Chapter VI – Corporate Powers
Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations 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 stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) 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 a 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. — — Primary rule: all corporate powers shall be exercised and all corporate businesses shall be conducted by the board of directors of the corporation Exception: specific instances where the Code requires the consent and ratification of the SHs, particularly those where the underlying contractual relationship between the parties: the corporation, the SHs/members, and the State, is being amended or altered How is consent expressed by the parties? o Corporation= through the Board o State= through act of the regulatory body o SHs= through majority or 2/3 vote where applicable But dissenting SHs in certain instances are given the option to withdraw from the relationship through the exercise of his appraisal right
General Powers of Corporations a. Express Powers General Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate 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 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 reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations 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
Section 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. (n) 1. A corporation has only three (3) types of power: a. Express (Sec 36) b. Implied or Necessary c. Incidental
purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (13a) — — — — — Sources of express powers are provided for by law and those enumerated in its charter Other express powers are in its AOI These are exercised by the Board In the absence of authority from the Board, no person, not even the officers, can validly bind the corporation in the exercise of express powers Code laws down two (2) general restrictions on the power of any corporation to purchase and hold properties o (1) property must be reasonable and necessarily required by the transaction of its lawful business depends on the nature of the business o (2) must be subject to limitations prescribed by law and the Constitution cannot acquire available public lands except by lease of not more than 1000 hectares (consti Art XII Sec 3) exploration, development, exploitation, etc, of natural resources= 60% Filipino-owned, and only in JV with the state General powers in Sec 36 are to be exercised by the Board of Directors in accordance with Sec 23 (except where otherwise provided)
books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) — Sec 37: extension or shortening of term of existence o Vote required: majority of board o Ratification: vote of at least 2/3 of OCS or members o Amendment to AOI: YES o Appraisal rights? YES (37 & 81)
2. To increase or decrease capital stock (38) o o o o o Vote required: majority of board Ratification: vote of at least 2/3 of OCS or members Prior approval of SEC required to take effect Amendment to AOI: YES Appraisal rights? NO Dissenting SH can simply sell his shares A grant of appraisal rights would defeat the purpose —to raise funds
3. To incur, create, or increase bonded indebtedness (38) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
Specific Powers 1. To extend or shorten the corporate term (37) Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the
(1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) — Sec 38: incur, create, or increase bonded indebtedness o Bonded indebtedness: covers indebtedness of the corporation which are secured by mortgage on real or personal property (does not include debentures) o Vote required: majority vote of the board o Ratification: vote of at least 2/3 OCS or members o Prior approval of SEC required o Appraisal rights? NONE
4. To deny preemptive right (39) Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. 5. To sell or otherwise dispose of substantially all its assets (40) Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. — Sec 40: power to sell, dispose, lease, or encumber all or substantially all assets o Vote required: majority vote of the board o Ratification: vote of at least 2/3 OCS or members o Nature of transactions covered: onerous contracts o Transactions no covered by SH vote: (does not involve the corporate purpose, but the corporate business) Necessary in the usual and regular course of business, or…
… proceeds of disposition is appropriate for the conduct of remaining business “substantially all” property/assets: if disposition renders corporation incapable of doing business if disposition renders corporation incapable of accomplishing its purpose in the AOI appraisal right? YES
6. To acquire its own shares (41) Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a) — Sec 41: power to purchase own shares o Corporation must first have unrestricted retained earnings o But redeemable shares may be acquired even without unrestricted retained earnings (Sec 8)
7. To invest in another corporation or business (42) Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) — Sec 42: power to invest in another corporation o Vote required: majority of the board o Ratification: vote of at least 2/3 OCS or members EXCEPT: where the investment is reasonably necessary to accomplish its PRIMARY PURPOSE If secondary purpose, ratificatory vote is required o Effect of ratification: corporation can now legally invest its funds OUTSIDE of its primary purpose, but LIMITED to its secondary purpose o Coverage of “funds”—any corporate property to be used to further its business o No ratificatory vote: ULTRA VIRES
Sec 43: power to declare dividends out of restricted retained earnings o Payable in cash, property, or stock o Cash dividends due on unpaid stock shall be applied to the unpaid balance on the subscription plus costs and expenses o Primary of SHs to DEMAND dividends o Vote required: majority of the board o Ratification: vote of at least 2/3 of OCS or members o Cannot retain surplus profits in excess of 100% of paid up capital stock o Exception: When justified by definite corporate expansion projects approved by the board When prohibited under any loan agreement When it is clear that the retention is necessary under special circumstances o Surplus profits in excess of 100%= distribute as dividends
9. To enter into management contracts (44) Section 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may
8. To declare dividends (43) Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)
be entered into for such periods as may be provided by the pertinent laws or regulations. (n) — Sec 44: power to enter into a management contract o Vote required: majority of the board o Ratification: vote of at least 2/3 of OCS or members, but… o Special rule: vote of SH of MANAGED corporation owning at least 2/3 of TOTAL outstanding stock or members entitled to vote, iff: SH(s) representing the same interest in both managed and managing corporations own or control more than 1/3 of TOTAL outstanding capital stock, or… … majority of Board of directors of the MANAGING corporation also constitute a MAJORITY of the board in the MANAGED o rationale for the special rule: entering into a management contract is a deviation from the GR that the board manages the corporation and that the board of the managing company should devote its affairs to its own corporation o Not covered by Sec 44: if managing other corporations is the primary purpose, ratificatory vote is not required! If managing a partnership or individual not a corporation, not covered!
b. Implied or Necessary Powers GR: all acts other than those specified in Sec 36-44 and in other special provisions would be ultra vires Exception: those which are: — necessary or incidental to the exercise of the powers so conferred (45), or — essential or necessary to carry out its purpose or purposes as stated in the AOI. (38) Presumption that a corporation can act within its powers and when a contract is not on its face necessarily beyond its authority, it will, in the absence of proof to the contrary, presumed to be valid. — Sec 36(11): corporations have the power and capacity to exercise such other powers as may be essential or necessary to carry out its purpose(s) as provided for in the AOI o Restated: the management of a corporation has discretionary authority, in the absence of explicit restrictions, to enter into contracts or transactions deemed reasonably necessary or incidental to its business purposes.
10. To buy the shares of another corporation (36) provided: a. Reasonably necessary for its lawful business b. The other corporation must be engaged in an allied business or not alien to the purposes of the purchasing corporation (42) — This means a corporation can enter into a joint venture with another person, partnership or another corporation — But a corporation cannot enter into a partnership contract 11. Power to enter into a partnership — — GR: corporation cannot enter into partnerships with other corporations or with individuals Exception: expressly allowed by statute or charter o Joint ventures o Limited partnerships (US Law) — —
Sec 2: powers, attributes, and properties expressly authorized by law or incident to its existence Incidental powers: those that attach to a corporation at the moment of its creation without regard to its express powers or particular primary purpose, and is inherent in it as a legal entity Examples: i. To sue and be sued ii. To grant and receive in the corporate name iii. To purchase hold and convey real and personal property for its purposes iv. To have a corporate seal v. To adopt and amend by-laws for its government vi. To disenfranchise or remove members Powers that go into the very nature and extent of a corporation’s juridical entity cannot be presumed to be incidental or inherent powers
The Ultra Vires Doctrine Section 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. (n) — Sec 45 embodies the ultra vires doctrine — Based on two (2) principles: Corporation is a creature of law and has only such powers and privileges as are granted by the State The doctrine upholds the duty of trust and obedience owed by the corporation’s directors and officers to the SHs
Defense of ultra vires rests on the violation of trust or duty towards SHs, and should not be entertained where its allowance will do greater wrong to innocent 3rd parties
Three (3) types of ultra vires acts: (1) acts beyond the powers of the corporation as stipulated in the law or AOI. The TEST: logical relation of the act to the corporate purpose: a. W/N the act is in direct and immediate furtherance of the corporation’s business b. W/N the act is fairly incident to the express powers and reasonably necessary for its exercise (2) acts or contracts entered in behalf of the corporation by persons without corporate authority a. GR: only acts of corporate officers within the scope of their authority are binding on the corporation; acts beyond the authority cannot bind the corporation b. Exception: ratification by the Board or estoppel c. Primary rule: In the absence of an authority from the board, no person, not even the officers, can validly bind the corporation d. Exception: i. Doctrine of apparent authority: in dealing with corporations, the public at large is bound to rely upon outward appearances, and relying on such, if it be found that the directors permitted the agent to hold himself out as having authority to bind or acquiesced in the contract and accepted the benefits therefrom, the corporation will be bound. (Ramirez v Orientalist) 1. Public is not expected to know what goes on inside the boardroom, or cannot be required to look beyond the officers acting for a
corporation If the corporation desires to set up the defense of lack of authority, it must plead and prove it… 3. …but once it discharges that duty, then the burden of proof shifts to the agent to proof that by previous acts of the corporation he had been clothed with apparent authority (3) acts or contracts which are per se illegal a. cannot be given effect and are void i. but in Harden, the Court upheld a patently void contract as between the contracting parties; a narrow exception is made in that since the violation of the particular law pertains to public policy concerns and may only be proceeded through a quo warranto, not by any of the parties ii. thus if no civil wrong was committed, the courts will leave the parties as they were (Harden) b. ultra vires acts which are NOT per se illegal are merely voidable can be ratified by the SHs (Pirovano) i. it cures the infirmity and makes it perfectly valid and enforceable, provided that it prejudices no creditors and if it has been partially executed and not merely executory 1. ratification may be by express act of the SH (if the act is by the Board) or the Board (if the act is by the officers)… 2. …or impliedly through acceptance of benefits… 3. …or through estoppel on the part of the Board or the officers 2. Corporations are now more of a product of the agreement of the incorporating parties rather than a mere “creature of the State:” — — — — Sec 10 allows 5 or more persons to form a private corporation for any lawful purpose/s Sec 36 par 11 allows every corporation the power to exercise such other powers as may be essential or necessary to carry out the purpose/s in the AOI The corporation’s powers depends on its purpose in the AOI Since parties are entirely free to insert any number of purposes in its AOI, it follows that the extent of the corporation’s powers depends largely on their agreement, and not merely on a direct grant from the State, unless of course the purposes are illegal. Instances where an act can or cannot be reasonably implied from
the purposes due to poor draftsmanship or lack of foresight of the drafters, the purpose clause may be reasonably stretched to accommodate the new and unexpected situations, otherwise, a proper amendment of the AOI would be necessary. Legal consequences of acts clearly beyond the powers of the corporation or ultra vires? — On the corporation: o if the act is illegal, involuntary dissolution under a quo warranto proceeding by the SolGen o revocation or suspension of the certificate of registration by the SEC On the parties to the ultra vires contract: o Parties are “left as they are” and no rescission would lie. o Where there has been partial performance by one party, and the other has not, the latter, having benefited from the performance, is estopped from claiming ultra vires On the rights of stockholders: o A stockholder can file an individual or derivative suit to enjoin a threatened ultra vires act or contract or a derivative suit for damages if the contract has been performed o Liability would depend on whether the contracting parties acted in GF and with reasonable diligence; an honest mistake would not give rise to liability If action is based on tort, the stockholders cannot set up the defense of ultra vires against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purpose clause.
H: It should be noted that it was Acoje itself that requested for the setting up of a post office for the convenience of its employees, which the SC held to cover a subject which is “a reasonable and proper adjunct to the conduct of the business of Acoje Mining.” An ultra vires act is one committed outside the object for which a corporation is created, but there are certain corporate acts that may be performed outside the scope of the powers expressly conferred if they are necessary to promote the interest and welfare of the corporation.” Even in the case of ultra vires acts which are not illegal per se, a corporation cannot be heard to complain that it is not liable for the acts of its board, because of estoppel by representation. The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be invalidated. It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. In this case, it is fair that the resolution be upheld at least on the ground of estoppel. The defense of ultra vires rests on violation of trust or duty towards the stockholders, and should not be entertained where its allowance will do greater wrong to innocent parties dealing with the corporation. The acceptance of benefits arising from the performance of the other party gives rise to an estoppel precluding the repudiation of the contract. Napocor v Vera. Sea Lion is a port and arrastre operator with a contract for stevedoring services with NPC which had already expired. Its PPA permit for cargo handling services at the NPC Calaca pier had expired as well. Napocor did not renew Sea Lion’s contract for Stevedoring Services for Coal-Handling Operations at Calaca plant, and took over its stevedoring services pursuant to a provision in its charter, “[t[o exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose.” Sea Lion sues, alleging that NPC had acted in bad faith and with grave abuse of discretion in not renewing its Contract for Stevedoring Services for Coal-Handling Operations at the Calaca plant, and in taking over its stevedoring services. Judge Vera, acting on Sea Lion’s suit, issued a writ of preliminary injunction enjoining NPC from further undertaking stevedoring and arrastre services in its pier located at the Batangas Coal-Fired Thermal Power Plant at Calaca, Batangas and directing it either to enter into a contract for stevedoring and arrastre services or to conduct a public bidding therefor. Sea Lion was also allowed to continue stevedoring and arrastre services at the pier. H: In determining whether or not the act of NPC falls within the purview of the
RP v Acoje Mining. F: Acoje Mining requested the opening of a post office at its mining camp in Zambales to service employees living in the camp. The Director of Posts agreed to set up the office, provided that in the meantime that funds are not available, the company would provide for all essential equipment and assign a responsible employee to perform the duties of a postmaster. He also added that the company shall assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of the dishonesty or negligence of the employee assigned. A Resolution by the Acoje Board of Directors was passed. The postmaster assigned, Hilario Sanchez, went on leave and never returned. It was soon discovered that a shortage was incurred iao P13,867.24, apparently embezzled by Sanchez. Bureau of Posts sues for the shortage. Acoje denied its liability contending that the resolution issued by the board was ultra vires, and its liability if any would only be that of a guarantor.
charter which creates it, the Court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers. A pier located at Calaca, Batangas, which is owned by NPC, receives the various shipments of coal which is used exclusively to fuel the Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric power. The stevedoring services which involve the unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are incidental and indispensable to the operation of the plant. The Court holds that NPC is empowered under its Charter to undertake such services, it being reasonably necessary to the operation and maintenance of the power plant. This Court is, guided by the case of Republic of the Philippines v. Acoje Mining Company, Inc., where the Court affirmed the rule that a corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. Whether NPC will enter into a contract for stevedoring and arrastre services to handle its coal shipments to its pier, or undertake the services itself, is entirely and exclusively within its corporate discretion. It does not involve a duty the performance of which is enjoined by law. Thus, the courts cannot direct the NPC in the exercise of this prerogative. Madrigal & Co v Zamora. Madrigal & Co was engaged in the management of Rizal Cement Co., Inc. and is also its sister company, both being owned by the same or practically the same stockholders. The Madrigal Central Office Employees Union sought for the renewal of its collective bargaining agreement and proposed a wage increase of P200.00 a month, an allowance of P100.00 a month, and other economic benefits. Madrigal requested for a deferment in the negotiations. Thereafter, Madrigal on two occasions reduced its capital stock from 765,000 shares to 267,366 shares and from 267,366 shares to 110,085 shares by virtue of two alleged resolutions of its stockholders, which was effected through the distribution of the marketable securities owned by the petitioner to its stockholders in exchange for their shares in an equivalent amount in the corporation. The Union filed a case for ULP with the NLRC. Madrigal answered citing operational losses. Madrigal then informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it derives income as the General Manager or Agent" had "ceased operating temporarily. In addition, because of the desire of the stockholders to phase out the operations of the Madrigal & Co., Inc.
due to lack of business incentives and prospects, and in order to prevent further losses," it had to reduce its capital stock on two occasions. The labor arbiter, having found that the petitioner "had been making substantial profits in its operation" since 1972 through 1975, granted the wage increase, and was affirmed by NLRC. Meanwhile Madrigal tried to terminate the services of Union members citing retrenchment but its application was declared illegal by DOLE. Upon appeal to OP, Ronaldo Zamora affirmed the decision of DOLE. H: What clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increases, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. In the face of the petitioner company's piling profits, the unionists had the right to demand for such salary adjustments. That the petitioner made quite handsome profits is clear from the records. We agree with the National Labor Relations Commission that "[t]he dividends received by the company are corporate earnings arising from corporate investment." 42 Indeed, as found by the Commission, the petitioner had entered such earnings in its financial statements as profits, which it would not have done if they were not in fact profits. 43 Moreover, it is incorrect to say that such profits — in the form of dividends — are beyond the reach of the petitioner's creditors since the petitioner had received them as compensation for its management services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends paid to it were its own money, which may then be available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its employees. Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks, especially of union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice.
Gov’t of Philippines v El Hogar. This is a quo warranto proceeding, alleging 17 causes of action, instituted originally in this court by the Government of the Philippine Islands on the relation of the Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution of said corporation. The respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success. The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid in. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit. From the time of its first organization the number of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence prior to the date last above-mentioned the association paid to withdrawing stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of dividends among its stockholders the sum of P7,621,565.81. I: W/N El Hogar is illegally holding title to real property in excess of 5 years, in violation of the law that while corporations may loan funds upon real estate security, they shall dispose of the same within 5 years after receiving title H: the corporation has not been shown to have offended against the law in a manner which would entail forfeiture of its charter. The evident purpose behind the law restricting the rights of corporations with respect to the tenure of land was to prevent the revival of the entail or other similar institution by which land could be fettered and its alienation hampered. In the case, El Hogar had in GF disposed of the property at the expiration of the period fixed by law. Under the circumstances the destruction of the corporation would bring irreparable loss upon thousands of innocent shareholders of the corporation without any corresponding benefit to the public. I: W/N el Hogar is illegally owning and holding a business lot in excess of the reasonable requirements and in contravention of the Corpo law that every corporation has the power to purchase hold lease real property as reasonable and necessary required for the transaction of the lawful business H: The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a
business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices — a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner. I: W/N el Hogar has engaged in activities foreign to the purposes for which the corporation was created and not reasonably necessary to its legitimate ends, specifically: (1) the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public; (2) the administration and management of properties belonging to delinquent shareholders of the association; (3) the management of some parcels of improved real estate situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so H: (1) The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful. (2) The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said section, the association may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the association the right to take over the property which constitutes the security for the delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt. (3) The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by law. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to which this criticism is directed relates of course solely to the management and administration of properties which are not mortgaged to the association. The circumstance that the owner of the property may have been required to subscribe to one or more shares of the association with a
view to qualifying him to receive this service is of no significance. It is a general rule of law that corporations possess only such express powers. The management and administration of the property of the shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort. I: W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation for his services rendered by him during the early stages of the organization of the corporation, is unconscionable, excessive, and thus necessitates dissolution H: No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organizing and maintaining the corporation. It is true that contracts with promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time this contract was made, that the compensation therein provided was excessive? If the amount of the compensation now appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent years. If the Melian contract had been clearly ultra vires — which is not charged and is certainly untrue — its continued performance might conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is mere matter for an action because Melian is not a party. It is rudimentary in law that an action to annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such an action is either the corporation itself, or some shareholder who has an interest to protect. I: W/N el Hogar had abused its franchise in issuing special shares, which is alleged to be illegal and inconsistent with the plan and purposes of building and loan associations,and that these are held by well-to-do people purely for investment purposes and not by wage-earners for savings H: The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned in the Corporation Law as one of the forms of security which may be issued by the association. Upon examination of the nature of the special shares in the light of American usage, it will be found that said shares are precisely the same kind of shares that, in some American jurisdictions, are generally known as advance payment shares; in if close attention be paid to the language used in the last sentence of section 178 of the Corporation Law, it will be found that special shares where evidently created for the purpose of meeting the condition cause by the prepayment of dues that is there permitted. The language of this provision is as follow "payment of dues or interest may be made in
advance, but the corporation shall not allow interest on such advance payment at a greater rate than six per centum per annum nor for a longer period than one year." In one sort of special shares the dues are prepaid to the extent of P160 per share; in the other sort prepayment is made in the amount of P10 per share, and the subscribers assume the obligation to pay P10 monthly until P160 shall have been paid. It will escape notice that the provision quoted say that interest shall not be allowed on the advance payments at a greater rate than six per centum per annum nor for a longer period than one year. The word "interest " as there used must be taken in its true sense of compensation for the used of money loaned, and it not must not be confused with the dues upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no interest is ever paid by the association in any amount for the advance payments made on these shares; and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance payments made by him; and no other incentive is necessary to induce inventors to purchase the stock. It will be observed that the final 20 per centum of the par value of each special share is not paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the shareholder's participation in the annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission of the special shares does not involve any violation of the principle that the shares must be sold at par. From what has been said it will be seen that there is express authority, even in the very letter of the law, for the emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The complaint consequently fails also as regards the stated in the ninth cause of action. I: W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at the discretion of its Board, the value of real properties acquired by it at its sales, thereby frustrating the right of SHs to participate annually and equally in the earnings. H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-
General upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations. Certainly this court cannot undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well founded. I: W/n el Hogar’s charter should be revoked because it illegally maintains excessive reserve funds and because it pursues a policy, allegedly unlawful, of paying a straight annual dividend of 10% regardless of losses suffered and profits made by the corporation and in violation of the requirement s of the corpo code. H: It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the case of building and loan associations, and at any rate the keeping of reserves is inconsistent with section 188 of the Corporation Law. Upon careful consideration of the questions involved we find no reason to doubt the right of the respondent to maintain these reserves. It is true that the corporation law does not expressly grant this power, but we think it is to be implied. It is a fact of common observation that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though among the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies the surest foundations of public confidence. Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association of a fixed dividend which is contrary to the intention of the statute. The government insists upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal. From the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of directors: and this means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met. Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the
control of administrative matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit. I: W/n el Hogar illegally departed from its charter because it has made loans which were intended to be used by the borrowers for other purposes than the building of homes. There is no statute here expressly declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the building of homes is mentioned in section 171 of the Corporation Law as only one among several ends which building and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors of the association from time to time to fix the premium to be charged. In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in which the idea is developed that the primary design of building and loan associations should be to help poor people to procure homes of their own. This beneficent end is undoubtedly served by these associations, and it is not to be denied that they have been generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community. I: W/n the el Hogar charter may be revoked because various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans, and that some of these juridical entities became shareholders merely for the purpose of qualifying themselves to take loans from the association. H: the Corporation Law declares that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every part of the Corporation Law. For instance, it would seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section 6 it is said that five or more "persons", although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as the common sense of the situation, suggests that natural persons are meant. When it is said, however, in section 173, that "any person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing
corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were without power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were competent to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of action, or in the facts developed in connection therewith, that would justify us in granting the relief. I: W/n el Hogar, in disposing of real estate purchased in the collection of defaulted loans, on credit at first and then sold and mortgaged to el Hogar to secure payment of the purchase price, had incurred several outstanding loans, and that that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are they made members or shareholders of the defendant. H: This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can of course be made upon terms and conditions approved by the parties; and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent make it a loan in law. The contention of the Government under this head is untenable.
proceeds of the insurance policies taken on the life of the late president. However, the policy had lapse because the company was not able to pay the premiums regularly. The BoardRes authorizes the allocation of P400K convertible into 4000 shares of stock ifo of the Pirovano children, as well as a waiver of the preemptive rights of the former owners, the Dela Rama siblings. This was submitted to the stockholders which duly approved the same. It appears, however, that Don Esteban did not realize that the dole out would actually be giving to the Pirovano children more than what they intended to give. This was because the value then of the shares was 3.6 times the par value thereof, thus the donation iao P400K would amount to a total of P1.44M. Thus the voting strength of the Pirovano children would be twice as much as that of the dela Rama sisters. The old Resolution having been nullified, the Board adopted a new BR changing the form of the donation from 4000 shares into a renunciation of the Company’s right and title to the life insurance policies of Pirovano. It also provides that the proceeds of the policy be retained by the Company as a loan drawing interest payable to the Pirovano children whenever the company is in a position to meet this financial obligation and after the Company settles its bonded indebtedness ifo NDC. This was ratified by the Dela Rama stockholders. Mrs Pirovano accepted the donation, and buys property in the US. Upon inquiry with the Sec, it was found that the donation was illegal and thus void on the grounds that the corporation acted ultra vires and that it could not dispose of its assets through donation. The stockholders then voted to revoke the donation. Mrs Pirovano sued to demand the credit owed to them by the Company. I: w/n the donation by the corporation of the proceeds of the insurance is an ultra vires act H: Under the AOI of Dela Rama Steamship it is provided under (g) that the company may invest and deal with moneys of the company not immediately required, in such a manner as from time to time may be determined, and under (i)… to lend money or to aid in any other manner any person association, or corporation of which any obligation or in which any interest is held by the corporation or in the affairs of prosperity of which the corporation has a lawful interest. The corporation was thus given broad and almost unlimited powers to carry out the purposes for which it was organized. The word ”deal” is broad enough to include any manner of disposition, and thus the donation comes within the scope of
Pirovano v Dela Rama. Under the leadership and management of Enrico Pirovano, president of Del Rama Steamship, the company grew and progressed until it became a multimillion corporation, the assets of which grew and increased from P240K to around P15M. He was insured by the company for P1M. Esteban dela Rama, majority stockholder, distributed his shares among his 5 daughters, including the NDC, to which Dela Rama had an outstanding bonded indebtedness iao P7.5M, through a debtequity swap arrangement which also gave the NDC representation in the Board. Pirovano was killed by the Japanese during the war, and a Boardres was adopted granting to the Pirovano children the
this broad power. The company was in fact very much solvent as it was able to declare and issue dividends to its stockholders, and shows that the excess funds which were not needed by the company which was donated to the children was justified under the AOI. Under the second broad power, the corporation knew well its scope such that noone lifted a finger to dispute its validity. The company gave the donation not only because it was indebted to him but also because it was fit and proper to make provisions for the children and out of a sense of gratitude. Even assuming that the donation was ultra vires, still it cannot be invalidated or declared legally ineffective for that reason alone, it appearing that the donation represents not only the act of the Board but also that of the stockholders themselves since they expressly ratified the resolution. By this ratification, the infirmity of the corporate act, if any, has been obliterated thereby making the act perfectly valid and enforceable, especially so if the donation is not merely executory but consummated. The defense of ultra vires cannot be set up against completed or consummated transactions. An ultra vires act may either be an act performed merely outside the scope of the powers granted to the corporation by its AOI or one which is contrary to law or violative of any principle which would void any contract. A distinction has to be made with respect to corporate acts which are illegal and those merely ultra vires. The former are contrary to law, morals, public order or policy, while the latter are not void ab initio, but merely go beyond the scope of the powers in the AOI, and which renders the act merely voidable and thus ratifiable by the stockholders. Harden v Benguet. Balatoc Mining, engaged in the mining of gold, sorely needed the infusion of new capital to resuscitate its stalled operations. The officers approached the Benguet Mining Co, an entity also engaged in gold mining. A contract was executed, which states that Benguet agrees to construct a milling plant for the Balatoc mine and erect a power plant, in exchange for Balatoc Mining shares valued at P600K and the excess in cash to compensate for the cost of the contract. By the time of the complaint, the value of the stock of Balatoc had soared for a nominal valuation to more than P11 per share. It was alleged by Harden of Balatoc that the Benguet Mining Co held shares of stock in another mining corporation, the Balatoc Mining Company, in violation of a prohibition against mining corporations from owning stock of another mining corporation in the old Corpo law. The shareholders of Balatoc sued Benguet Mining to annul stock certificates of
Balatoc issued ifo Benguet and to recover money earned from the transaction. TC dismissed complaint. H: Although the contract between the two mining companies was illegal for contravening the old Corpo Law, the Legislature, in adopting such a provision had the intention that public policy should be controlling in the granting of mining rights. The violation in this case was of such a nature that it can be proceeded upon only by way of a criminal prosecution, or by action quo warranto, which can be maintained only by the State. Insofar as the parties are concerned, no civil wrong had been committed between them, and if public wrong had been committed, then the directors of Balatoc Mining and Harden were the active inducers of that wrong. The contract has in fact been performed on both sides, and there is no possibility of undoing what had been done. Thus even where corporate contracts are illegal per se, when only public or government policy or interests are at stake and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original contractual expectations.
Corporate powers: WYSIWYG AOI related to relevant code provisions Powers are built-in in the AOI, limited by primary purpose 45: all encompassing powers Necessary and incidental rule: necessary is different from incidental Common denominator contained in AOI Code sets parameters/requirements (36-44) Statute sets parameters (i.e. banks, Gen Banking Act) Specific powers: dealing with SHs and 3rd parties Cannot divorce exercise of corporate powers from control and management Extent of corporate powers would limit control and management Unlimited discretion cannot be exercised for furtherance of secondary purposes in AOI