Topic No. 6: Revised Corporation Code of - v.

Any other commercial

the Philippines (RA 11232)
II. CORPORATE POWERS
A. General Powers; Theory of General
Capacity [Sec. 35]
General Powers
Every corporation has the power and
capacity:
a) To sue and be sued in its corporate
name;
b) To have perpetual existence;
- Unless the certificate
incorporation provides otherwise
c) To adopt and use a corporate seal;
d) To amend its articles of incorporation in
accordance with the provisions of this
Code;
e) To adopt bylaws, and to amend or
repeal the same in accordance with this
Code;
- Must not contrary to law, morals
or public policy
f) In case of stock corporations: To
issue or sell stocks to subscribers and to
sell treasury stocks in accordance with
the provisions of this Code; and In case
of non-stock corporations: To admit
members to the corporation;
g) To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such
real and personal property, including
securities and bonds of
corporations;
- As the transaction of the lawful
business of the corporation may
reasonably and necessarily
require
- Subject to the limitations
prescribed by law and the
Constitution
h) To enter, with natural and juridical
persons, into a:
- i. Partnership, (Note: New in the
RCC)
- ii. Joint venture, (Note: New in
the RCC)
- iii. Merger,
- iv. Consolidation, or
agreement
i) To make reasonable donations,
including those for the public welfare or
for hospital, charitable, cultural,
scientific, civic, or similar purposes:
- Provided, That no foreign
corporation shall give donations
in aid of any political party or
candidate or for purposes of
partisan political activity;
- Note: Under OLD Corporation
Code, both domestic and foreign
corporations were prohibited from
of giving donations in aid of any
political party or candidate or for
purposes of partisan political
activity.
j) To establish pension, retirement, and
other plans for the benefit of its
directors, trustees, officers, and
employees; and
k) To exercise such other powers as may
be essential or necessary to carry out its
purpose or purposes as stated in the
articles of incorporation. [Sec. 35]
A corporation has:
a) Express Powers – such powers as are
expressly granted by law and its articles
of incorporation;
b) Implied Powers – those reasonably
necessary to accomplish its purposes,
as stated in its articles of incorporation;
and Note: Such implied powers are
other deemed to exist because of the
following provisions –
- “Except such as are necessary or
incidental to the exercise of
thepowers so conferred” [Sec. 44]
- “Such powers as are essential or
necessary to carry out its purpose
or purposes as stated in the
Articles of Incorporation” – catch-
all phrase. [Sec. 35(k)]
c) Incidental Powers – those which may
be incident to its existence as a juridical
entity [Pilipinas Loan v. SEC, 356 SCRA
193 (2001)]
- Examples of incidental powers
may include the right to
succession, the right to have a
 corporate name, right to make
bylaws, and the right to hold
properties for the purposes that
are allowed by its charter.
The Theory of General Capacity states that a
corporation is said to hold such powers as are
not prohibited or withheld from it by general
law.
B. Specific Powers; Theory of Specific
Capacity [Secs. 36-43, 15]
The Theory of Specific Capacity states that
the corporation cannot exercise powers except
those expressly/impliedly given. Under the
Theory of Specific Capacity, the specific
powers of a corporation are as follows:
- Power to extend or shorten corporate
term [Sec. 36]
- Power to increase or decrease capital
stock, or incur, create, increase bonded
indebtedness [Sec. 37]
- Power to deny pre-emptive rights [Sec.
38]
- Power to sell or dispose corporate
assets [Sec. 39]
- Power to acquire own shares [Sec. 40]
- Power to invest corporate funds in
another corporation or business, or for
any other purpose [Sec. 41]
- Power to declare dividends [Sec. 42]
Power to enter into management
contract [Sec. 43]
- Power to amend AOI [Sec. 15]
C. Power to Extend or Shorten the
Corporate Term [Sec. 36]
A private corporation may extend or shorten its
term as stated in the articles of incorporation.
[Sec. 36]
Perpetual existence under the RCC applies to
existing corporations. AOIs shall be deemed
amended to reflect its perpetual term, unless
the corporation elects to retain its limited term
[Herbosa, 2019].
When Exercised
Period to extend the corporate term has been
reduced by the RCC to three years before
expiration. When the term expires, it is not ipso
facto dissolved but may apply for a revival of its
corporate existence. [Divina, 2020]
Requirements
a) Approval by majority vote of the boardof
directors or trustees, and
b) Ratification at a meeting by the
stockholders or members representing
at least two-thirds (2/3) of the
outstanding capital stock or of its
members.
c) Notice Requirement – Written notice of
the proposed action and the time and
place of the meeting shall be:
a. Sent to stockholders or members
at their respective place of
residence as shown in the books
of the corporation, and
b. Either:
i. Deposited to the
addressee in the post
office with postage
prepaid, served personally,
OR
ii. Sent electronically in
accordance with the rules
and regulations of the
Commission on the use of
electronic data messages,
when allowed in the by-
laws or done with the
consent of the stockholder.
[Sec. 36]
Exercise of Appraisal Right
In case of extension of corporate term, a
dissenting stockholder may exercise the right
of appraisal under the conditions provided in
this Code. [Sec. 36]
When a dissenting shareholder disagrees with
a firm's actions, they can exercise appraisal
rights; appraising their shares, and being paid
the fair market value for them.
D. Power to Increase or Decrease
Capital Stock or Incur, Create,
Increase Bonded Indebtedness [Sec.
37]
A corporation may increase or decrease its
capital stock or incur, create or increase any
bonded indebtedness. [Sec. 37]
Power to Increase or Decrease Capital
Stock An increase or decrease of the capital
stock amends the underlying contractual
relationships between and among members of
the corporation.
Aside from the requisites in Sec. 37, when the
capital stock is increased or decreased, the
provisions of Sec. 15 on the amendment of the
articles of incorporation must also be complied
with. [Villanueva]
Power to Incur, Create, or Increase Bonded
Indebtedness
“Bonded indebtedness” are long term debts
of the corporation, secured by mortgage on
real or personal property of the corporation,
which are:
a) Structured in denominated units of
indebtedness
b) Intended to eventually circulate within
the investing public as securities,
representing units of investment.
Thus, the power to incur, create, or increase
bonded indebtedness is a form of distributing
liability securities to the public, and constitutes
an aspect of the inherent power of every
corporation to borrow or to incur loan
obligations. [Villanueva]
For the requirements, see (Sec. 37)
E. Power to Deny Pre-Emptive Rights
[Sec. 38]
Preemptive right
The preferential right of shareholders to
subscribe to all issues or disposition of shares
of any class in proportion to their present
shareholdings. [Sec 38] The purpose of pre-
emptive right is to enable the shareholder to
retain his proportionate control in the
corporation and to retain his equity in the
surplus.
General Rule: All shareholders of a stock
corporation have the preemptive right to
subscribe to all issues or disposition of shares
of any class, in proportion to their respective
shareholdings.
Exception: If such right is denied by the AOI or
an amendment thereto. [Sec. 38]
For the requirements, see (Sec. 38)
F. Power to Sell or Dispose Corporate
Assets [Sec. 39]
A corporation may sell, lease, exchange,
mortgage, pledge, or otherwise dispose of its
property and assets:
 For such consideration as its board of
directors or trustees may deem
expedient, which may be:
o Money
o Stocks
o Bonds, or
o Other instruments for the
payment of money or
o Other property or consideration
 Subject to the provisions of Republic Act
No. 10667, otherwise known as
“Philippine Competition Act”, and other
related laws.
For the requirements, see (Sec. 39)
G. Power to Acquire Its Own Shares
[Sec. 40]
The power of a corporation to acquire its
own shares
A stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes.
This corporate power does not need
shareholder’s approval. Discretion solely rests
on the board, subject to the existence of
unrestricted retained earnings (“URE – those
that are available for distribution”) and for a
legitimate corporate purpose/s. [Sec. 40]
Additional notes:
Unrestricted Retained Earnings
This is defined as the amount which is:
a) The accumulated profits and gains
realized out of the normal and
 continuous operations of the company
AFTER deducting therefrom:
- Distributions to stockholders and
- Transfers to capital stock or other
accounts, and
b) NOT appropriated by its Board of
Directors for corporate expansion
projects or programs:
c) NOT covered by a restriction for
dividend declaration under a loan
agreement; and
d) NOT required to be retained under
special circumstances obtaining in the
corporation such as when there is a
need for a special reserve for probable
contingencies. [SEC Memorandum
Circular No. 11-08, (December 5, 2008)]
H. Power to Invest Corporate Funds in
Another Corporation or Business
[Sec. 41]
General Rule: The corporation is not allowed
to engage in a business different from those
enumerated in its AOI.
Exception: The purpose will be amended to
include the desired business activity among its
secondary purpose.
Rules in case a corporation wants to invest
in an undertaking
a) Investment of a corporation in a
business which is in line with its primary
purpose requires only the approval of
the board.
b) Investment of assets for any of its
secondary purposes requires the prior
approval of its shareholders/members
c) If the investment is outside the
purpose/s for which the corporation was
organized, Articles of Incorporation must
be amended first, otherwise it will be an
Ultra Vires act (any acts that lie beyond
the authority of a corporation to
perform).
For the requirements, see (Sec. 41)
Exercise of Appraisal Right
Any stockholder who disagrees from the
investment of corporate funds in another
corporation or business may exercise his
appraisal right.
I. Power to Declare Dividends [Sec. 42]
Requirements
a) Must be distributed out of URE
b) Payable in cash, in property, or in stock
to all shareholders on the basis of
outstanding stock held by them
c) Resolution by the Board
Additional requirement for stock dividend
Approved by 2/3 of shareholders representing
the outstanding capital stock at a
regular/special meeting called for that purpose
- Note: The approval requirement for the
declaration of stock dividends
underscores that the payment of
dividends to a stockholder is not a
matter of right but a matter of
consensus. [Republic Planters Bank v.
Agana, 269 SCRA 1 (1997)]
A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders (if ACS is
insufficient, corporation must apply for increase
in capital stock).
Source of dividends
Dividends may only be declared out of actual
and bona fide unrestricted retained earnings.
Prohibition imposed by law on UREs of a
stock corporation
Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
their paid-in capital stock, except:
A. When justified by definite corporate
expansion projects or programs
approved by the BOD;
B. When the corporation is prohibited
under any loan agreement with any
financial institution or creditor from
declaring dividends without its consent,
and such consent has not yet been
secured;
C. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation.
Note: In case a corporation unjustifiably retains
surplus profits in excess of one hundred
(100%) percent of the paid-in accumulated
capital, it will be liable for Improperly
Accumulated Earnings Tax (IAET) equal to
10% of the improperly accumulated taxable
income. [Sec. 29 (A), NIRC] Moreover, it will
also be liable to pay a penalty imposed by the
SEC. [SEC Memo. Circ. No. 6, s. 2005]
Forms of dividends
1. Cash - Any cash dividend due on
delinquent stock shall first be applied to
the unpaid balance on the subscription
plus cost and expenses. [Sec. 42]
2. Stock - Stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid;
Stock dividends cannot be issued to a
person who is not a stockholder in
payment of services rendered.
3. Property - Stockholders are entitled to
dividends pro-rata based on the total
number of shares and not on the
amount paid on shares.
J. Power to Enter into Management
Contracts [Sec. 43]
Management Contract
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.
This refers only to a management contract with
another corporation and does not apply to
management contracts entered into by a
corporation with natural persons. Corollary to
this, management contract with a natural
person need not comply with the requisites of
Sec. 43
Period of every management contract
General Rule: No management contract shall
be entered into for a period longer than 5 years
for any one term.
Exception: Service contracts or operating
agreements which relate to exploration,
development, exploitation or utilization of
natural resources may be entered into for such
periods as may be provided in the pertinent
laws and regulations.
For the requirements, see (Sec. 42)
K. Limitations
Ultra Vires Acts
Those acts which a corporation is not
empowered to do or perform because they are
outside or beyond the express and implied
powers conferred by its Articles of
Incorporation or by the Revised Corporation
Code, or not necessary or incidental to the
exercise of the powers so conferred. [Sec. 44]
Types of Ultra Vires Acts
a) Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation;
b) Ultra Vires acts of officers and not of the
corporation
c) Acts or contracts, which are per se
illegal as being contrary to law.
[Villanueva]
Kinds of Ultra Vires acts by reason
a) By reason of Lack of Authority (ultra
vires acts)
b) By reason of Illegality (illegal acts)
Consequences of Ultra Vires Acts
Ultra vires acts, which are per se illegal are
generally void.
While ultra vires acts which are not illegal but
are within the scope of the articles of
incorporation, are merely voidable and may
become binding and enforceable when ratified
by stockholders. [Montelibano v.
BacolodMurcia Milling Co., Inc., G.R. No. L-
15092 (1962)]
Consequences of Ultra Vires Acts with
respect to contracts:
a) Executed contract – courts will not set
aside or interfere with such contracts; \
b) Executory contracts – no enforcement
even at the suit of either party (void and
unenforceable);
 c) Partly executed and partly executory
– principle of “no unjust enrichment at
expense of another” shall apply;
d) Executory contracts apparently
authorized but Ultra Vires – the
principle of estoppel shall apply.
L. Doctrine of Individuality of
Subscription
The Doctrine of Individuality of Subscription
states that a subscription is one entire and
indivisible whole contract. It cannot be
divided into portions.
Consequently, where stocks were
subscribed and part of the subscription
contract price was not paid, the whole
subscription shall be considered delinquent,
and not only the shares which correspond
to the amount not paid.
Nevertheless, holders of subscribed shares
not fully paid, which are not delinquent,
shall have all the rights of a stockholder.
[Sec. 71]
M. Doctrine of Equality of Shares
The doctrine of equality of shares states that all
stocks issued by the corporation are presumed
equal with the same privileges and liabilities,
provided that the Articles of Incorporation is
silent on such differences. [Sec. 6]
There is a presumption of equality of the rights
and features of shares when nothing is
expressly provided to the contrary.
- Although a corporation has the power to
classify its shares of stock, provide for
preferences and other conditions, no
presumption should exist to distinguish
one share from another.
- Sec. 6 of the RCC now requires that the
distinguishing features be stated also in
the Certificate of Stock.
N. Trust Fund Doctrine
The Trust Fund Doctrine states that the
capital stock, properties and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors.
- All funds received by the corporation in
payment of the shares of stock shall be
held in trust for the corporate creditors
and other stockholders of the
corporation.
- No fund shall be used to buy back the
issued shares of stock except only in
instances specifically allowed by the
Corporation Code. [Boman
Environmental Development
Corporation v. CA, G.R. No. 77860
(1988)]
Exceptions to the Trust Fund Doctrine ---
When Distribution of Corporate Capital is
Allowed
The Trust Fund Doctrine, first enunciated by
this Court in the 1923 case of Philippine Trust
Co. v. Rivera is the underlying principle in the
procedure for the distribution of capital assets,
embodied in Corporation Code, which allows
the distribution of corporate capital only in three
instances:
1. Amendment of the AOI to reduce the
authorized capital stock,
2. Purchase of redeemable shares by the
corporation, regardless of the existence
of unrestricted retained earnings, and
3. Dissolution and eventual liquidation of
the corporation.
The creditors of a corporation have the right to
assume that so long as there are debts and
liabilities, the BOD will not use corporate
assets to purchase its own shares of stock or
to declare dividends to its stockholders when
the corporation is insolvent. [Steinberg v.
Velasco, G.R. No. L-30460 (1929)]