Chapter VI – Corporate Powers

General Powers of Corporations

Section 23. The board of directors or trustees. - Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code a. Express Powers
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be General
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year Section 36. Corporate powers and capacity. - Every corporation incorporated
until their successors are elected and qualified. (28a) under this Code has the power and capacity:

Every director must own at least one (1) share of the capital stock of the 1. To sue and be sued in its corporate name;
corporation of which he is a director, which share shall stand in his name on
the books of the corporation. Any director who ceases to be the owner of at 2. Of succession by its corporate name for the period of time stated in
least one (1) share of the capital stock of the corporation of which he is a the articles of incorporation and the certificate of incorporation;
director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or trustees
3. To adopt and use a corporate seal;
of all corporations organized under this Code must be residents of the
Philippines.
4. To amend its articles of incorporation in accordance with the
— Primary rule: all corporate powers shall be exercised and all provisions of this Code;
corporate businesses shall be conducted by the board of directors
of the corporation 5. To adopt by-laws, not contrary to law, morals, or public policy, and
— Exception: specific instances where the Code requires the to amend or repeal the same in accordance with this Code;
consent and ratification of the SHs, particularly those where the
underlying contractual relationship between the parties: the
6. In case of stock corporations, to issue or sell stocks to subscribers
corporation, the SHs/members, and the State, is being amended
and to sell stocks to subscribers and to sell treasury stocks in
or altered
accordance with the provisions of this Code; and to admit members to
— How is consent expressed by the parties?
the corporation if it be a non-stock corporation;
o Corporation= through the Board
o State= through act of the regulatory body
o SHs= through majority or 2/3 vote where applicable 7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
 But dissenting SHs in certain instances are given the
property, including securities and bonds of other corporations, as the
option to withdraw from the relationship through the
transaction of the lawful business of the corporation may reasonably
exercise of his appraisal right
and necessarily require, subject to the limitations prescribed by law
and the Constitution;
Section 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by this
Code or by its articles of incorporation and except such as are necessary or 8. To enter into merger or consolidation with other corporations as
incidental to the exercise of the powers so conferred. (n) provided in this Code;

9. To make reasonable donations, including those for the public

1. A corporation has only three (3) types of power: welfare or for hospital, charitable, cultural, scientific, civic, or similar
a. Express (Sec 36) purposes: Provided, That no corporation, domestic or foreign, shall
b. Implied or Necessary give donations in aid of any political party or candidate or for
c. Incidental
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purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of
incorporation. (13a)
— Sources of express powers are provided for by law and those enumerated
in its charter
— Other express powers are in its AOI
— These are exercised by the Board
— In the absence of authority from the Board, no person, not even the
officers, can validly bind the corporation in the exercise of express
powers
— Code laws down two (2) general restrictions on the power of any
corporation to purchase and hold properties
o (1) property must be reasonable and necessarily required by the
transaction of its lawful business
 depends on the nature of the business
o (2) must be subject to limitations prescribed by law and the
Constitution
 cannot acquire available public lands except by lease of not
more than 1000 hectares (consti Art XII Sec 3)
 exploration, development, exploitation, etc, of natural
resources= 60% Filipino-owned, and only in JV with the state
— General powers in Sec 36 are to be exercised by the Board of Directors in
accordance with Sec 23 (except where otherwise provided)
Specific Powers
1. To extend or shorten the corporate term (37)
Section 37. Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3)
of the members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the
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books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise his
appraisal right under the conditions provided in this code. (n)
— Sec 37: extension or shortening of term of existence
o Vote required: majority of board
o Ratification: vote of at least 2/3 of OCS or members
o Amendment to AOI: YES
o Appraisal rights? YES (37 & 81)
2. To increase or decrease capital stock (38)
o Vote required: majority of board
o Ratification: vote of at least 2/3 of OCS or members
o Prior approval of SEC required to take effect
o Amendment to AOI: YES
o Appraisal rights? NO
 Dissenting SH can simply sell his shares
 A grant of appraisal rights would defeat the purpose
—to raise funds
3. To incur, create, or increase bonded indebtedness (38)
Section 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or decrease its
capital stock or incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice
of the proposed increase or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of the time and place
of the stockholder's meeting at which the proposed increase or diminution of
the capital stock or the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
 (1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in cash or
property, or the amount of capital stock or number of shares of no-par
stock allotted to each stock-holder if such increase is for the purpose
of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five (25%)
percent of such increased capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to the
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corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease of the capital
stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase
the same, with the approval by a majority vote of the board of trustees and of
at least two-thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
— Sec 38: incur, create, or increase bonded indebtedness
o Bonded indebtedness: covers indebtedness of the corporation
which are secured by mortgage on real or personal property
(does not include debentures)
o Vote required: majority vote of the board
o Ratification: vote of at least 2/3 OCS or members
o Prior approval of SEC required
o Appraisal rights? NONE
4. To deny preemptive right (39)
Section 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or
an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be issued
in good faith with the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted debt.
5. To sell or otherwise dispose of substantially all its assets (40)
Section 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments
for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and place
of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it
was incorporated.
After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage, pledge or other disposition of property
and assets, subject to the rights of third parties under any contract relating
thereto, without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of
said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by
this section.
— Sec 40: power to sell, dispose, lease, or encumber all or
substantially all assets
o Vote required: majority vote of the board
o Ratification: vote of at least 2/3 OCS or members
o Nature of transactions covered: onerous contracts
o Transactions no covered by SH vote: (does not involve the
corporate purpose, but the corporate business)
 Necessary in the usual and regular course of
business, or…
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 … proceeds of disposition is appropriate for the
conduct of remaining business
o “substantially all” property/assets:
 if disposition renders corporation incapable of doing
business
 if disposition renders corporation incapable of
accomplishing its purpose in the AOI
 appraisal right? YES
6. To acquire its own shares (41)
Section 41. Power to acquire own shares. - A stock corporation shall have
the power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its books
to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code. (a)
— Sec 41: power to purchase own shares
o Corporation must first have unrestricted retained earnings
o But redeemable shares may be acquired even without
unrestricted retained earnings (Sec 8)
7. To invest in another corporation or business (42)
Section 42. Power to invest corporate funds in another corporation or
business or for any other purpose. - Subject to the provisions of this Code, a
private corporation may invest its funds in any other corporation or business
or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case of
non-stock corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and the time and
place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)
— Sec 42: power to invest in another corporation
o Vote required: majority of the board
o Ratification: vote of at least 2/3 OCS or members
 EXCEPT: where the investment is reasonably
necessary to accomplish its PRIMARY PURPOSE
 If secondary purpose, ratificatory vote is required
o Effect of ratification: corporation can now legally invest its
funds OUTSIDE of its primary purpose, but LIMITED to its
secondary purpose
o Coverage of “funds”—any corporate property to be used to
further its business
o No ratificatory vote: ULTRA VIRES
8. To declare dividends (43)
Section 43. Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance
on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the
purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by
the board of directors; or (2) when the corporation is prohibited under any
loan agreement with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies. (n)
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— Sec 43: power to declare dividends out of restricted retained
earnings
o Payable in cash, property, or stock
o Cash dividends due on unpaid stock shall be applied to the
unpaid balance on the subscription plus costs and expenses
o Primary of SHs to DEMAND dividends
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members
o Cannot retain surplus profits in excess of 100% of paid up
capital stock
o Exception:
 When justified by definite corporate expansion
projects approved by the board
 When prohibited under any loan agreement
 When it is clear that the retention is necessary under
special circumstances
o Surplus profits in excess of 100%= distribute as dividends
9. To enter into management contracts (44)
Section 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a non-stock corporation,
of both the managing and the managed corporation, at a meeting duly called
for the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must
be approved by the stockholders of the managed corporation owning at least
two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in the case of a non-stock corporation.
No management contract shall be entered into for a period longer than five
years for any one term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially
all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however,
That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources may
be entered into for such periods as may be provided by the pertinent laws or b. Implied or Necessary Powers
regulations. (n)

— Sec 44: power to enter into a management contract
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members, but…
o Special rule: vote of SH of MANAGED corporation owning at
least 2/3 of TOTAL outstanding stock or members entitled to
vote, iff:
 SH(s) representing the same interest in both
managed and managing corporations own or control
more than 1/3 of TOTAL outstanding capital stock,
or…
 … majority of Board of directors of the MANAGING
corporation also constitute a MAJORITY of the board in
the MANAGED
o rationale for the special rule: entering into a management
contract is a deviation from the GR that the board manages
the corporation and that the board of the managing company
should devote its affairs to its own corporation
o Not covered by Sec 44:
 if managing other corporations is the primary
purpose, ratificatory vote is not required!
 If managing a partnership or individual not a
corporation, not covered!
10. To buy the shares of another corporation (36) provided:
a. Reasonably necessary for its lawful business
b. The other corporation must be engaged in an allied business
or not alien to the purposes of the purchasing corporation
(42)
— This means a corporation can enter into a joint venture with
another person, partnership or another corporation
— But a corporation cannot enter into a partnership contract
11. Power to enter into a partnership
— GR: corporation cannot enter into partnerships with other
corporations or with individuals
— Exception: expressly allowed by statute or charter
o Joint ventures
o Limited partnerships (US Law)
GR: all acts other than those specified in Sec 36-44 and in other special
provisions would be ultra vires
Exception: those which are:
— necessary or incidental to the exercise of the powers so
conferred (45), or
— essential or necessary to carry out its purpose or purposes as
stated in the AOI. (38)
Presumption that a corporation can act within its powers and when a contract
is not on its face necessarily beyond its authority, it will, in the absence of
proof to the contrary, presumed to be valid.
— Sec 36(11): corporations have the power and capacity to exercise
such other powers as may be essential or necessary to carry out
its purpose(s) as provided for in the AOI
o Restated: the management of a corporation has discretionary
authority, in the absence of explicit restrictions, to enter into
contracts or transactions deemed reasonably necessary or
incidental to its business purposes.
c. Incidental Powers
— Sec 2: powers, attributes, and properties expressly authorized
by law or incident to its existence
— Incidental powers: those that attach to a corporation at the
moment of its creation without regard to its express powers
or particular primary purpose, and is inherent in it as a legal
entity
— Examples:
i. To sue and be sued
ii. To grant and receive in the corporate name
iii. To purchase hold and convey real and personal
property for its purposes
iv. To have a corporate seal
v. To adopt and amend by-laws for its government
vi. To disenfranchise or remove members
— Powers that go into the very nature and extent of a
corporation’s juridical entity cannot be presumed to be
incidental or inherent powers

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The Ultra Vires Doctrine
Section 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by this
Code or by its articles of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred. (n)
— Sec 45 embodies the ultra vires doctrine
— Based on two (2) principles:
1. Corporation is a creature of law and has only such powers and
privileges as are granted by the State
2. The doctrine upholds the duty of trust and obedience owed by the
corporation’s directors and officers to the SHs
a. Defense of ultra vires rests on the violation of trust or duty
towards SHs, and should not be entertained where its allowance
will do greater wrong to innocent 3rd parties
Three (3) types of ultra vires acts:
(1) acts beyond the powers of the corporation as stipulated in the law or
AOI. The TEST: logical relation of the act to the corporate purpose:
a. W/N the act is in direct and immediate furtherance of the
corporation’s business
b. W/N the act is fairly incident to the express powers and
reasonably necessary for its exercise
(2) acts or contracts entered in behalf of the corporation by persons
without corporate authority
a. GR: only acts of corporate officers within the scope of their
authority are binding on the corporation; acts beyond the
authority cannot bind the corporation
b. Exception: ratification by the Board or estoppel
c. Primary rule: In the absence of an authority from the board,
no person, not even the officers, can validly bind the
corporation
d. Exception:
i. Doctrine of apparent authority: in dealing with
corporations, the public at large is bound to rely upon
outward appearances, and relying on such, if it be
found that the directors permitted the agent to hold
himself out as having authority to bind or acquiesced
in the contract and accepted the benefits therefrom,
the corporation will be bound. (Ramirez v Orientalist)
1. Public is not expected to know what goes on
inside the boardroom, or cannot be required
to look beyond the officers acting for a
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corporation
2. If the corporation desires to set up the
defense of lack of authority, it must plead and
prove it…
3. …but once it discharges that duty, then the
burden of proof shifts to the agent to proof
that by previous acts of the corporation he
had been clothed with apparent authority
(3) acts or contracts which are per se illegal
a. cannot be given effect and are void
i. but in Harden, the Court upheld a patently void
contract as between the contracting parties; a narrow
exception is made in that since the violation of the
particular law pertains to public policy concerns and
may only be proceeded through a quo warranto, not
by any of the parties
ii. thus if no civil wrong was committed, the courts will
leave the parties as they were (Harden)
b. ultra vires acts which are NOT per se illegal are merely
voidable can be ratified by the SHs (Pirovano)
i. it cures the infirmity and makes it perfectly valid and
enforceable, provided that it prejudices no creditors
and if it has been partially executed and not merely
executory
1. ratification may be by express act of the SH
(if the act is by the Board) or the Board (if the
act is by the officers)…
2. …or impliedly through acceptance of
benefits…
3. …or through estoppel on the part of the
Board or the officers
Corporations are now more of a product of the agreement of the
incorporating parties rather than a mere “creature of the State:”
— Sec 10 allows 5 or more persons to form a private corporation for
any lawful purpose/s
— Sec 36 par 11 allows every corporation the power to exercise
such other powers as may be essential or necessary to carry out
the purpose/s in the AOI
— The corporation’s powers depends on its purpose in the AOI
— Since parties are entirely free to insert any number of purposes in
its AOI, it follows that the extent of the corporation’s powers
depends largely on their agreement, and not merely on a direct
grant from the State, unless of course the purposes are illegal.
— Instances where an act can or cannot be reasonably implied from
 the purposes due to poor draftsmanship or lack of foresight of the
drafters, the purpose clause may be reasonably stretched to
accommodate the new and unexpected situations, otherwise, a
proper amendment of the AOI would be necessary.
Legal consequences of acts clearly beyond the powers of the corporation or
ultra vires?
— On the corporation:
o if the act is illegal, involuntary dissolution under a quo
warranto proceeding by the SolGen
o revocation or suspension of the certificate of registration by
the SEC
— On the parties to the ultra vires contract:
o Parties are “left as they are” and no rescission would lie.
o Where there has been partial performance by one party, and
the other has not, the latter, having benefited from the
performance, is estopped from claiming ultra vires
— On the rights of stockholders:
o A stockholder can file an individual or derivative suit to enjoin
a threatened ultra vires act or contract or a derivative suit for
damages if the contract has been performed
o Liability would depend on whether the contracting parties
acted in GF and with reasonable diligence; an honest mistake
would not give rise to liability
— If action is based on tort, the stockholders cannot set up the
defense of ultra vires against the injured party who had no
knowledge that the corporation was engaging in an act not
included expressly or impliedly in its purpose clause.
RP v Acoje Mining. F: Acoje Mining requested the opening of a post office at
its mining camp in Zambales to service employees living in the camp. The
Director of Posts agreed to set up the office, provided that in the meantime
that funds are not available, the company would provide for all essential
equipment and assign a responsible employee to perform the duties of a
postmaster. He also added that the company shall assume direct
responsibility for whatever pecuniary loss may be suffered by the Bureau of
Posts by reason of the dishonesty or negligence of the employee assigned. A
Resolution by the Acoje Board of Directors was passed. The postmaster
assigned, Hilario Sanchez, went on leave and never returned. It was soon
discovered that a shortage was incurred iao P13,867.24, apparently
embezzled by Sanchez. Bureau of Posts sues for the shortage. Acoje denied
its liability contending that the resolution issued by the board was ultra vires,
and its liability if any would only be that of a guarantor.
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H: It should be noted that it was Acoje itself that requested for the setting up
of a post office for the convenience of its employees, which the SC held to
cover a subject which is “a reasonable and proper adjunct to the conduct of
the business of Acoje Mining.” An ultra vires act is one committed outside the
object for which a corporation is created, but there are certain corporate acts
that may be performed outside the scope of the powers expressly conferred if
they are necessary to promote the interest and welfare of the corporation.”
Even in the case of ultra vires acts which are not illegal per se, a corporation
cannot be heard to complain that it is not liable for the acts of its board,
because of estoppel by representation. The term ultra vires should be
distinguished from an illegal act for the former is merely voidable which may
be enforced by performance, ratification, or estoppel, while the latter is void
and cannot be invalidated. It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for taking such action. In
this case, it is fair that the resolution be upheld at least on the ground of
estoppel.
The defense of ultra vires rests on violation of trust or duty towards the
stockholders, and should not be entertained where its allowance will do
greater wrong to innocent parties dealing with the corporation. The
acceptance of benefits arising from the performance of the other party gives
rise to an estoppel precluding the repudiation of the contract.
Napocor v Vera. Sea Lion is a port and arrastre operator with a contract for
stevedoring services with NPC which had already expired. Its PPA permit for
cargo handling services at the NPC Calaca pier had expired as well. Napocor
did not renew Sea Lion’s contract for Stevedoring Services for Coal-Handling
Operations at Calaca plant, and took over its stevedoring services pursuant
to a provision in its charter, “[t[o exercise such powers and do such things as
may be reasonably necessary to carry out the business and purposes for
which it was organized, or which, from time to time, may be declared by the
Board to be necessary, useful, incidental or auxiliary to accomplish said
purpose.” Sea Lion sues, alleging that NPC had acted in bad faith and with
grave abuse of discretion in not renewing its Contract for Stevedoring
Services for Coal-Handling Operations at the Calaca plant, and in taking over
its stevedoring services. Judge Vera, acting on Sea Lion’s suit, issued a writ of
preliminary injunction enjoining NPC from further undertaking stevedoring
and arrastre services in its pier located at the Batangas Coal-Fired Thermal
Power Plant at Calaca, Batangas and directing it either to enter into a
contract for stevedoring and arrastre services or to conduct a public bidding
therefor. Sea Lion was also allowed to continue stevedoring and arrastre
services at the pier.
H: In determining whether or not the act of NPC falls within the purview of the
charter which creates it, the Court must decide whether or not a logical and
necessary relation exists between the act questioned and the corporate
purpose expressed in the NPC charter. For if that act is one which is lawful in
itself and not otherwise prohibited, and is done for the purpose of serving
corporate ends, and reasonably contributes to the promotion of those ends in
a substantial and not in a remote and fanciful sense, it may be fairly
considered within the corporation's charter powers. A pier located at Calaca,
Batangas, which is owned by NPC, receives the various shipments of coal
which is used exclusively to fuel the Batangas Coal-Fired Thermal Power Plant
of the NPC for the generation of electric power. The stevedoring services
which involve the unloading of the coal shipments into the NPC pier for its
eventual conveyance to the power plant are incidental and indispensable to
the operation of the plant. The Court holds that NPC is empowered under its
Charter to undertake such services, it being reasonably necessary to the
operation and maintenance of the power plant. This Court is, guided by the
case of Republic of the Philippines v. Acoje Mining Company, Inc., where the
Court affirmed the rule that a corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter, but has the power to do
what is reasonably necessary or proper to promote the interest or welfare of
the corporation. Whether NPC will enter into a contract for stevedoring and
arrastre services to handle its coal shipments to its pier, or undertake the
services itself, is entirely and exclusively within its corporate discretion. It
does not involve a duty the performance of which is enjoined by law. Thus,
the courts cannot direct the NPC in the exercise of this prerogative.
Madrigal & Co v Zamora. Madrigal & Co was engaged in the management
of Rizal Cement Co., Inc. and is also its sister company, both being owned by
the same or practically the same stockholders. The Madrigal Central Office
Employees Union sought for the renewal of its collective bargaining
agreement and proposed a wage increase of P200.00 a month, an allowance
of P100.00 a month, and other economic benefits. Madrigal requested for a
deferment in the negotiations.
Thereafter, Madrigal on two occasions reduced its capital stock from 765,000
shares to 267,366 shares and from 267,366 shares to 110,085 shares by
virtue of two alleged resolutions of its stockholders, which was effected
through the distribution of the marketable securities owned by the petitioner
to its stockholders in exchange for their shares in an equivalent amount in
the corporation.
The Union filed a case for ULP with the NLRC. Madrigal answered citing
operational losses. Madrigal then informed the Secretary of Labor that Rizal
Cement Co., Inc., "from which it derives income as the General Manager or
Agent" had "ceased operating temporarily. In addition, because of the desire
of the stockholders to phase out the operations of the Madrigal & Co., Inc.
9
due to lack of business incentives and prospects, and in order to prevent
further losses," it had to reduce its capital stock on two occasions. The labor
arbiter, having found that the petitioner "had been making substantial profits
in its operation" since 1972 through 1975, granted the wage increase, and
was affirmed by NLRC. Meanwhile Madrigal tried to terminate the services of
Union members citing retrenchment but its application was declared illegal
by DOLE. Upon appeal to OP, Ronaldo Zamora affirmed the decision of DOLE.
H: What clearly emerges from the recorded facts is that the petitioner, awash
with profits from its business operations but confronted with the demand of
the union for wage increases, decided to evade its responsibility towards the
employees by a devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all indications, just a
mask for the purge of union members, who, by then, had agitated for wage
increases. In the face of the petitioner company's piling profits, the unionists
had the right to demand for such salary adjustments. That the petitioner
made quite handsome profits is clear from the records. We agree with the
National Labor Relations Commission that "[t]he dividends received by the
company are corporate earnings arising from corporate investment." 42
Indeed, as found by the Commission, the petitioner had entered such
earnings in its financial statements as profits, which it would not have done if
they were not in fact profits. 43
Moreover, it is incorrect to say that such profits — in the form of dividends —
are beyond the reach of the petitioner's creditors since the petitioner had
received them as compensation for its management services in favor of the
companies it managed as a shareholder thereof. As such shareholder, the
dividends paid to it were its own money, which may then be available for
wage increments. It is not a case of a corporation distributing dividends in
favor of its stockholders, in which case, such dividends would be the absolute
property of the stockholders and hence, out of reach by creditors of the
corporation. Here, the petitioner was acting as stockholder itself, and in that
case, the right to a share in such dividends, by way of salary increases, may
not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction
efforts were, to begin with, a subterfuge, a deception as it were, to
camouflage the fact that it had been making profits, and consequently, to
justify the mass layoff in its employee ranks, especially of union members.
They were nothing but a premature and plain distribution of corporate assets
to obviate a just sharing to labor of the vast profits obtained by its joint
efforts with capital through the years. Surely, we can neither countenance
nor condone this. It is an unfair labor practice.
Gov’t of Philippines v El Hogar. This is a quo warranto proceeding,
alleging 17 causes of action, instituted originally in this court by the
Government of the Philippine Islands on the relation of the Attorney-General
against the building and loan association known as El Hogar Filipino, for the
purpose of depriving it of its corporate franchise, excluding it from all
corporate rights and privileges, and effecting a final dissolution of said
corporation. The respondent, El Hogar Filipino, was apparently the first
corporation organized in the Philippine Islands under the provisions cited, and
the association has been favored with extraordinary success. The articles of
incorporation bear the date of December 28, 1910, at which time capital
stock in the association had been subscribed to the amount of P150,000 of
which the sum of P10,620 had been paid in. Under the law as it then stood,
the capital of the Association was not permitted to exceed P3,000,000, but by
Act No. 2092, passed December 23, 1911, the statute was so amended as to
permit the capitalization of building and loan associations to the amount of
ten millions. Soon thereafter the association took advantage of this
enactment by amending its articles so as to provide that the capital should be
in an amount not exceeding the then lawful limit. From the time of its first
organization the number of shareholders has constantly increased, with the
result that on December 31, 1925, the association had 5,826 shareholders
holding 125,750 shares, with a total paid-up value of P8,703,602.25. During
the period of its existence prior to the date last above-mentioned the
association paid to withdrawing stockholders the amount of P7,618,257,.72;
and in the same period it distributed in the form of dividends among its
stockholders the sum of P7,621,565.81.
I: W/N El Hogar is illegally holding title to real property in excess of 5 years, in
violation of the law that while corporations may loan funds upon real estate
security, they shall dispose of the same within 5 years after receiving title
H: the corporation has not been shown to have offended against the law in a
manner which would entail forfeiture of its charter. The evident purpose
behind the law restricting the rights of corporations with respect to the tenure
of land was to prevent the revival of the entail or other similar institution by
which land could be fettered and its alienation hampered. In the case, El
Hogar had in GF disposed of the property at the expiration of the period fixed
by law. Under the circumstances the destruction of the corporation would
bring irreparable loss upon thousands of innocent shareholders of the
corporation without any corresponding benefit to the public.
I: W/N el Hogar is illegally owning and holding a business lot in excess of the
reasonable requirements and in contravention of the Corpo law that every
corporation has the power to purchase hold lease real property as reasonable
and necessary required for the transaction of the lawful business
H: The law expressly declares that corporations may acquire such real estate
as is reasonably necessary to enable them to carry out the purposes for
which they were created; and we are of the opinion that the owning of a
10
business lot upon which to construct and maintain its offices is reasonably
necessary to a building and loan association such as the respondent was at
the time this property was acquired. A different ruling on this point would
compel important enterprises to conduct their business exclusively in leased
offices — a result which could serve no useful end but would retard industrial
growth and be inimical to the best interests of society. We are furthermore of
the opinion that, inasmuch as the lot referred to was lawfully acquired by the
respondent, it is entitled to the full beneficial use thereof. No legitimate
principle can discovered which would deny to one owner the right to enjoy his
(or its) property to the same extent that is conceded to any other owner.
I: W/N el Hogar has engaged in activities foreign to the purposes for which
the corporation was created and not reasonably necessary to its legitimate
ends, specifically: (1) the administration of the offices in the El Hogar building
not used by the respondent itself and the renting of such offices to the public;
(2) the administration and management of properties belonging to delinquent
shareholders of the association; (3) the management of some parcels of
improved real estate situated in Manila not under mortgage to it, but owned
by shareholders, and has held itself out by advertisement as prepared to do
so
H: (1) The activities here criticized clearly fall within the legitimate powers of
the respondent, as shown in what we have said above relative to the second
cause of action. This matter will therefore no longer detain us. If the
respondent had the power to acquire the lot, construct the edifice and hold it
beneficially, as there decided, the beneficial administration by it of such parts
of the building as are let to others must necessarily be lawful.
(2) The case for the government supposes that the only remedy which the
respondent has in case of default on the part of its shareholders is to proceed
to enforce collection of the whole loan in the manner contemplated in section
185 of the Corporation Law. It will be noted, however, that, according to said
section, the association may treat the whole indebtedness as due, "at the
option of the board of directors," and this remedy is not made exclusive. We
see no reason to doubt the validity of the clause giving the association the
right to take over the property which constitutes the security for the
delinquent debt and to manage it with a view to the satisfaction of the
obligations due to the debtor than the immediate enforcement of the entire
obligation, and the validity of the clause allowing this course to be taken
appears to us to be not open to doubt.
(3) The practice described in the passage above quoted from the agreed facts
is in our opinion unauthorized by law. The administration of property in the
manner described is more befitting to the business of a real estate agent or
trust company than to the business of a building and loan association. The
practice to which this criticism is directed relates of course solely to the
management and administration of properties which are not mortgaged to
the association. The circumstance that the owner of the property may have
been required to subscribe to one or more shares of the association with a
view to qualifying him to receive this service is of no significance. It is a
general rule of law that corporations possess only such express powers. The
management and administration of the property of the shareholders of the
corporation is not expressly authorized by law, and we are unable to see that,
upon any fair construction of the law, these activities are necessary to the
exercise of any of the granted powers. The corporation, upon the point now
under the criticism, has clearly extended itself beyond the legitimate range of
its powers. But it does not result that the dissolution of the corporation is in
order, and it will merely be enjoined from further activities of this sort.
I: W/N the royalty paid to the founder of el Hogar, Antonio Melian, as
compensation for his services rendered by him during the early stages of the
organization of the corporation, is unconscionable, excessive, and thus
necessitates dissolution
H: No possible doubt exists as to the power of a corporation to contract for
services rendered and to be rendered by a promoter in connection with
organizing and maintaining the corporation. It is true that contracts with
promoters must be characterized by good faith; but could it be said with
certainty, in the light of facts existing at the time this contract was made,
that the compensation therein provided was excessive? If the amount of the
compensation now appears to be a subject of legitimate criticism, this must
be due to the extraordinary development of the association in recent years. If
the Melian contract had been clearly ultra vires — which is not charged and is
certainly untrue — its continued performance might conceivably be enjoined
in such a proceeding as this; but if the defect from which it suffers is mere
matter for an action because Melian is not a party. It is rudimentary in law
that an action to annul a contract cannot be maintained without joining both
the contracting parties as defendants. Moreover, the proper party to bring
such an action is either the corporation itself, or some shareholder who has
an interest to protect.
I: W/N el Hogar had abused its franchise in issuing special shares, which is
alleged to be illegal and inconsistent with the plan and purposes of building
and loan associations,and that these are held by well-to-do people purely for
investment purposes and not by wage-earners for savings
H: The ground for supposing the issuance of the "special" shares to be
unlawful is that special shares are not mentioned in the Corporation Law as
one of the forms of security which may be issued by the association. Upon
examination of the nature of the special shares in the light of American
usage, it will be found that said shares are precisely the same kind of shares
that, in some American jurisdictions, are generally known as advance
payment shares; in if close attention be paid to the language used in the last
sentence of section 178 of the Corporation Law, it will be found that special
shares where evidently created for the purpose of meeting the condition
cause by the prepayment of dues that is there permitted. The language of
this provision is as follow "payment of dues or interest may be made in
11
advance, but the corporation shall not allow interest on such advance
payment at a greater rate than six per centum per annum nor for a longer
period than one year." In one sort of special shares the dues are prepaid to
the extent of P160 per share; in the other sort prepayment is made in the
amount of P10 per share, and the subscribers assume the obligation to pay
P10 monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that interest shall not be
allowed on the advance payments at a greater rate than six per centum per
annum nor for a longer period than one year. The word "interest " as there
used must be taken in its true sense of compensation for the used of money
loaned, and it not must not be confused with the dues upon which it is
contemplated that the interest may be paid. Now, in the absence of any
showing to the contrary, we infer that no interest is ever paid by the
association in any amount for the advance payments made on these shares;
and the reason is to be found in the fact that the participation of the special
shares in the earnings of the corporation, in accordance with section 188 of
the Corporation Law, sufficiently compensates the shareholder for the
advance payments made by him; and no other incentive is necessary to
induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value of each
special share is not paid for by the shareholder with funds out of the pocket.
The amount is satisfied by applying a portion of the shareholder's
participation in the annual earnings. But as the right of every shareholder to
such participation in the earnings is undeniable, the portion thus annually
applied is as much the property of the shareholder as if it were in fact taken
out of his pocket. It follows that the mission of the special shares does not
involve any violation of the principle that the shares must be sold at par.
From what has been said it will be seen that there is express authority, even
in the very letter of the law, for the emission of advance-payment or "special"
shares, and the argument that these shares are invalid is seen to be
baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El
Hogar Filipino, supra, that even assuming that the statute has not expressly
authorized such shares, yet the association has implied authority to issue
them. The complaint consequently fails also as regards the stated in the ninth
cause of action.
I: W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive
rate at the discretion of its Board, the value of real properties acquired by it
at its sales, thereby frustrating the right of SHs to participate annually and
equally in the earnings.
H: This count for the complaint proceeds, in our opinion, upon an erroneous
notion as to what a court may do in determining the internal policy of a
business corporation. If the criticism contained in the brief of the Attorney-
General upon the practice of the respondent association with respect to
depreciation be well founded, the Legislature should supply the remedy by
defining the extent to which depreciation may be allowed by building and
loan associations. Certainly this court cannot undertake to control the
discretion of the board of directors of the association about an administrative
matter as to which they have legitimate power of action. The tenth cause of
action is therefore not well founded.
I: W/n el Hogar’s charter should be revoked because it illegally maintains
excessive reserve funds and because it pursues a policy, allegedly unlawful,
of paying a straight annual dividend of 10% regardless of losses suffered and
profits made by the corporation and in violation of the requirement s of the
corpo code.
H: It is insisted in the brief of the Attorney-General that the maintenance of
reserve funds is unnecessary in the case of building and loan associations,
and at any rate the keeping of reserves is inconsistent with section 188 of the
Corporation Law. Upon careful consideration of the questions involved we find
no reason to doubt the right of the respondent to maintain these reserves. It
is true that the corporation law does not expressly grant this power, but we
think it is to be implied. It is a fact of common observation that all
commercial enterprises encounter periods when earnings fall below the
average, and the prudent manager makes provision for such contingencies.
To regard all surplus as profit is to neglect one of the primary canons of good
business practice. Building and loan associations, though among the most
solid of financial institutions, are nevertheless subject to vicissitudes.
Fluctuations in the dividend rate are highly detrimental to any fiscal
institutions, while uniformity in the payments of dividends, continued over
long periods, supplies the surest foundations of public confidence.
Moreover, it is said that the practice of the association in declaring regularly a
10 per cent dividend is in effect a guaranty by the association of a fixed
dividend which is contrary to the intention of the statute. The government
insists upon an interpretation of section 188 of the Corporation Law that is
altogether too strict and literal. From the fact that the statute provides that
profits and losses shall be annually apportioned among the shareholders it is
argued that all earnings should be distributed without carrying anything to
the reserve. But it will be noted that it is provided in the same section that
the profits and losses shall be determined by the board of directors: and this
means that they shall exercise the usual discretion of good businessmen in
allocating a portion of the annual profits to purposes needful to the welfare of
the association. The law contemplates the distribution of earnings and losses
after other legitimate obligations have been met. Our conclusion is that the
respondent has the power to maintain the reserves criticized in the eleventh
and twelfth counts of the complaint; and at any rate, if it be supposed that
the reserves referred to have become excessive, the remedy is in the hands
of the Legislature. It is no proper function of the court to arrogate to itself the
12
control of administrative matters which have been confided to the discretion
of the board of directors. The causes of action under discussion must be
pronounced to be without merit.
I: W/n el Hogar illegally departed from its charter because it has made loans
which were intended to be used by the borrowers for other purposes than the
building of homes. There is no statute here expressly declaring that loans
may be made by these associations solely for the purpose of building homes.
On the contrary, the building of homes is mentioned in section 171 of the
Corporation Law as only one among several ends which building and loan
associations are designed to promote. Furthermore, section 181 of the
Corporation Law expressly authorities the Board of directors of the
association from time to time to fix the premium to be charged. In the brief of
the plaintiff a number of excerpts from textbooks and decisions have been
collated in which the idea is developed that the primary design of building
and loan associations should be to help poor people to procure homes of their
own. This beneficent end is undoubtedly served by these associations, and it
is not to be denied that they have been generally fostered with this end in
view. But in this jurisdiction at least the lawmaker has taken care not to limit
the activities of building and loan associations in an exclusive manner, and
the exercise of the broader powers must in the end approve itself to the
business community.
I: W/n the el Hogar charter may be revoked because various loans now
outstanding have been made by the respondent to corporations and
partnerships, and that these entities have in some instances subscribed to
shares in the respondent for the sole purpose of obtaining such loans, and
that some of these juridical entities became shareholders merely for the
purpose of qualifying themselves to take loans from the association.
H: the Corporation Law declares that "any person" may become a stockholder
in building and loan associations. The word "person" appears to be here used
in its general sense, and there is nothing in the context to indicate that the
expression is used in the restricted sense of both natural and artificial
persons, as indicated in section 2 of the Administrative Code. We would not
say that the word "person" or persons," is to be taken in this broad sense in
every part of the Corporation Law. For instance, it would seem reasonable to
say that the incorporators of a corporation ought to be natural persons,
although in section 6 it is said that five or more "persons", although in section
6 it is said that five or more "persons," not exceeding fifteen, may form a
private corporation. But the context there, as well as the common sense of
the situation, suggests that natural persons are meant. When it is said,
however, in section 173, that "any person" may become a stockholder in a
building and loan association, no reason is seen why the phrase may not be
taken in its proper broad sense of either a natural or artificial person. At any
rate the question whether these loans and the attendant subscriptions were
properly made involves a consideration of the power of the subscribing
corporations and partnerships to own the stock and take the loans; and it is
not alleged in the complaint that they were without power in the premises. Of
course the mere motive with which subscriptions are made, whether to
qualify the stockholders to take a loan or for some other reason, is of no
moment in determining whether the subscribers were competent to make the
contracts. The result is that we find nothing in the allegations of the sixteenth
cause of action, or in the facts developed in connection therewith, that would
justify us in granting the relief.
I: W/n el Hogar, in disposing of real estate purchased in the collection of
defaulted loans, on credit at first and then sold and mortgaged to el Hogar to
secure payment of the purchase price, had incurred several outstanding
loans, and that that the persons and entities to which said properties are sold
under the condition charged are not members or shareholders nor are they
made members or shareholders of the defendant.
H: This part of the complaint is based upon a mere technicality of
bookkeeping. The central idea involved in the discussion is the provision of
the Corporation Law requiring loans to be stockholders only and on the
security of real estate and shares in the corporation, or of shares alone. It
seems to be supposed that, when the respondent sells property acquired at
its own foreclosure sales and takes a mortgage to secure the deferred
payments, the obligation of the purchaser is a true loan, and hence
prohibited. But in requiring the respondent to sell real estate which it acquires
in connection with the collection of its loans within five years after receiving
title to the same, the law does not prescribe that the property must be sold
for cash or that the purchaser shall be a shareholder in the corporation. Such
sales can of course be made upon terms and conditions approved by the
parties; and when the association takes a mortgage to secure the deferred
payments, the obligation of the purchaser cannot be fairly described as
arising out of a loan. Nor does the fact that it is carried as a loan on the books
of the respondent make it a loan on the books of the respondent make it a
loan in law. The contention of the Government under this head is untenable.
Pirovano v Dela Rama. Under the leadership and management of 
Enrico Pirovano, president of Del Rama Steamship, the company 
grew and progressed until it became a multi­million corporation, 
the assets of which grew and increased from P240K to around P15M. 
He was insured by the company for P1M. Esteban dela Rama, 
majority stockholder, distributed his shares among his 5 
daughters, including the NDC, to which Dela Rama had an 
outstanding bonded indebtedness iao P7.5M, through a debt­equity 
swap arrangement which also gave the NDC representation in the 
Board. Pirovano was killed by the Japanese during the war, and a 
Boardres was adopted granting to the Pirovano children the 
13
proceeds of the insurance policies taken on the life of the late 
president. However, the policy had lapse because the company was 
not able to pay the premiums regularly. The BoardRes authorizes 
the allocation of P400K convertible into 4000 shares of stock ifo 
of the Pirovano children, as well as a waiver of the preemptive 
rights of the former owners, the Dela Rama siblings. This was 
submitted to the stockholders which duly approved the same. It 
appears, however, that Don Esteban did not realize that the dole 
out would actually be giving to the Pirovano children more than 
what they intended to give. This was because the value then of 
the shares was 3.6 times the par value thereof, thus the donation 
iao P400K would amount to a total of P1.44M. Thus the voting 
strength of the Pirovano children would be twice as much as that 
of the dela Rama sisters. The old Resolution having been 
nullified, the Board adopted a new BR changing the form of the 
donation from 4000 shares into a renunciation of the Company’s 
right and title to the life insurance policies of Pirovano. It 
also provides that the proceeds of the policy be retained by the 
Company as a loan drawing interest payable to the Pirovano 
children whenever the company is in a position to meet this 
financial obligation and after the Company settles its bonded 
indebtedness ifo NDC. This was ratified by the Dela Rama 
stockholders. Mrs Pirovano accepted the donation, and buys 
property in the US. Upon inquiry with the Sec, it was found that 
the donation was illegal and thus void on the grounds that the 
corporation acted ultra vires and that it could not dispose of 
its assets through donation. The stockholders then voted to 
revoke the donation. Mrs Pirovano sued to demand the credit owed 
to them by the Company.
I: w/n the donation by the corporation of the proceeds of the 
insurance is an ultra vires act
H: Under the AOI of Dela Rama Steamship it is provided under (g) 
that the company may invest and deal with moneys of the company 
not immediately required, in such a manner as from time to time 
may be determined, and under (i)… to lend money or to aid in any 
other manner any person association, or corporation of which any 
obligation or in which any interest is held by the corporation or 
in the affairs of prosperity of which the corporation has a 
lawful interest. The corporation was thus given broad and almost 
unlimited powers to carry out the purposes for which it was 
organized. The word ”deal” is broad enough to include any manner 
of disposition, and thus the donation comes within the scope of 
this broad power. The company was in fact very much solvent as it  Balatoc issued ifo Benguet and to recover money earned from the
was able to declare and issue dividends to its stockholders, and  transaction. TC dismissed complaint.
shows that the excess funds which were not needed by the company 
which was donated to the children was justified under the AOI.  H: Although the contract between the two mining companies was illegal for
contravening the old Corpo Law, the Legislature, in adopting such a provision
Under the second broad power, the corporation knew well its scope  had the intention that public policy should be controlling in the granting of
such that noone lifted a finger to dispute its validity. The  mining rights. The violation in this case was of such a nature that it can be
proceeded upon only by way of a criminal prosecution, or by action quo
company gave the donation not only because it was indebted to him 
warranto, which can be maintained only by the State. Insofar as the parties
but also because it was fit and proper to make provisions for the 
are concerned, no civil wrong had been committed between them, and if
children and out of a sense of gratitude. 
public wrong had been committed, then the directors of Balatoc Mining and
Harden were the active inducers of that wrong. The contract has in fact been
Even assuming that the donation was ultra vires, still it cannot  performed on both sides, and there is no possibility of undoing what had
be invalidated or declared legally ineffective for that reason  been done. Thus even where corporate contracts are illegal per se, when only
alone, it appearing that the donation represents not only the act  public or government policy or interests are at stake and no private wrong is
of the Board but also that of the stockholders themselves since  committed, the courts will leave the parties as they are, in accordance with
they expressly ratified the resolution. By this ratification, the  their original contractual expectations.
infirmity of the corporate act, if any, has been obliterated 
thereby making the act perfectly valid and enforceable, especially 
so if the donation is not merely executory but consummated. The 
defense of ultra vires cannot be set up against completed or 
consummated transactions. 
Corporate powers: WYSIWYG
An ultra vires act may either be an act performed merely outside  AOI related to relevant code provisions
the scope of the powers granted to the corporation by its AOI or  Powers are built-in in the AOI, limited by
one which is contrary to law or violative of any principle which  primary purpose
would void any contract. A distinction has to be made with  45: all encompassing powers
respect to corporate acts which are illegal and those merely  Necessary and incidental rule: necessary is
different from incidental
ultra vires. The former are contrary to law, morals, public order 
Common denominator contained in AOI
or policy, while the latter are not void ab initio, but merely go 
Code sets parameters/requirements (36-44)
beyond the scope of the powers in the AOI, and which renders the  Statute sets parameters (i.e. banks, Gen
act merely voidable and thus ratifiable by the stockholders. Banking Act)
Specific powers: dealing with SHs and 3rd
Harden v Benguet. Balatoc Mining, engaged in the mining of gold, sorely parties
needed the infusion of new capital to resuscitate its stalled operations. The Cannot divorce exercise of corporate
officers approached the Benguet Mining Co, an entity also engaged in gold powers from control and management
mining. A contract was executed, which states that Benguet agrees to Extent of corporate powers would limit
construct a milling plant for the Balatoc mine and erect a power plant, in control and management
exchange for Balatoc Mining shares valued at P600K and the excess in cash Unlimited discretion cannot be exercised for
to compensate for the cost of the contract. By the time of the complaint, the furtherance of secondary purposes in AOI
value of the stock of Balatoc had soared for a nominal valuation to more than
P11 per share. It was alleged by Harden of Balatoc that the Benguet Mining
Co held shares of stock in another mining corporation, the Balatoc Mining
Company, in violation of a prohibition against mining corporations from
owning stock of another mining corporation in the old Corpo law. The
shareholders of Balatoc sued Benguet Mining to annul stock certificates of
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