CHAPTER IV POWERS OF CORPORATIONS reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
The powers of a corporation are categorized 126 into three:
1. General powers127;
2. Specific powers; 128 and
3. Implied powers129
These are discussed in seriatim.
General Powers
Section 35 enumerates the general powers, namely:
a. To sue and be sued in its corporate name130;
126
Corporation Code, Volume I, Campos and Campos, at 282- 286. 127Section 35.
128Sections 36 to 43. These are (1) power to extend or shorten corporate term; (2) power to increase
or decrease capital stock; incur, create or increase bonded indebtedness; (3) power to deny pre-
emptive right; (4) power to sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property
and assets: (5) power to acquire own shares: (6) power to invest corporate funds in another corporation
or business or for any other purpose; and (7) power to declare dividends; (8) power to enter into
management contracts.
129Section
44 when it mentions "except as necessary or incidental to the exercise of the powers
conferred ".
130n Laureano Investment & Development Corporation vs. The Honorable Court of Appeals and
Bormaheco, Inc., G.R. No. 100468, May 6, 1997, the Supreme Court held that "Lideco Corporation"
had no personality to intervene since it had not been duly registered as a corporation. If petitioner
legally wanted to intervene, it should have used its corporate name as the law requires and not another
name which it had not registered. Indeed, nowhere in the motion for intervention and complaint in
b. To have perpetual existence unless the certificate of incorporation provides otherwise;131
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this Code;
e. To adopt bylaws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
h. To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons 132;
i. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided. That no foreign
corporation shall give donations in aid of any political party or candidate or for purposes
of partisan political activity;
j. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
k. To exercise such other powers as may be essential or necessary to carry out its purpose
or purposes as stated in the articles of incorporation.
2012 Bar: AAA Corporation is a wholly owned subsidiary of BBB Corporation. To support the
business of AAA Corporation, BBB Corporation agreed to give its corporate guarantee to the
loan of AAA Corporation. What is required so that the corporate guarantee will be valid?
a. It only requires the approval of the Board of Directors of BBB Corporation.
b. The Articles of Incorporation must provide such power and be approved by the Board of
Directors.
c. Providing corporate guarantee to another corporation is a necessary exercise of power of
a corporation.
d. It would require both the approval of the Board of Directors and the stockholders on record.
The answer is (B).
Specific Powers
A. Power to Extend or Shorten Corporate Term 133 Voting requirement: majority vote of the
board of directors or trustees, and ratified at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding capital stock or of its members.
Appraisal right134: Present135
- Appraisal right means that a stockholder who dissented and voted against the proposed
corporate action, may choose to get out of the corporation by demanding payment of the
fair market
Notification requirement: Written notice of the proposed action and of the time and
place of the meeting shall be sent to stockholders or members at their respective place of
residence as shown in the books of the corporation, and must be deposited to the
addressee in the post office with postage prepaid, served personally, or when allowed in
the bylaws or done with the consent of the stockholder, sent electronically in accordance
with the rules and regulations on the use of electronic data messages.
 2011 Bar: The corporate term of a stock corporation is that which is stated in its Articles of
Incorporation. It may be extended or shortened by an amendment of the Articles when
approved by majority of its Board of Directors and:
a. approved and ratified by at least 2/3 of all stockholders.
b. approved by at least 2/3 of the stockholders representing the outstanding capital stock.
c. ratified by at least 2/3 of all stockholders. the
d. ratified by at least 2/3 of the stockholders representing outstanding capital stock.
The answer is (D).
B. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded
Indebtedness137
Voting requirement: majority vote of the board of directors and by two-thirds (2/3) of the
outstanding capital stock at a stockholders' meeting duly called for the purpose; non-stock
corporations may incur, create or increase bonded indebtedness when approved by a majority
vote of the board of trustees and at least two-thirds (2/3) of the members in a meeting duly
called for the purpose
Appraisal right:
None Notification requirement: Written notice of the time and place of the stockholder's
meeting and the purpose for said meeting must be sent to the stockholders at their places of
residence as shown in the books of the corporation and served on the stockholders personally,
or through electronic means recognized in the corporation's bylaws and/or the SEC rules as
a valid mode for service and notices.138
Formalities:
1. A certificate must be signed by a majority of the directors of the corporation and
countersigned by the chairperson and the secretary of the stockholders' meeting, setting
forth:
a. that the requirements of this section have been complied with;
b. the amount of the increase or decrease of the capital stock;
c. In case of an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names. nationalities and
addresses of the persons subscribing. the amount of capital stock or number of no-
par stock subscribed by each, and the amount paid by each on the subscription in
cash or property, or the amount of capital stock or number of shares of no- par stock
allotted to each stock- holder if such increase is for the purpose of making effective
stock dividend therefor authorized;
d. Any bonded indebtedness to be incurred, created or increased:
e. The amount of stock represented at the meeting; and
f. The vote authorizing the increase or decrease of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
2. Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the SEC, and where appropriate, of
the Philippine Competition Commission. The application with the SEC shall be made
within six (6) months from the date of approval of the board of directors and stockholders,
which period may be extended for justifiable reasons.139
3. Coples of the certificate shall be kept on file in the office of the corporation filed with the
SEC and attached to the original articles of incorporation. After approval by the SEC and the
issuance by the SEC of its certificate of fling, the capital stock shall be deemed increased or
decreased and the incurring. creating or increasing of any bonded indebtedness authorized,
as the certificate of fling may declare provided that:
a. SEC 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 the increase in capital stock has been subscribed and that at least twenty-five
percent (25%) of the amount subscribed has been paid in actual cash to the corporation
or that property, the valuation of which is equal fo twenty-five percent (25%) of the
subscription, has been transferred to the corporation:
b. No decrease in capital stock shall be approved by the SEC if its effect shall prejudice the
rights of corporate creditors.
In MSCI Nocusip Local Chapter vs. National Wages and Productivity Commission, GR No.
125198. March 3, 1997, the Supreme Court invalidated Monomer Sugar Central, Inc. (MSC)
board's treatment of the loons taken from Monomer Trading industries, Inc. (MTI) which were
recorded as additional investments of MSC for failure to comply with the formalities.
2012 Bar: if ABC Corporation will increase its authorized capital stock the Corporation Code
requires :
a. the approval of the majority of the Board of Directors only.
b. the approval of the majority of the stockholders and the Board of Directors.
C. the approval of 2/3 of the shareholders of the outstanding capital stock as well as the
approval of the Securities and Exchange Commission.
d. the approval of the majority of the Board of Directors and approval of the shareholders
holding 2/3 share of the outstanding capital stock.
The answer is (D).
C. Power to Deny Pre-emptive Right 140
Pre-emptive right is the right of all stockholders to subscribe to all issues or disposition of
shares of any class, in proportion to their respective shareholdings.
All stockholders enjoy this right unless such right is denied by the articles of incorporation or
an amendment thereto, provided that such pre- emptive right shall not extend to:
1. shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public:
2. 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.
The law includes all issues or disposition of shares of any class. This broad language would
include not only new shares issued pursuant to an increase of capital stock, but would cover
the issue of previously unissued shares which form part of the existing authorized capital
stock, as well as treasury shares. The former would come under all issues, the latter under
disposition.141
2019 Bar: In June 2018, DEF Corporation sent notices to its stockholders informing them of
the corporation's issuance of new shares of stock. The notice included a reminder that
pursuant to DEF's articles of incorporation, any stockholder who fails to exercise his or her
pre-emptive right within three (3) weeks from receipt of notice would be considered to have
waived the same.
Mr. Z, a stockholder of DEF Corp., failed to exercise her pre-emptive rights within the said
period. However, she claimed that she did not validly waive her right to do so because a waiver
must be expressed in writing.
a. Explain the concept of pre- emptive right under the Corporation Code.
Pre-emptive right is the right of a stockholder to subscribe to any and all issuance or
disposition of shares of any class by the corporation in proportion to their shareholdings in the
corporation. This means that except in the cases provided by law, shares of stock of the
corporation must be offered to the stockholders prior to any offer to non- stockholders. This
rule is intended to prevent the dilution of stockholder's equity stake in the corporation.
b. Is Mr. X's contention correct? Explain.
Z's contention is not correct. Pre- emptive right is not absolute. It may be waived expressly or
impliedly. Failure of the stockholder to exercise his right within the period set forth by the
corporation amounts to a waiver of pre- emptive right.
2018 Bar: Yenetic Corporation wants to increase its Authorized Capital Stock (which is
currently fully subscribed and issued) to be able to increase its working capital to undertake
business expansions. The Board of Directors consults with you. as legal counsel on the proper
answers to the following issue: Once the increase in the Authorized Capital Stock of Yenetic
has been legally effected with the SEC, can the new shares from the unissued shares be
offered to a new limited group of investors without having to offer them to the shareholders of
record since no pre-emptive right is provided for in the AOI and By-laws of Yenetic?
No, this is not valid. If there is no denial of the pre-emptive right in the articles, it is presumed
that the stockholders possess the pre-emptive right to subscribe to additional unissued
shares.
2012 Bar: So that ABC Corporation could venture into more projects, it needed to raise funds
by issuing new shares to increase its capitalization. X, Y, Z, J and G are the five existing
shareholders of the company. They hold 20% each. How will the additional shares be divided
among the existing shareholders?
a. The existing shareholders can subscribe to the new shares the equivalent to their existing
shareholdings because Corporation Code provides that each of the existing stockholders
will have pre-emptive rights to the extent of their existing shareholdings.
b. The existing shareholders' pre- emptive rights is equivalent to the percentage that they
want.
c. Each of the existing shareholder can exercise their right of first refusal against each other.
d. Pre-emptive rights and right of first refusal are one and the same. The answer is (A).
2011 Bar: ABC Corp. increased its capital stocks from Php10 Million to Php15 Million and, in
the process, issued 1,000 new shares divided into Common Shares "B" and Common Shares
"C." T, a stockholder owning 500 shares, insists on buying the newly issued shares through a
right of pre-emption. The company claims, however, that its By-laws deny T any right of pre-
emption. Is the corporation correct?
a. No, since the By-Laws cannot deny a shareholder his right of pre- emption.
b. Yes, but the denial of his pre- emptive right extends only to 500 shares.
c. Yes, since the denial of the right under the By-laws is binding on T. d.
d. No, since pre-emptive rights are governed by the articles of incorporation. The answer is
(A).
D. Power to Sell or Dispose Assets
Subject to the provisions of RA No. 10667143 (Philippine Competition Act) and other related
laws, a corporation may, by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge, or otherwise dispose of its property and assets, including its
goodwill, which may be money, stocks, bonds, or other instruments for the payment of money
or other property or consideration.
Voting requirement: majority vote of the board of directors and vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or at least two-thirds
(2/3) of the members, in a stockholders' or members' meeting duly called for the purpose; in
non-stock corporations where there are no members with voting rights, the vote of at least a
majority of the trustees in office.
However, no stockholder or member action is required if:
a. the same is necessary in the usual and regular course of business of the corporation or
b. the proceeds of the sale or other disposition of such property and assets shall be
appropriated for the conduct of its remaining business
Appraisal right: Present
How to determine if the sale involves all or substantially all of the corporation's properties and
assets?
a. computed based on its net asset value, as shown in its latest financial statements14
b. if the corporation would be rendered incapable of continuing the business or accomplishing
the purpose for which it was incorporated
Formalities:
1. Written notice of the proposed action and of the time and place for the meeting shall be
addressed to stockholders or members at their places of residence as shown in the books of
the corporation and deposited to the addressee in the post office with postage prepaid, served
personally, or when allowed by the bylaws or done with the consent of the stockholder, sent
electronically
2. 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.
This provision gave birth to the Nell Doctrine. In the case of Y-I Leisure Philippines, Inc. vs.
Yu, G.R. No. 2017161, September 8, 2015, James Yu purchased golf and country club shares
from Mt. Arayat Development Co., Inc. The golf and country club was non-existent so James
Yu asked for the return of the payment. However, all of the assets of Mt. Arayat Development
Co., Inc. consisting of 120 hectares of land were sold to Yats International Ltd.. Y-l Leisure
Phils., Inc. and and Y-I Club & Resorts, Inc. These are investment companies engaged in the
development of real estates, projects, leisure, tourism, and related businesses. The following
disquisitions were made:
The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to
another shall not render the latter liable to the liabilities of the transferor. If any of the following
exceptions are present, then the transferee corporation shall assume the liabilities of the
transferor:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the transaction is entered into fraudulently in order to escape liability for such debts;
and
4. Where the purchasing corporation is merely a continuation of the selling corporation.
The first exception under the Nell Doctrine, where the transferee corporation expressly or
impliedly agrees to assume the transferor's debts, is provided under Article 2047 of the Civil
Code. When a person binds himself solidarily with the principal debtor, then a contract of
suretyship is produced. Necessarily, the corporation which expressly or impliedly agrees to
assume the transferor's debts shall be liable to the same.
The second exception under the doctrine, as to the merger and consolidation of corporations,
is well-established under Sections 76 to 80, Title X of the Corporation Code. If the transfer of
assets of one corporation to another amounts to a merger or consolidation, then the transferee
corporation must take over the liabilities of the transferor.
Another exception of the doctrine, where the sale of all corporate assets is entered into
fraudulently to escape liability for transferor's debts, can be found under Article 1388 of the
Civil Code. It provides that whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered. Thus, if there is fraud in the transfer
of all the assets of the transferor corporation, its creditors can hold the transferee liable.
The last exception contemplates the "business-enterprise transfer."147 In such transfer. the
transferee corporation's interest goes beyond the assets of the transferor's assets and its
desires to acquire the latter's business enterprise. including its goodwill.
When one is to buy the business of another as a going concern, he would usually wish to keep
it going: he would wish to get the location, the building, the stock in trade, and the customers.
He would wish to step into the seller's shoes and to enjoy the same business relations with
other men. He would be willing to pay much more if he could get the "good will" of the
business, meaning by this, the good will of the customers, that they may continue to tread the
old footpath to his door and maintain with him the business relations enjoyed by the seller.46
In other words, in this last exception, the transferee purchases not only the assets of the
transferor, but also its business. As a result of the sale, the transferor is merely left with its
juridical existence, devoid of its industry and earning capacity.
The purpose of the business-enterprise transfer is to protect the creditors of the business by
allowing them a remedy against the new owner of the assets and business enterprise.
Otherwise, creditors would be left holding the bag," because they may not be able to recover
from the transferor who has "disappeared with the loot," or against the transferee who can
claim that he is a purchaser in good faith and for value. Based on the foregoing, as the
exception of the Nell doctrine relates to the protection of the creditors of the transferor
corporation, and does not depend on any deceit committed by the transferee corporation, then
fraud is certainly not an element of the business enterprise doctrine.
In business-enterprise transfer, it is possible that the transferor and the transferee may enter
into a contractual stipulation stating that the transferee shall not be liable for any or all debts
arising from the business which were contracted prior to the time of transfer. Such stipulations
are valid, but only as to the transferor and the transferee. These stipulations, though, are not
binding on the creditors of the business enterprise who can still go after the transferee for the
enforcement of the liabilities.
The same doctrine was applied in the case of Caltex (Phils.), Inc. vs. PNOC Shipping &
Transport Corp., G.R. No. 150711, August 10, 2006 where under an agreement of assumption
of obligations, LUSTEVECO transferred, conveyed and assigned to PSTC all of its business,
properties and assets pertaining to its tanker and bulk business together with all the
obligations, properties and assets. Meanwhile, Caltex, Inc. obtained a judgment debt against
LUSTEVECO, and it sought to enforce the same against PSTC. The Supreme Court ruled
that PSTC was bound by its agreement with LUSTEVECO and the former assumed all of the
latter's obligations pertaining to such business.
E. Power to Acquire Own Shares149
Provided that the corporation has unrestricted retained earnings 50 in its books to cover the
shares to be purchased or acquired, a stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or purposes, including the following
cases: ECP
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.
4. Why the requirement of unrestricted retained earnings? This is due to the Trust Fund
Doctrine. Under the doctrine, the capital stock,
149
Section 40.
15
0SEC Memorandum Circular No. 11-08 dated December 5, 2008 defines this as the amount
of 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 which is: (1) not appropriated by its Board of Directors for corporate
expansion projects or programs: (2) not covered by a restriction for dividend declaration under
a loan agreement; and (3) 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.
property, and other assets of a corporation are regarded as equity in trust for the payment of
corporate creditors, who are preferred in the distribution of corporate assets. The creditors of
a corporation have the right to assume that the board of directors will not use the assets of
the corporation to purchase its own stock for as long as the corporation has outstanding debts
and liabilities. There can be no distribution of assets among the stockholders without first
paying corporate debts.151
2012 Bar: ABC Corporation declared stock dividends to its stockholders. The stock dividends
were approved by the Board of Directors of ABC Corporation. In the subsequent year however,
the Board again approved the redemption of all stock dividends and to pay the shareholdings
in cash. Which statement is most accurate?
a) The redemption of the stock dividends can be validly approved by the Board without any
conditions.
b) The redemption of stock dividends may only be allowed if there are sufficient earnings
and should not be violative of the trust fund doctrine.
c) The redemption of the shares may be taken from the existing property and other assets
of the corporation.
d) None of the above.
The answer is (B).
F. Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
Purpose 152
Voting requirement: If primary purpose, only majority of the board approval. But if for any
purpose other than the primary purpose for which it was organized, 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 meeting duly called for the purpose.
Appraisal right: Present
Notification requirement: Notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at the place of residence as
shown in the books of the corporation and deposited to the addressee in the post office with
postage prepaid served personally, or sent electronically in accordance with the rules and
regulations of the SEC on the use of electronic data message, when allowed by the bylaws or
done with the consent of the stockholders,
Bar: X Corp., whose business purpose is to manufacture and sell vehicles, invested its funds
in Y Corp., an investment firm, through a resolution of its Board of Directors. The investment
grew tremendously on account of Y Corp.'s excellent business judgment. But a minority
stockholder in X Corp. assails the investment as ultra vires. Is he right and, if so, what is the
status of the investment?
a. Yes, it is an ultra vires act of the corporation itself but voidable only. subject to stockholders'
ratification.
b. Yes, it is an ultra vires act of its Board of Directors and thus void.
c. Yes, it is an ultra vires act of its Board of Directors but voidable only, subject to
stockholders' ratification.
d. Yes, it is an ultra vires act of the corporation itself and, consequently, void.
The answer is (C).
G. Power to Declare Dividends
Whether or not there should be distribution of dividends and the form of such dividends are
matters addressed to the business judgment of the board. The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings which shall be
payable in cash, property, or in stock to all stockholders on the basis of outstanding stock held
by them. Any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholders until their unpaid subscription is fully paid. Thus, absent the
availability of unrestricted retained earnings, the board of directors of respondent had no
power to issue dividends.
Voting Requirement: Cash dividend - majority vote of the board
Stock dividend - majority vote of the board plus approval of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for
the purpose.
Stock corporations are prohibited from. Retaining surplus profits in excess of one hundred
percent (100%) of their paid-in capital stock. Except:
A. when justified by definite corporate expansion projects or programs approved by the board
of directors; or
B. when the corporation is prohibited under any loan agreement with financial institutions or
creditors, whether local or foreign, from declaring dividends without their consent, and
such consent has not yet been secured; or
C. when it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies.
The term "dividend" both in the technical sense and its ordinary acceptation, is that part or
portion of the profits of the enterprise which the corporation, by its governing agents, sets
apart for ratable division among the holders of the capital stock. It means the fund actually set
aside, and declared by the directors of the corporation as a dividends, and duly ordered by
the director, or by the stockholders at a corporate meeting, to be divided or distributed among
the stockholders according to their respective interests,
Dividends are not the same as profits. Profits are a result of operations of the corporation.
Hence, it belongs to the corporation. There can be no dividends unless there are profits, as it
is the source of dividends. Dividends belong to the stockholders. Therefore, it is possible that
there are profits but no dividends but there can never be dividends unless there are profits.
A stock dividend is a distribution to the stockholders of the company's own stocks. This means
that the corporate profits or earnings are transferred to capital stock and shares of stock
representing the increase in capitalization are distributed to the stockholders in proportion to
their interests. Unless there are available unissued shares of the corporation, stock dividends
cannot be declared without first increasing the capital stock. Although the number of their
shares increased, the stockholders' investment and proportionate interest remain the same.
They have received nothing out of the company's assets; unless they sell the stock dividends,
they receive no income, 157 This is the rationale why stockholder action is required for stock
dividends.
Note: Under SEC Memorandum Circular No. 11-08 dated December 5, 2008, the following
are not available for dividend declaration:
a) Share/equity in net income of the associate or joint venture accounted for equity method
as the same is not yet actually earned or realized. It is only after the investee company
declares such income as dividend that said income is actually realized or the earnings
becomes available for dividend declaration. Due to the effect on the investment account,
only cash or property dividends declared by the investee-company shall be considered as
earnings declarable as dividends by the investor company;
b) Unrealized foreign exchange gains, except those attributable to cash and cash
equivalents, for the time being that they are not yet actual income prior to realization of
such foreign exchange gain;
c) Unrealized actuarial gains which is the result when the company chooses the option of
recognizing actuarial gains or losses directly to profit or loss statement;
d) Fair value adjustment or the gains arising only from marked-to-market valuation which are
not yet realized;
e) The amount of recognized deferred tax asset that reduced the amount of income tax
expense and increased the net income and retained earnings, until realized;
f) Adjustment due to deviation from Generally Accepted Accounting Principles in the
Philippines (GAAP) or Philippine Financial Reporting Standards (PFRS) of the audited
financial statements which results to gain:
g) Other unrealized gains or adjustments to the retained earnings brought about by certain
transactions accounted for under the PFRS such as accretion income under IAS 39, Day
1 gains on initial recognition of financial instruments, reversal of revaluation increment to
retained earnings, and negative goodwill on investments in associate
Retained earnings include earnings from sale of goods or services of a corporation in the
ordinary course of business as well as earnings from sale of corporate property other than the
stock in trade, at a price higher than its cost. However, they do not include premium on par
stock, i.e. the difference between the par value and the higher price for which the stock is sold
by the corporation, since this is regarded as paid-in capital. Nevertheless, the SEC has
allowed the declaration of stock dividends out of such premium, with the justification that a
stock dividend does not involve distribution of corporate assets to the stockholders but merely
gives tangible evidence of the increase in their equity.
• Under what circumstances may a corporation declare dividends?
 A corporation may declare dividends only if there is unrestricted retained earnings. If
its surplus profits exceed 100% of its paid-in capital, it must declare dividends, except
in any of the three exceptions mentioned above.
• Distinguish cash dividend from stock dividend. From what funds are cash and stock
dividends sourced?
 The voting requirement in declaration of cash dividend is only approval of the
majority of the board; for stock, it must be by the majority of the board plus 2/3 of
the stockholders representing the outstanding capital stock. The source of cash
dividend is only unrestricted retained earnings.
 The source of stock dividend, aside from unrestricted retained earnings, is
premium on par stock (additional paid-in capital).
• The rule is that no stock dividend shall be issued without the approval of stockholders
representing at least 2/3 of the outstanding capital stock at a regular or special meeting
called for the purpose. As to other forms of dividends:
a) a mere majority of the entire Board of Directors applies.
b) a mere majority of the quorum of the Board of Directors applies.
c) a mere majority of the votes of stockholders representing outstanding capital stock
applies.
d) the same rule of 2/3 votes applies.
The answer is (B).
• True or false. Explain. Dividends on shares of stocks can only be declared out of
unrestricted retained earnings of the corporation.
 False. Cash dividends come only from unrestricted retained earnings while stock.
dividends can be sourced, aside from unrestricted retained earnings, from premium on
par stock (additional paid-in capital).
• On September 15, 2007, XYZ Corporation issued to Paterno 800 preferred shares with
the following terms: "The Preferred Shares shall have the following rights. preferences,
qualifications, and limitations, to wit: The right to receive a quarterly dividend of One Per
Centum (1%), cumulative and participating: These shores may be redeemed, by drawing
of lots, at any time after two (2) years from date of issue, at the option of the Corporation;
xxx."
Today, Paterno sues XYZ Corporation for specific performance, for the payment of
dividends on, and to compel the redemption of, the preferred shares, under the terms and
conditions provided in the stock certificates. Will the suit prosper? Explain.
Payment of dividends is not possible as no dividends were declared yet, it also requires the
presence of unrestricted retained eamings. Redemption of shares also require the presence
of unrestricted retained. earnings.
• 2018 Bar: Yangchou Inc.'s (M) Articles of Incorporation (AOI) provides for two (2) types of
shares of stock: common and preferred shares. Its AOI further provides that "the preferred
shares shall have a guaranteed annual dividend of 3% of the par value." Its By-Laws also
specifically provides that "preferred shareholdings shall be cumulative and participating."
 No other terms of preference are provided for preferred shares in either the AOI or By-
Laws of YI.
For the first five years of operations, the company was operating at a loss. At the end of the
sixth year. YI realized a net profit of PhP100 milion, and unrestricted retained earnings of
PhP30 million. The YI Board of Directors declared and paid out dividends of 1% on common
shares, and 5% on preferred shares, which amounted to a total of PhP30 million. However,
the preferred shareholders made a formal demand that they be given an additional 3%
dividend for each of the five (5) years based on the preferred shares features of "cumulative
and participating." and an additional 1% given to the common shareholders, which could all
be accommodated within the remaining balance of the net profits.
Should Yi's Board heed the demand of its preferred shareholders
 No. While the preferred shares are Indeed cumulative and participating, there is the
requirement of sufficiency of unrestricted retained earnings. It is not based on profit.
• 2015 Bar: DEF Corporation has retained surplus profits in excess of 100% of its paid-in
capital stock. However, it is unable to declare dividends, because it had entered into a
loan agreement with a certain creditor wherein the declaration of dividends is not allowed
without the consent of such creditor. If DEF Corporation cannot obtain this consent, will it
be justified in not declaring dividends to its stockholders? Explain.
 Yes, this is one of the instances allowed by Section 42.
H. Power to Enter into Management Contracts
Voting Requirement: majority of the board of directors and by the 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.
Special ratification rule of 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 of the
managed corporation if:
A. stockholder or stockholders representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or
B. 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
Contract duration: no longer than five (5) years for any one (1) term
These shall apply to any contract whereby a corporation undertakes to manage or operate all
or substantially all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however, That such service
contracts or operating agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods as may be provided by
pertinent laws or regulations.
Ultra Vires Acts
A corporation shall possess or exercise only those corporate powers conferred by this Code
or by its articles of incorporation and those necessary or incidental to the exercise of the
powers conferred. Corporate acts which are outside those mentioned are ultra vires.
A distinction should be made between corporate acts or contracts which are illegal and those
which are merely ultra vires. The former contemplates the doing of an act which are contrary
to law, morals or public policy or public duty, and are. like similar transactions between
individuals, void. They cannot serve as basis of a court action nor acquire validity by
performance, ratification or estoppel. Mere ultra vires acts, on the other hand, or those which
are not illegal or vold ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when ratified by
the stockholders.
Montelibano, et al. vs. Bacolod-Murcia Milling Co., Inc. 115 Phil. 18 stated the test to determine
if a corporate act is in accordance with its purposes: It is a question, therefore, in each case,
of the logical relation of the act to the corporate purpose expressed in the charter. If that act
is one which is lawful in itself, and not otherwise prohibited, is done. for the purpose of serving
corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial,
and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The
test to be applied is whether the act in question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and reasonably necessary to their
exercise. If so, the corporation has the power to do it; otherwise, not.
Illustrations:
1. University of Mindanao does not have the power to mortgage its properties in order to
secure loans of other persons. As an educational institution, it is limited to developing
human capital through formal instruction. It is not a corporation engaged in the
business of securing loans of others,162
2. The donation given by the corporation to the children of a deceased person who
contributed to the growth of the corporation is valid. This donation was within the broad
scope of powers and purposes of the corporation to aid in any other manner any
 person in which any interest is held by this corporation or in the affairs or prosperity of
which this corporation has a lawful interest. 163
3. The rule by Twin Towers Condominium denying delinquent members the right to use
condominium facilities is valid. The condominium's power to promulgate rules on the
use of facilities and to enforce provisions of the Master Deed was clear in the
Condominium Act, Master Deed, and By-laws of the condominium. Moreover, the
promulgation of such rule was "reasonably necessary to attain the purposes of the
condominium project.
4. Suspension of the rights of the members of Magallanes Watercraft Association for
failure to pay membership dues is valid. The fact alone that neither the articles of
incorporation nor the by-laws granted its Board the authority to discipline members
does not make the suspension of the rights and privileges of the respondents ultra
vires. An act might be considered within corporate powers, even if it was not among
the express powers, if the same served the corporate ends.145
5. The establishment of a local post office in a mining camp which is far removed from
the postal facilities or means of communication accorded to people living in a city or
municipality is valid,
2009 Bar: When is there an ultra vires act on the part of [a] the corporation; [b] the board of
directors: and [c] the corporate officers?
Ultra vires act on the part of the corporation refers to acts beyond the corporate powers
conferred by this Code or by its articles of incorporation and those necessary or incidental to
the exercise of the powers conferred.
What is ultra vires or beyond the power of the corporation must also be ultra vires or beyond
the power of its board of directors to undertake. The powers of the board of directors, who
under the law are authorized to exercise the powers of the corporation, are necessarily limited
by restrictions imposed by law on the corporation, as these restrictions are necessarily
imposed also on the board of directors who act in behalf of the corporation. See Republic VS.
Sandiganbayan, 648 SCRA 47
Ultra vires act on the part of the corporate officers are those acts performed beyond the
authority granted to them.