevent injustice to an otherwise
innocent person.
Sec. 22. Effect of non-use of corporate charter and
continuous in operation of a corporation. – If a
corporation does not formally organize and commence
the transaction of its business or the construction of its
works within two (2) years from the date of its
incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its
business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same
shall be ground for the suspension or revocation of its
corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize,
commence the transactions of its businesses or the
construction of its works, or to continuously operate is
due to causes beyond the control of the corporation as
may be determined by the Securities and Exchange
Commission.
Organization
The idea of organization in reference to corporations
means executive structure, election of officers, providing
for subscription and payment of capital, adoption of by-
laws, and other steps necessary to endow the legal entity
with capacity to transact business for which it was
created.
The Grant of corporate existence, conferred by the
issuance of certificate of incorporation, is subject to two
subsequent conditions, to wit:
1. The corporation must “formally organize”.
2. The corporation must actually begin the “transaction of
its business”.
Failure to comply with either or both of these conditions
within two (2) years from the date of its incorporation, its
corporate power cease and the corporation must be
deemed dissolved.
TITLE III – BOARD OF DIRECTORS/TRUSTEES
AND OFFICERS
Sec. 23. The board of directors or trustees. – Unless
otherwise provided in this Code, the corporate powers of
all corporation formed under this Code shall be
exercised, all business conducted and all property of such
corporations controlled and held by the board of
directors or trustees to be elected from among the holders
of stock, or where there is no stock, from among the
members of the corporation, who shall hold office for one
(1) year and until their successors are elected and
qualified.
Every director must own at least one (1) share of the
capital stock of the corporation of which he is a director,
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of
at least one (1) share of the capital stock of the
corporation of which he is the director shall thereby cease
to be a director. Trustees of non-stock corporations must
be members thereof. A majority of the directors or
trustees of all corporations organized under this Code
must be residents of the Philippines.
Qualifications of directors
1. He must own at least one (1) share of the capital stock
of the corporation in his name.
2. Majority of the directors must be a resident citizen of
the Philippines.
3. A director must not have been convicted by final
judgement of an offense punishable by imprisonment
exceeding six (6) years or a violation of the provisions of
the Corporation Code committed within five (5) years
prior to the date of election or appointment.
The directors, once elected, become the representatives of
the corporation itself, not its stockholders. The directors
of a non-stock corporation are required to be members
thereof and like stock corporations “majority of the
directors and trustees of all corporations organized under
the Corporation Code must be residents citizen of the
Philippines”. There are some special corporation not
organized with the Corporation Code where directors are
required to be citizens of the Philippines. They are as
follows:
1. Bank and banking institution, at least 2/3 of the
members of the board of directors shall be citizen of the
Philippines.
2. Rural banks, every member of the board of directors
shall be citizens of the Philippines.
3. Domestic air carrier, the directing head or 2/3 of the
board of directors and other managing officers shall be
citizens of the Philippines.
4. Registered investments companies, the directors
thereof must be Filipino citizen.
5. Private development banks, all the members of the
board of directors shall be citizen of the Philippines.
6. In case of financing corporation, at least 2/3 of all
members of the board of directors shall be citizen of the
Philippines.
Sec. 24. Election of directors or trustees. – At all
elections of directors or trustees, there must be present,
either in person or by representative authorized to act by
written proxy, the owners of the majority of the
outstanding capital stock, or if there be no capital stock,
a majority of the members entitled to vote. The election
must be by ballot if requested by any voting stockholder
or member. In stock corporations, every stockholder
entitled to vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the time
fixed in the by-laws, in his own name on the stock books
of the corporation, or where the by-laws are silent, at the
time of the election; and said shareholder may vote such
number of shares for as many persons as there are
directors to be elected or he may cumulate said shares
and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same
principle among as many candidate as he shall see fit;
Provided, That the total number of votes cast by him shall
not exceed the numbers of shares owned by him as shown
in the books of the corporation multiplied by the whole
number of directors to be elected: Provided, however,
that no delinquent stocks shall be voted. Unless otherwise
provided in the articles of incorporation, or in the by-
laws, members of corporation which have no capital stock
may cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall be
declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to
day or from time to time but not sine die or definitely if,
for any reason, no election is held, or if there are not
present or represented by proxy, at the meeting, the
owners of the majority of the outstanding capital stock, or
if there be no capital stock, a majority of the members
entitled to vote.
Methods of voting
The voting methods which may be resorted to by a voting
stockholder are as follows:
1. Straight voting.
2. Cumulative voting for one candidate.
3. Cumulative voting by distribution.
Example of Straight Voting
A owns 100 shares of stock in X corporation. During the
meeting for the purpose of electing five directors, he may
cast his vote by giving each of the five candidates 100
votes, hence, he distribute equally his vote without
preference or discrimination.
Example of Cumulative voting for one candidate
In the preceding illustration, if A owns 100 voting shares
and there are five directors to be elected, A is entitled to
500 votes which he may “cumulate” by giving it to
candidate Z alone.
Example of Cumulative voting by distribution
As in the same example above, if A owns 100 voting
shares, and there are five directors to be elected, A is
entitled to 500 votes which he may distribute to candidate
Y and Z giving the former 300 and the latter 200 provided
that the total number of votes cast by him does not exceed
500 votes.
Voting of sequestered shares of stock
It has been held that the “Presidential Commission on
Good Government may properly exercise the prerogative
to vote sequestered stock of corporation, granted to it by
the President of the Philippines xxx pending the outcome
of proceeding to determine the ownership of sequestered
shares of stock. xxx Substitution of directors is not be
done without reason or rhyme and undertaken only when
essential to prevent disappearance or wastage of corporate
property, and always under such circumstance as assure
that replacements are truly processed of competence,
experience and probity.
Sec. 25. Corporate officers, quorum. – Immediately
after their election, the directors of a corporation must
formally organized by the election of a president, who
shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident citizen of the
Philippines, and such other officers as may be provided
for in the by-laws. Any two (2) or more positions may be
held concurrently by the same person, except that no one
shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall
perform the duties enjoined on them by law and by the by-
laws of the corporation. Unless the articles of
incorporation or the by-laws provide form a greater
majority, a majority of the number of directors or trustees
as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business, and
every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum
shall be valid as a corporate act , except for the election
of the officers which shall require the vote of a majority
of all the members of the board.
Qualification of corporate officer
1. President. He must be a director.
2. Treasurer. He may or may not be a director.
3. Secretary. He must be a resident and citizen of the
Philippines
4. Other officers provided for in the by-laws.
Three levels of corporate control
1. The board of director which is responsible for the
corporate policies and the general management of the
business affairs of the corporation.
2. The officers, who in theory execute the policies lay
down by the board , but in practice often have wide
latitude in determining the course of business operations.
3. Stockholders who like amendments of the articles of
incorporation.
Teleconferencing of Board Members
In the Philippines, teleconferencing and
videoconferencing of members of board of directors of
private corporation is a reality, in light of the Republic
Act No. 8792.The Securities and Exchange Commission
issued SEC Memorandum Circular No. 15, on November
30, 2001, providing the guidelines to be complied with
related to such conferences. Thus, the court agrees with
the RTC that persons in the Philippines may have a
teleconference with a group of persons in South Korea
relating to business transactions or corporate governance.
Directors and officers distinguished
The officers of a corporation, unlike the directors, are true
agent of the corporation. Each officer may bind the
corporation by his individual acts within the actual or
apparent scope of authority. On the other hand, a director
has no authority to act for the corporation.
Authority of corporate officers
The corporation transact its business through its officers
or agents. An officer’s power as an agent of the
corporation must be sought from the statute, charter, and
the by-laws or in a delegation of authority to such officers,
from the acts of board of directors, formally expressed or
implied from a habit or custom of doing business.
Chairman of the Board
A chairman of the board of directors must himself director
be a director of the corporation. His duty as presiding
officer is not an executive one. It has been suggested that
he well be given advisory duties in determining executive
salaries, bonus plans and pensions, determining dividend
policy, selecting auditors, and dealing questions with
labor and company policy.
President
The president must be a director of the corporation. The
powers of the president of a corporation are vested in him
by law or the by-laws; otherwise, he has no power over
the corporate property and business than has any other
director. However, he may be given actual authority to
make particular contracts, or to execute conveyances,
borrow money, execute mortgages, and do other acts, by
the charter, the by-laws, resolutions of directors or their
informal acquiescence.
Vice- President
In the absence of the president, or if the office of the
president becomes vacant, as a rule, the vice president
elected and appointed by the shareholders or directors
has authority to act in his stead, and to perform the duties
of the office.
Secretary
A secretary must be a resident citizen of the Philippines.
It is generally its duty to make and keep corporate records;
to make proper entries of the votes, resolution and
proceedings of the shareholders and directors in the
management of the corporation, and of all other matters
required to be entered in the records. The secretary is the
ministerial officer who cannot bind the corporation unless
he is authorized to do so.
Treasurer
The treasurer of the corporation “may or may not be a
director”. He is the proper officer and the only proper
officer in the absence of express provision to the contrary,
to receive and keep the money of the corporation and to
disburse them as he may be authorized.
Other officers
The by-laws of the corporation may provide for such other
officers and agent as may be necessary and convenient
considering the nature and needs of the business. Their
compensation is provided for by the by-laws and the
board of directors in a suitable manner.
Quorum – signifies the number of persons belonging to a
corporation required to transact business.
Section 25 of the Corporation Code requires more people
than a simple majority to form a quorum. If no such
defining number is determined, a quorum is a simple
majority.
Directors cannot vote by proxy
The directors cannot vote by proxy but must personally
present, and act by themselves.
Sec. 26. Report of election of directors, trustees and
officers. – Within thirty (30) days after the election of the
officers, trustees and directors of the corporation, the
secretary, or any other officer of the corporation shall
submit to the Securities and Exchange Commission, the
names, nationalities and residences of the directors,
trustees and officers elected. Should a director, trustee or
officer die, resign or in any manner cease to hold office,
his heirs in case of his death, the secretary or any other
officer of the corporation, or the director, trustee or
officer himself, shall immediately report such fact to the
Securities and Exchange Commission.
Sec. 27. Disqualification of directors, trustees or
officers. – No person convicted by final judgement of an
offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code,
committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director,
trustee or officer of any corporation.
Sec. 27 of the Corporation Code is an additional safeguard
that only upright and honest individuals be entrusted with
management of the corporate affairs.
A director of a cooperative who is subsequently elected as
member of the Sangguniang Panglungsod (City Council)
becomes automatically disqualified from continuing as
such director by virtue of the clear mandate of PD No. 269
providing that except for “barrio captains and
councillors” elective officials are ineligible to become
officers and/or directors of any cooperative.
The SEC ruled that firms engage in wholly or partially
nationalized activities, aliens are banned from being
appointed to management position such as president,
vice-president, treasurer, auditor, secretary, etc. of said
companies. However, they can be elected directors in
preparation to their allowable participation or share in the
capital of such activities, in accordance with the
Commonwealth Act No. 108, as amended by PD 715,
otherwise known as the Anti- Dummy Law.
Sec. 28. Removal of director or trustees. – Any director
or trustee of the corporation may be removed from office
by a vote of the stockholders holding or representing at
least two- thirds (2/3) of the outstanding capital stock, or
if the corporation be a non-stock corporation , by a vote
of at least two- thirds (2/3) of the members entitled to
vote: Provided, That such removal shall take place either
at a regular meeting of the corporation or at the special
meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the
corporation of the intention to propose such removal at
the meeting. A special meeting of the stockholders or
members of the corporation for the purpose of removal of
directors or trustees, or any of them, must be called by the
secretary on order of the president or on the written
demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, or, if it
be a non-stock corporation, on the written demand of a
majority of the members entitled to vote. Should the
secretary failed to refuse to call the special meeting upon
such demand, or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed
directly to the stockholders or members of any by any
stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as
well as the intention to propose such removal, must be
given by publication or by written notice as prescribed in
this Code. The vacancy resulting from removal pursuant
to this section may be filled by election at the same
meeting without further notice, or at any regular or at any
special meeting called for the purpose after giving notice
as prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may
not be used to deprived minority stockholders or members
of the right of representation to which they may be entitled
under Section 24 of this Code.
Directors or trustee may be removed even without
cause
The legislative policy is that the shareholders shall be the
ultimate masters, not the directors. The shareholders
should be clothed with the power of judging the
competency and fitness of the directors and of choosing a
board that will carry out of their business policy.
Directors representing minority may not be removed
without cause. The power to removed director or trustee
even without cause given to shareholders or members
may not be used to deprived minority shareholders or
members of the right of representation to which they may
be entitled under Section 24 of the Corporation Code.
Cumulative voting of directors in a stock corporation is
mandatory and cannot be dispensed with in the by-laws.
Being a statutory right, the stockholders cannot be
deprived of the use of cumulative voting.
May the result of the duly held election of directors be
altered by mere agreement of the directors?
The Securities and Exchange Commission ruled that: “An
agreement by which director is reposed in any body
except majority of stockholders is in violation of ‘public
policy’ and ‘enforceable’ ”.
The Securities and Exchange Commission has
jurisdiction or authority to “hear and decide cases”
involving controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations. Controversy
concerning removal of directors or trustees may also be
heard by the SEC.
Sec. 29. Vacancies in the office of director or trustee. –
Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the
vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular
or special meeting called for that purpose. A director or
trustee so elected to fill the vacancy shall be elected only
for the unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of
an increase in the number of directors or trustees shall be
filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the
purpose, or in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the
meeting.
Sec. 30. Compensation of directors. – In the absence of
any provision in the by-laws fixing their compensation,
the directors shall not receive any compensation, as such
directors, except for reasonable per diems: Provided,
however, That any such compensation (other than pier
diems) may be granted to directors by the vote of the
stockholders representing at least a majority of the
outstanding capital stock at a regular or special
stockholders’ meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten
percent (10%) of the net income before income tax of the
corporation during the preceding year.
Sec. 31. Liability of directors, trustees or officers. –
Directors or trustees who willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty
as such directors, or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other
persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes
a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the
corporation.
Directors are trustees
It is well-stated rule in corporate law that directors of
corporations are trustees and are required to act in the
utmost good faith.
Liability of corporate directors and officers for illegal
dismissal of employees
In cases of illegal dismissal, corporate directors and
officers are solidarily liable with the corporation, where
terminations of employment are done with malice or in
bad faith. (Acesite Corp. vs. NLRC, G.R. No. 152308,
January 26, 2005, 449 SCRA 360)
Sec. 32. Dealings of directors, trustees or officers with
the corporation. – A contract of the corporation with one
or more of its directors or trustees or officers is voidable,
at the option of such corporation, unless all the conditions
are present:
1. That the presence of such director or trustee in the
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting.
2. That the vote of such director or trustee was not
necessary for the approval of the contract.
3. That the contract is fair and reasonable under the
circumstances.
4. That in the case of an officer, the contract with the
officer has been previously authorized by the Board of
Directors.
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified
by the vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or of two-
thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at
such meeting: Provided, however, That the contract is fair
and reasonable under the circumstances.
Director disqualified to vote if he has personal interest
A director is disqualified to vote at a meeting of the board
if he has any personal interest in a matter before the board;
in such case, his vote cannot be counted in making up a
quorum.
Disclosure of adverse interest by director
It has been held that in dealing with their corporation the
directors must make full disclosure of all relevant facts or
the transaction is voidable. The failure of a director to
inform his fellow directors of his adverse bargaining
position and other material circumstances should be
seriously considered and inspected by the courts as
manner on the fairness and good faith of the transaction
and whether it is just and reasonable as to the corporation.
Exceptions in Signing contract without authority of
Board of Directors is void
If a private corporation intentionally or negligently
clothed its officers or agents with apparent power to
perform acts of it, the corporation will be estopped to deny
that such apparent authority is real, as to innocent third
persons dealing in good faith with such officers or agents.
(Yao Ka Sin Trading vs. Court of Appeals, G.R. No.
53820, June 15, 1992, citing Francisco vs. GSIS, 7 SCRA
577)
Corporate president presumed to have authority
As a strict rule, the corporate president has no inherent
power to act for the corporation, slowly giving way to
realization that such officer has certain limited powers in
the transaction of the usual and ordinary business of the
corporation. In the absence of agreement or by law
provision to the contrary, the president is presumed to
have the authority to act within the domain of the general
of his or her usual duties. (People’s Aircargo, and
Warehousing Co., Inc. vs. Court of Appeals, G.R. No.
117847, Oct. 7, 1998)
Sec. 33. Contracts between corporations with
interlocking directors. – Except in cases of fraud, and
provided the contract is fair and reasonable under the
circumstances, a contract between two or more
corporations having interlocking directors shall not be
invalidated on that ground alone; Provided, That if the
interest of the interlocking director in one corporation or
corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial
for purposes of interlocking directors.
Interlocking directors – Interlocking directors are persons
who serve as member of the board of directors of two or
more competing corporations or corporations engaged in
practically the same kind of business.
Effect of Corporate contracts with interlocking
directors
Interlocking directors of corporations does not make a
contract between or among the corporations void and of
no effect provided there in no fraud and reasonable under
the circumstances.
Sec. 34. Disloyalty of a director. – Where a director, by
virtue of his office, acquires for himself a business
opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such
profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding
capital stock. This provision shall be applicable
notwithstanding the fact that the director risked his own
funds in the venture.
Duties of directors
Directors owe a three-fold duty to the corporation. First,
they must be obedient; they owe a duty to keep within the
powers of the corporation as well as within those of the
board of directors. Second, they must be diligent; they
owe a duty to exercise reasonable care and prudence. The
third duty owing by directors is that of individual loyalty.
Concept of “corporate or business opportunity.”
The doctrine of “corporate opportunity” is but one phase
of the cardinal rule of undivided loyalty on the part of the
fiduciaries. If there is a presented to a corporate officer or
director a business opportunity which the corporation is
financially able to undertake, is from its nature, in the line
of the corporation’s business and is of practical advantage
to it, is one in which the corporation will be brought into
conflict with that of his corporation, the law will not
permit him to seize the opportunity for himself.
Director is a fiduciary.
He who is in such fiduciary position cannot serve himself
first and his cestuis (beneficiary) second. He cannot
manipulate the affairs of his corporation to their
disadvantage and in disregard of the standards of common
decency. He cannot by the intervention of a corporate
entity violate the ancient principle against serving two
masters.
Sec. 35. Executive Committee. – The by-laws of a
corporation may create an executive committee,
composed of not less than three members of the board, to
be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated
to it in the by-laws or on a majority vote of the board,
except with respect to: (1) approval of any action for
which shareholders’ approval is also required; (2) the
filling of vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of the board which
by it express terms is not so amenable or repealable; and
(5) a distribution of cash dividends to the shareholders.
TITLE IV – POWERS OF CORPORATIONS
Sec. 36. Corporate powers and capacity. – Every
corporation incorporated under this Code has the power
and capacity:
1. To sue and be sued in its corporation name.
2. Of succession by its corporate name for the period of
time stated in the articles of incorporation and the
certificate of incorporation.
3. To adopt and use a corporate seal.
4. To amend its articles of incorporation in accordance
with the provisions of this code.
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code.
6. 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 non-stock corporation.
7. 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 be reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution.
8. To enter into with other corporations merger or
consolidation as provided in this code.
9. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity.
10. To establish pension, retirement, and other plans for
the benefit of its directors, trustees, officers and
employees.
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in its articles of incorporation.
Powers of a corporation
A corporation has such powers, and such powers only, as
are conferred upon it by law or by its agreement. Powers
may be conferred upon a corporation:
1. Expressly.
2. Impliedly, because they are incidental to corporate
existence.
3. Impliedly, because they are necessary or proper in order
to exercise the powers expressly conferred.
General express powers
Section 36 of the Corporation Code enumerates the
general and express powers of corporations.
Other corporate powers
The Corporation Code enumerates other express powers
of corporations as follows:
1. Power to extend or shorten corporate term (Sec. 37).
2. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness (Sec. 38).
3. Power to deny pre-emptive right (Sec. 39).
4. Power to sell or dispose assets (Sec. 40).
5. Power to acquire own shares (Sec. 41).
6. Power to invest corporate funds in another corporation
or business or for any other purpose (Sec. 42).
7. Power to declare dividends (Sec. 43).
8. Power to enter into management contracts (Sec. 44).
Sec. 37. Power to extend or shorten corporate term. – A
private corporation may extend or shorten its terms as
stated in the articles of incorporation when improved by
a majority vote of the board of directors or trustees and
ratified at a meeting by the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in case of non-
stock corporations. Written notice of proposed action and
of the time and place of the meeting shall be addressed to
each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or
served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise
his appraisal right under the conditions provided in this
Code.
Extension of corporate term limited to 50 years
The corporate term may be extended for periods not
exceeding 50 years in any single instance as provided by
section 11 of the Corporation Code. No extension can be
made earlier than 5 years prior to the original or
subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as determined by the SEC.
Corporation cannot extend expired term.
A corporation cannot extend its life by amendment of its
articles of incorporation effected during the three-year
statutory period for liquidation when its original term of
existence had already expired.
Sec. 38. Power to increase or decrease capital stock;
incur, create or increase bonded indebtedness. – No
corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholders’ meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or
the incurring, creating or increasing of and bonded
indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and
of the time and place of the stockholders’ meeting at
which the proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to
each stockholder at his place of residence as shown on
the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
served personally.
A certificate in duplicate must be signed by a majority of
the directors of the corporation and countersigned by the
chairman and secretary of the stockholders’ meeting,
setting forth:
1. That the requirements of this section have been
complied with.
2. The amount of the increase or diminution of the capital
stock.
3. If an increase of the capital stock, the amount of capital
stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the
persons subscribing, the amount of capital stock or
number of shares of no-par stock subscribed by each, and
the amount paid by each on his subscription in cash or
property, or the amount of capital stock or number of
shares of no-par stock allotted to each stockholder if such
increase is for the purpose of making effective stock
dividend therefor authorized.
4. Any bonded indebtedness to be incurred, created, or
increased.
5. The actual indebtedness of the corporation on the day
of the meeting.
6. The amount of the stock represented at the meeting.
7. The vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the
office of the corporation and the other shall be filed with
the Securities and Exchange Commission and attached to
the original articles of incorporation. From and after
approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased
and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by the
sworn statement of the Treasurer of the corporation
lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five percent
(25%) of such increased capital stock has been
subscribed and that at least twenty-five percent (25%) of
the amount subscribed has been paid either in actual cash
to the corporation or that there has been transferred to
the corporation property the valuation of which is equal
to twenty-five percent (25%) of the subscription:
Provided, further, That no decrease of the capital stock
shall be approved by the Commission, if its effect shall
prejudice the rise of corporate creditors.
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for
the purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have
the authority to determine the sufficiency of the terms
thereof.
Bonds – Bonds are in form and effect similar to
promissory notes, secured by mortgage or trust deed upon
specified property of the debtor corporation.
Properties to a bond
Every bond issue usually involve three parties: (1) the
debtor – corporation; (2) the creditor – bondholder; and
(3) the trustee.
Bonds classified
Bonds are classified into: coupon or registered bonds,
mortgage bonds, debentures, convertible bonds,
participating bonds, collateral trust bands, and guaranteed
bonds.
Coupon or registered bonds
Coupon bonds are payable to bearer or to the order of a
person, and have attached to them coupon notes for each
instalment of interest as it falls due.
Mortgage bond
A mortgage bond is one secured by a mortgage on
corporate property.
Debenture bonds
Debenture bonds are not secured by specific corporate
property but rather solely on the issuer’s ability to pay the
indebtedness.
Convertible bonds
Convertible bonds are those which includes a provision
which permits the holder of the bond to convert the bond
into a specified number of shares of stock of the
corporation at his option within a period fixed therein.
Participating bonds
The owners or holders of participating bonds entitle them
to participate in earnings of the corporation above the
specified rates of interest fixed.
Collateral trust bonds
Collateral trust bonds are secured by a lien on securities
deposited with a named trustee constituting the collateral.
Guaranteed bonds
Guaranteed bonds are guaranteed or secured by another
corporation other than the issuing corporation.
Sec. 39. Power to deny pre-emptive right. – All
stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto: Provided,
That such pre-emptive right shall not extend to shares to
be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
to shares to be issued in good faith with the approval of
the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
Pre-emptive right – It means literally to establish a prior
right. A stockholder’s pre-emptive right is his right to
subscribe to new shares of stock in proportion to his
existing stockholdings, before the new shares are issued
to others.
Sec. 40. Sale or other disposition of assets. – Subject to
the provisions of existing laws on illegal combinations
and monopolies, a corporation may, by a majority vote of
its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its
goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or
other instruments for the payment of money or other
property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the vote
of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock; or in case of non-stock
corporation, by the vote of at least two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly
called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and
deposited to the addressee in the post office with the
postage prepaid, or served personally: Provided, That
any dissenting stockholder may exercise his appraisal
right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.
After such authorization or approval by the stockholders
or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties
under any contract relating thereto, without further
action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of
any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual
and regular course of business of said corporation or if
the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its
remaining business.
In non-stock corporations, where there are no members
with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by
this section.
Sec. 41. Power to acquire own shares. – A stock
corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased
or acquired:
1. To eliminate fractional shares arising out of stock
dividends.
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale.
3. To pay dissenting or withdrawing stockholders entitled
to payment for their shares under the provisions of this
Code.
Sec. 42. Power to invest corporate funds in another
corporation or business or for any other purpose. –
Subject to the provisions of this code, a private
corporation may invest its funds in any other corporation
or business or for any purpose other than the primary
purpose for which it was organized when approved by a
majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or by at least two-thirds
(2/3) of the members in the case of non-stock
corporations, at a stockholders’ or members’ meeting
duly called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally; Provided, That any
dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That were 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.
Sec. 43. Power to declare dividends. – The board of
directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall
be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting
duly called for the purposes.
Stock corporation are prohibited from retaining surplus
profits in excess of one hundred percent (100%) of their
paid-in capital stock, except: (1) when justified approved
by the Board of Directors; or (2) when the corporation is
prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be
clearly shown that such retention is necessary under
special circumstance obtaining in the corporation, such
as when there is a need for special reserve for probable
contingencies.
Concept of dividends
A dividend is a corporate profit set aside, declared and
ordered by the directors to be paid to the stockholders on
demand or at a fixed time.
Dividends distinguished from profits
“Dividends” means the profits or that portion of the
profits of the corporation which its board of directors, by
proper resolution, sets apart for rotable distribution
among the stockholders. It is distinguished from “profits”
for the profits in the hands of a corporation do not become
dividends until they have been set apart, or at least
declared, as dividends and transferred to the separate
property of the individual stockholders.
Surplus profits – Surplus or net profits of a corporation is
the difference between the total present value of its assets,
after deducting losses and liabilities, and the amount of its
capital stock. (11 Fletcher, Sec. 5335)
Basis of dividend declaration
The board of directors of a stock corporation may declare
dividends on the basis of outstanding stock held by the
stockholders. The basis therefore is the stockholder’s total
subscription and not on the amount paid by him on the
subscription. This is for the reason that his entire
subscription represents his holding in the corporation for
which he pays interests on any unpaid portion. (SEC
Opinion, Dec. 17, 1973)
Classes of dividends
Dividends which a corporation may declare and distribute
to its stockholders may be classified into: cash dividend,
stock dividend, property dividend, scrip dividend, and
liquidating dividend.
Cash dividend
Cash dividend is one payable in money.
Stock dividend
Stock dividend is a dividend payable in stock instead of
cash or property.
Property dividend
The directors in their discretion may authorize
distributions in bonds or in property, such as warehouse
receipts for whiskey or shares of stock of a subsidiary
corporation.
Scrip dividend
Scrip dividend is a writing or a certificate issued to a
stockholder entitling him to the payment of money or the
like at some future time inasmuch as the company, at the
time the scrip dividends are declared, has profits not in
cash.
Liquidating dividend
Liquidating dividend involves the distribution of assets by
a corporation to its stockholders upon dissolution.
Sec. 44. Power to enter into a management contract. –
No corporation shall conclude a management contract
with another corporation unless such contract shall have
been approved by the Board of Directors and by
stockholders owning at least the majority of the
outstanding capital stock, or by at least majority of the
members in the case of a non-stock corporation, of both
the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (a) where a
stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own and control more than one-third (1/3)
of the total outstanding capital stock entitled to vote of the
managing corporation; or (b) where the 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 of 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 case of a non-stock corporation. No
management contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding paragraph shall
apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business
of the other 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.
Concept of management contract
A management contract is an agreement under which the
board of directors of a corporation delegates the powers
of management to another person or corporation for a
period of time provided for in the agreement.
Effects of Management contracts
Contracts by which the board of directors delegates the
power of supervision and management to another person
or corporation for a specified period are invalid if they
involve a surrender by the board of its power and duty of
supervision and control.
Management prerogatives
An owner of a business enterprise is given considerable
margin in managing his business because it is deemed
important to society as a whole that he should succeed.
Sec. 45. Ultra vires acts of corporations. – No
corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or
by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so
conferred.
Intra vires – The acts of a corporation within its express
or implied powers.
Ultra vires – The acts of a corporation outside its express
or implied powers.
It denotes some act or transaction on the part of a
corporation which, although not unlawful or contrary to
public policy of executed by an individual, is yet beyond
the legitimate powers of the corporation as they are
defined by the statute under which it is formed, or which
are applicable to it, or by its charter or incorporation
papers.
Admittedly, if the contract is executed on both sides
neither party can maintain an action to set aside the
transaction or to recover what has been parted with. The
courts will not interfere in such a case to deprive either
the corporation or the other part of money or property
acquired under the contract. On the other hand, the great
weight of authority is to consider executor contracts as
unenforceable.
Ultra vires contracts accepted doctrines
1. If the contract is fully executed on both sides, the
contract is effective and the courts will not interfere to
deprive either part of what has been acquired under it.
2. If the contract is executor on both sides, as a rule either
party can maintain an action for its non-performance.
3. Where the contract is executor on side only, and has
been fully performed on the other, the courts differ as
whether an action will lie on the contract against the party
who has received benefits of performance under it.
Majority of the courts hold that the party who has received
benefits from the performance is stopped” to set up that
the contract us ultra vires to defeat an action on the
contract. There is, however, a rule which is widely
recognized by the courts that ultra vires. “Should not be
allowed to prevail, when involved for or against the
corporation, where it will defeat the ends of justice or
work a legal wrong.
Acts which are ultra vires are voidable but may be
ratified. In order that such ultra vires may be ratified it
must be shown that
1. The act was consummated or executed.
2. No creditors are prejudiced, or they have given their
consent thereto.
3. The right of the public or the state are not involved.
4. All of the stockholders consent thereto.
A corporation, like an individual, may ratify and
thereby render binding upon it the originally
authorized 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 purported
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 2/3 of the
voting power.