Zehan Loren E.

Tocao

Business Organization II

Corporate Powers - refers to corporations capacity or right under its charter and laws to do certain things. It must not be confused with primary franchise, secondary franchise and objects of the corporation. The first one refers to its right to exist as an entity for the purpose of doing things embraced within its powers. The second one refers to the right granted to corporation to use public property for a public use, but with private profit. The third one, a corporation exercises its powers for the purpose of attaining its objectives. The enumeration of corporate powers implies the exclusion of all other powers except when they are incidental or implied, this is line with the principle that a corporation owes its existence to the state and therefore can only exercise rights expressly and impliedly granted by law. Classification of corporate Powers
A. Expressed powers powers expressly conferred upon the corporation by law. These are granted under the Corporation code and Articles of Incorporation. Unless otherwise provided by the code, these powers are to be exercised by the board of directors. ( Sections 36, 37-44)

B. implied powers Powers which are reasonably necessary to execute the express powers and to accomplish the purposes for which the corporation was formed. Sections 36(11), section 45. 1. 2. 3.
4. 5.

Acts in the usual course of business Acts to protect debts owing to a corporation Embarking in different business
Acts in part or wholly to protect or aid employees. Example: borrowing money, making ordinary contracts, acquiring personal property for use in connection with the business, mortgaging, leasing and other transfers in connection with the running of the business.

C. Inherent powers Powers which a corporation can exercise by the mere fact of its being a corporation or powers which are necessary to corporate existence. It is recognized under sections 2, and 45. Sections 36 can also be classified under this category even if it is not expressly granted.

Zehan Loren E. Tocao

Expressed Powers The applicable provisions are as follows:

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 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.

Section 36: Corporate Powers and Capacity 1. To sue and be sued in its corporate name This is an incident to corporate existence. The power to sue is lodged with the Board of Directors or Trustees. Corporations de facto may sue and be sued but a dissolved corporation after the expiration of the three year winding up period ceases to exist de jure or de facto. Unregistered corporation has no legal capacity to sue . Foreign corporation , it can only transact business in the Philippines if it has a license from the SEC.

Zehan Loren E. Tocao where corporation is the party in interest , neither the administrator nor the the project lawyer is allowed to sign the certificate against forum shopping without being duly authorized by resolution made by the Board of Directors. The following officials or employees can sign the verification and certification without need of Board resolution: Chairperson of the Board of Directors, President, General Manager, Personnel Officer and an Employment Specialist in a labor case. The rationale for this is that they are in a position to verify the truthfulness and correctness of the allegations in the petition. ( Cagayan Valley Drug Corp vs CIR) In a derivative suit, stockholders may bring suit against erring officials in the corporation with the corporation as the real party in interest. The physical acts of the corporation like the signing of documents can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of Board of Directors( Shipside Incorporated vs CA) 2. P0wer to adopt and use a corporate seal Seal is a device ( as an emblem, symbol or word) used to identify or replace the signatures of an individual or organization and to authenticate written matter purportedly emanating from such individual or organization. It is not required for the validity of any corporate act. It is mere directory and a corporation still exists even without it. It merely establishes a,prima facie, that the instrument to which it is affixed is the act of the corporation. 3. Power to acquire and convey property This is considered as incident to every corporation since the latter needs properties or assets to carry on its business. Even if corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will still be with the Board of Directors whose approval will finalize the transaction( Firme vs Bukal Enterprise and Dev. Corp.,) The said power is qualified by the phrase as the transaction of the lawful business of the corporation may reasonably and necessarily require. Hence, property obtained by a corporation which is foreign to the purpose for which it was organized is an unlawful acquisition. Transfer or sale of shares owned by a corporation in another corporation requires the approval by the board of directors of the seller corporation. ( section 25, BP Blg 68) Limitations: The right of the private corporation to deal in real or personal property is also subject to limitations or restrictions prescribed by special laws and the constitution. Thus, no private corporation or association is allowed to hold any alienable lands of public domain except by lease for a period of not exceeding 25 years and not to exceed 25 years, renewable for not more than 5o years and not to exceed 1,000 hecatares in area ( Sec3, Art. XII, 1987 Constitution) Under the General Banking Law of 2000, any real property acquired by a bank by way of satisfaction of claims under the circumstances enumerated by law

Zehan Loren E. Tocao shall be disposed of by it within a period of 5 years or as may be prescribed by the Monetary board. 4. Power to acquire shares or securities This act of acquiring shares of other corporations does not need any approval from the stockholders so long as it is done in pursuance of its purpose/ purposes however if the purpose is for investment, the approval of the stockholders is needed as required by section 42 is necessary. Limitations: this power is still subject to restrictions established by the Corporation Code, special laws and the Constitution.. the shares must be limited to shares of existing corporations because only natural persons can be incorporators. When a corporations subscribes to the capital stock of another corporation, it is required, as a rule, to pay its subscription in full. A corporation may purchase its own stock provided it has unrestricted retained earnings to cover shares to be purchased or acquired. 5. Power to contribute to charity Section 36(9) clearly states that the corporation may contribute for purely charitable purposes, this is due to the growing tendency to regard charitable gifts as within the scope of corporate authority. Corporations are not solely created for profit making enterprises but also as economic and social institutions. Limitations: the contribution must ne reasonable; the donations must not be in aid of any political party or candidate or for purposes of partisan political activity( Sec 95, B.P B;g. 881)

6. Power to establish pension, retirement and other plans This is for the benefit of the officers and employees of the corporation, to promote better relations between the former and the latter. 7. Power to act as guarantor General Rule: no corporation has the power, by any form of contract or endorsement, to become a guarantor or surety or otherwise lend its credit to another person or corporation. A corporation is without any power to guarantee for accommodation the contract of its customers with third persons on the ground that it may thus simulate its own business. Except: if it tends to promote the business authorized by its articles. Corporation which acquired the bonds of another corporation in the legitimate transaction of its business ( payment of debt due to it) may sell them and to make them more readily marketable, guarantee their payment ( Carlos vs Mindoro Sugar Co.,)

Zehan Loren E. Tocao

Specific Corporate Powers

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 twothirds (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 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) 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 stockholders meeting duly called for the purpose, two -thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of 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 stockholders meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholder s meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of nopar 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 corporatio

Zehan Loren E. Tocao

n 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) Section 39. Power to deny pre-emptive right. All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such 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. 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 stockholders or members meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with 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. 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:

Zehan Loren E. Tocao

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) 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 stockholders or members meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That 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) 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) 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 be entered into for such periods as may be provided by the pertinent laws or regulations.

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Section 37 Power to extend or shorten corporate term Power to increase or decrease capital stock is not inherent in a corporation since capital stock is governed by common law doctrines such as trust fund doctrine and pre emptive rights. Limitations: cannot decrease its capital stock is such decrease will have the effect of relieving existing subscribers from the obligation of paying for their unpaid subscriptions without a valuable considerations for such release. ( Phil Trust Co vs Rivera) It cannot issue stock in excess of the amount limited by its AOI, such issue is ultra vires. Mere written assent would not be sufficient. Requirements: 1. approved by the majority vote of the board of directors or trustees 2.ratified at a meeting of the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of nonstock corporations. 3. Certificate which will be signed by the majority of the members of the Board and the Chairman and Secretary of the Stockholders meeting. 4. certificate must be accompanied by the Treasurers affidavit certifying compliance with the 25%- 25% requirements as to stock corporation. 5. copy of the amended AOI shall be submitted for its approval 6. in cases of special corporation, a favorable recommendation of appropriate government agency. Appraisal right of dissenting stockholders Right granted to stockholders in cases provided by law to demand payment of the fair value of his shares in case of extension of corporate term. It is also available in cases of shortening the corporate term ( Section 81, BP Blg 68) Section 38 power to increase or decrease capital stock This is a fundamental change in the corporation. It can only be exercised if it is expressly conferred. Limitations: cannot decrease its capital stock is such decrease will have the effect of relieving existing subscribers from the obligation of paying for their unpaid subscriptions without a valuable considerations for such release. ( Phil Trust Co vs Rivera) It cannot issue stock in excess of the amount limited by its AOI, such issue is ultra vires and void in the hands of the purchaser. ( over-issue stocks/ spurious stocks) Requirements: 1. approved by a majority vote of the board of directors and, at a stockholders meeting duly called for the purpose 2. 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. 8

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3. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, 4. 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.

Ways of increasing ( decreasing) authorized capital stock By increasing ( decreasing) the number of shares authorized to be issued without increasing ( decreasing) the par value . By increasing ( decreasing) the par value of each share without increasing ( decreasing ) the number thereof By increasing ( decreasing) both the number of shares authorized to be issued and the par value thereof. By way of stock dividends( declared out of the authorized but unissued shares of the corporation) Reduction of capital stock By decrease of number of authorized shares, by redeeming redeemable shares, purchasing its shares and cancelling or retiring the same, including treasury shares and by decrease of par value of authorized shares.

Persons entitled to question increase of decrease of capital stock Dissenting stockholders Creditors of the corporation Subscribers for or purchasers of such stock.

Power to incur, create, increase bonded indebtedness Corporate bond is an obligation to pay a definite sum of money at a future time at a fixed rate of interest. Business corporation is allowed to borrow money whenever the necessity of its business so requires and issue security or customary evidence of debt such as notes, bonds or mortgages. Procedures are the same with the procedure required in increasing/ decreasing the capital stock except: no more sworn statement of the treasurer of the corporation concerning the amount of the increased capital stock subscribed and paid. Subject to prior approval of SEC. Notes/ bonds when a corporation borrows money its indebtedness may be evidenced by notes/ bonds as its security. Notes- if the amount is small, Bonds- the amount is large , in a single sum , from a few obtained from a number of persons and for a short time. people, extends for a period 9

Zehan Loren E. Tocao of years. Payments of bonds secured as to principal and interest by certain specified property. The creation of such obligations is a borrowing from the general public. Corporate bond contractborrowing corporation, bondholders and the trustee( bank/ trust company) Bond indenture- a lengthy document which constitutes the agreement between the parties. The corporation here promises to pay the principal and interest, to pay trustee, taxes and other debts. Types of secured bonds Mortgaged bond- Collateral trust debt instruments bondsdebt of financing instruments secured by a lien secured by a on specifically pledge of either named property. stocks or bonds, which are deposited with the trustee

Equipment obligations debt instruments to secure financing loans on locomotives, cars and similar equipment.

Section 39 To Deny Pre- Emptive Right It is the shareholders right to subscribe to all issues or disposition of shares or any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings and also in the net assets in the event of dissolution. Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at he time the increase was made in proportion to their existing shareholdings. It extends to issues of unissued shares belonging to the original stock of the corporation. This aims to safeguard the right of the stockholder to preserve unaltered an d unimpaired his proportionate influence and interest in the corporation and the relative value of his holding. However, a stockholder may waive such right. This right may be denied by the AOI or an amendment thereto or may fall under any of the exceptions( sec 39). 1. shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; 2. 2. to shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or 10

Zehan Loren E. Tocao 3. in payment of a previously contracted debt. If right is violated: may maintain an action to compel the corporation to give him that right or exercise his appraisal right.

Section 40 power to sell, lease all or substantially all corporate assets Requisites for its validity: 1. The sale must be approved by the Board of directors 2. The action of the board must be authorized by the vote of stockholders representing 2/3 of the outstanding capital stock including holders of non voting shares or 2/3 of the members 3. The authorization must be done at a stockholders or members meeting duly called for that purpose after written notice. Effect of Non compliance: the sale will be null and void if the ratification of the members is not complied with. Limitations: the sale is subject to the provisions of laws on illegal combinations and monopolies, bulk sales law, A corporation may sell its assets without necessarily dissolving or terminating its existence. GR: when corporation sells or transfers all its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor provided it is in good faith and except: o the purchaser accepts or agrees to assume debts, o when it amounts to consolidation or merger o purchasing corporation is a mere continuation of the selling corporation o when transaction entered into fraudulently in order to escape liability. ( PNB vs Andrada Electric and Engineering Company) If the property to be sold constitutes merely as a part of the assets and will not render the corporation incapable of continuing its business, the Board of Directors / Trustees may dispose the same as it may deem convenient without the need the approval of the shareholders. Disposition of properties in the regular course of business, approval of stockholders is no longer needed.

Section 41 Power to acquire own shares As a rule stock corporation is not allowed to purchase or acquire its own shares except otherwise provided in the code or if the acquisition is for a legitimate corporate purposes and that there be unrestricted retained earnings in its books to cover the shares acquired.

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Zehan Loren E. Tocao REASON: Protect the interest of the creditors who might be adversely affected by the stock purchase. However, this right is not absolute, it depends upon the contingency of the condition of its affairs and its relations to creditors at the time of the purchase. a. Capital is not impaired; b. For a legitimate purpose; c. There shall be unrestricted retained earnings; d. Corporation acts in good faith; e. Conditions of corporate affairs warrant it. ( SEC Opinions, Sept 11, 1985 , Oct 12, 1992, and April 11, 1994) Elimination of fractional shares- fractional share is a share which is less than 1 corporation share. Since it cannot be represented at corporation meetings, the corporation may purchase the same from its stockholders or issue fractional scrip certificates to such stockholder who may negotiate for the sale with other stockholders. Satisfaction of indebtedness to corporations , section 41, number2, does not authorize the corporation to arbitrarily purchase the shares it issued to any of its stockholders indebted to it. Payment of shares of dissenting or withdrawing stockholders, instances where a dissenting stockholder is given appraisal right and the right to withdraw from corporation as provided in sec 16, sec 37, sec 40, sec42 , sec 68, sec 77 ans sec 105. Trust Fund Doctrine- the assets of the corporation as represented by its capital stock are trust funds to be maintained unimpaired and to be used to pay creditors before distributing the same to stockholders. Section 42 Power to invest corporate funds in other corporations or for other purposes A corporation may be organized with multiple lawful purposes so long as the primary purpose is indicated in the articles of incorporation however the investment of its funds is limited to the primary purpose. Requirements: 1. Approval by the majority vote of the board od directors or trustees 2. Ratification by the stockholders at 2/3 of the outstanding capital stock or 2/3 of the members 3. Must be made in a meeting called for that purpose 4. Prior written notice of the proposed investment and the time and place of the meeting shall be made addressed to each stockholder or member by mail or personal service. If funds invested for other purposes ( secondary purposes) no need to amend the AOI, so long as it is authorized by the shareholders. If not among the secondary purposes, amendment of AOI is needed.

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Zehan Loren E. Tocao Funds include any corporate property to be used in furtherance of the business. A corporate transaction which is within the corporate powers but defective since it failed to observe in its execution the requirements setforth by law that the investment must be authorized by the vote of the stockholders or members, may be ratified.

Section 43 Power to declare dividends Stock corporation exists to make profit and to distribute a portion of the profits to its stockholders. To declare dividends is subject to the discretion of the board of directors. Stock corporations are prohibited from retaining surplus profits in the excess of 100% of their paid in capital stock except when justified by any reasons. ( sec 43, par 2) Dividend is part or portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time. Unrestricted retained earnings- these are retained earnings which have not been reserved or set aside by the board of directors for some corporate purpose. It is a payment to the stockholders of a corporation as a return upon their investment. It is a characteristic of a dividend that stockholders of the same class share in it in proportion to the respective amounts of stock which they hold. Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the trust fund of the corporation. Dividends received by a company which is a stockholder in another corporation are corporate earnings arising from corporate investment. The right to share in such dividends by way of salary increases may not be denied its employees when they are entitled thereto. It is not a case of a corporation distributing dividends in favor of the stockholders, in such case the dividends would be the absolute property of the stockholders and hence, out of reach of the creditors of the corporation. ( Madrigal & Company , Inc. vs Zamora) The Board of Directors of a stock corporation has the power to 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 the outstanding shares held by them. o Stock dividends- may only be issued with the approval of stockholders representing at least 2/3 of the capital stock then outstanding at a regular meeting of the 13

Zehan Loren E. Tocao corporation or at a special meeting duly called for the purpose. ( sec 43, par 1) o Other dividends- a mere majority of the quorum of the board of directors is sufficient to declare other dividends. The board may declare, other dividends other than stock without the need of stockholders approval. Dividends payable out of unrestricted retained earnings, dividends other than liquidating dividends may be declared and paid out of the unrestricted retained earnings of the corporation. An agreement to pay out of the capital is unlawful and void. The power to acquire its own share is also subject to the condition that it has an unrestricted retained earnings. ( Section 41) Reason: the outstanding capital stock of a corporation, including unpaid subscriptions, is a trust fund for the security of creditors and cannot be distributed to their prejudice to the stockholders as dividends, the creditors being precluded from holding the stockholders personally liable of their claims. Requisites for the declaration of dividends: o Existence of unrestricted retained earnings o Corporate resolution of the board of directors declaring the payment of a portion or all of such earnings to the stockholders. Cash Dividend- only approval of Board of Directors is needed. Stock dividends- resolution of the board and approval of the resolution by the stockholders, with sufficient number of authorized unissued shares for distribution to stockholders.

Remedies of corporate creditors if dividends are improperly declared and paid when there are no net earnings: 1. It may be pursued by the creditors into the hands of any one who is not an innocent purchaser. 2. If such a wrong is threatened, Creditor may maintain an injunction action Classes of dividends: a. Cash dividend- payable in cash. Effect: the assets of the corporation diminishes by exactly the amount paid out and the property of the individual stockholder increases. b. Property dividends- distributed to stockholders in the form of property, real or personal such as warehouse receipt or shares of stock of another corporation. c. Stock dividend- payable in unissued or increased or additional shares of the corporation instead of in cash or in property out of the unrestricted retained earnings of the corporation. It may only declare up to the xtent of the maximum number of shares authorized in the articles of incorporation. Effect: surplus or profitsof the corporation will be a permanent account, thereby

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Zehan Loren E. Tocao placing it beyond the power of the board of directors to withdraw from corporate use and to distribute to the stockholders. Optional dividend- which gives the stockholder an option to receive cash or stock dividend Composite dividend- which is partly in cash and partly in stocks. No option involved. Cumulative dividend- which is contracted to be paid at a certain rate at stated times and if net earnings at any dividend period are sufficient to pay the contract dividend, it is to be paid to another class. Scrip dividend- in the form of writing or certificate issued to a stockholder entitling him to the payment of money, stock or other benefit at some future time inasmuch as the corporation at the time such dividends are declared has profits not in cash or has no sufficient cash. It is in the form of promissory note or a promise to pay and may be issued to bear interest. Bond dividend- distributed in the bondsof the corporation to the stockholders. Liquidating dividends- actually distributions of the assets of the corporation upon dissolution or winding up of the same.

d. e. f.

g.

h. i.

Section 44 Power to enter into a management contract A corporation is allowed to enter into a management contract without need of amending the articles of incorporation. Management contract is a contract whereby the corporation undertakes to manage and operate all or substantially all of the business of another corporation, whether such contracts are called service contracts , operating agreements or otherwise. A corporation under management is bound by the acts of the managing corporation and is stopped to deny its authority. ( national bank vs producers warehouse association) Requirements: o The contract must be approved by a majority of the quorum of the board of directors or trustees and ratified by the prescribed vote of the outstanding capital stock entitled to vote or of the members , of both the managing and the managed corporations at a meeting duly called for the purpose. o The management contract must be approved by the stockholders of the managed corporation owning at least 2/3, not merely a majority, of the total outstanding capital stock entitled to vote. If the contract is between two corporations having interlocking directors, the contract must comply with the requirements of section33. Rationale for ratification requirement on the part of managed corporation Since management contract is a deviation from the rule that corporate powers shall only be exercised by

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Zehan Loren E. Tocao the board of directors, to allow it will vary the contractual corporate managements. Rationale for ratification requirement on the part of managing corporation It is a deviation from the principle that the directors of the managing corporation will devote their time and resources to the affairs of the corporation. Section 45Ultra Vires Acts Ultra Vires acts outside or beyond the Intra vires Acts within the corporate powers, including those that legitimate powers of the may be ostensibly within such powers but corporation are declared prohibited or illegal. ( Twin Towers Condo vs CA)

Ultra vires , acts which are beyond the conferred powers of a corporation or the purposes or objects for which it is created. It is not necessarily illegal. ( Pirovano vs Dela Rama). It is merely voidable and may be ratified except third parties are affected and acts are illegal.

Illegal corporate act is an act which is contrary to law, morals, good customs, public policy and public order. It is void and cannot be ratified. ( Pirovano vs Dela Rama)

Corporate transactions which are within the powers of the corporation but which are defective from a failure to observe in its execution a requirement of the law are only voidable, the parties may still ratify it. The defense of ultra vires rests on the violation of trust or duty toward stockholders ( members) and should not be entertained where its allowance will do greater wrong to innocent parties dealing with the corporation. Consequences of these acts: a. Corporation may be dissolved under a quo warranto proceedings but in most cases the court merely enjoins the corporation from commission thereof. b. Certificate of registration may be revoked or suspended. c. Ultra vires contract while executory on both sides, cannot be enforced by either party thereto. d. Ultra vires contract has been fully performed on both sides, neither party can maintain an action to set aside the transaction. e. Ultra vires contract has been performed on one side and the other received benefits , may be permitted to recover. f. Stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act. Who may invoke ultra vires: States, Stockholders, strangers, competitors in business, creditors provided it is authorized to do so. `

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