Lecture - Title IV

Powers of Corporations

After setup, meaning the election of a working board of directors, it is now time to consider what the
corporation can do. Naturally, it sets out to do business, the one stated in its corporate purpose in the
Articles of Incorporation, and any secondary purpose that may be listed there in connection with or
in support of the main corporate purpose. What this next Title lists as powers are those that the
corporation can legally perform during its existence, to support it as a corporate entity, to wit:

1. Sue and be sued in its corporate name

2. Have perpetual existence, or to exist as stated in the certificate of incorporation
3. Adopt and use a corporate seal
4. Amend its articles of incorporation
5. Adopt bylaws
6. Sell and issue stocks, for stock corporations
7. Admit members, for non-stock corporations
8. Transact on assets, real or personal, including securities or bonds of other companies
9. Enter into commercial agreements and combinations with natural or juridical persons
10. Make reasonable donations
11. Establish pension or retirement plans for directors, trustees, and employees 1
12. Extend or shorten the corporate term (Sec. 36)
13. Increase or decrease capital stock (Sec. 37)
14. Incur or increase bonded indebtedness (Ibid.)
15. Deny stockholders’ pre-emptive right (Sec. 38)
16. Sell or dispose of assets (Sec. 39)
17. Acquire own shares (Sec. 40)
18. Invest corporate funds in other companies or for any purpose (Sec. 41)
19. Declare dividends (Sec. 42)
20. Enter into Management contracts (Sec. 43)
21. Other powers essential or necessary to carry out its purpose or purposes (Sec. 35k)

Express, Implied, Incidental

“No corporation shall possess or exercise corporate powers other than those conferred by this Code
or by its articles of incorporation and except as necessary or incidental to the exercise of the powers
conferred.” So states Sec. 44 of the Revised Corporation Code. This statement enumerates the kinds
of powers that corporations have – those that are conferred, i.e., expressly granted and written, by
the corporation law and the corporation’s own articles, those that are necessary for and implied with
such conferred powers, which would be possible without such supporting or necessary powers, and
finally, those that are incidental, meaning those that a corporation can do just because it is a
corporation.

Among the third kind (incidental) are powers that a corporation can exercise because it is a juridical
person, like having a corporate name, having a corporate seal, suing to protect its name and goodwill,
and even issuing shares for stock corporations. Such are incidents to the existence of the corporation
(Sec. 2). Express or conferred powers are those that the law or the articles allow. Aside from the

1 Items 1-11 are listed under Sec. 35 of the Revised Corporation Code
enumerated powers under Title IV of the law, if, for example, the corporation’s purpose is to
manufacture textiles, that is what is conferred upon it by its articles, and it cannot, say, manufacture
food products, because the latter is not the purpose stated in its articles and approved by the SEC.
Neither is manufacturing food products valid as a secondary purpose because it is not substantially
connected with textiles. It may not also qualify as a necessary power because of the conceptual gap
between the two activities. The test, essentially, is to show that an activity is substantially connected
to the purpose/s and other powers of the corporation.

If that substantial connection is lacking, the corporation is said to be doing an ultra vires act. The term
is Latin for beyond (ultra) the powers (vis, plural vires). The powers, again, are those expressly granted
or authorized, those that are implied from those expressly authorized, and those that are incidental
to the corporation’s existence. But aside from this, Dean Cesar Villanueva of the Ateneo says that acts
not authorized by the board of directors are also ultra vires. From one angle, this makes sense because
it is the board of directors that are the brains of the corporation, and they dictate what the corporation
does. So even if the action is in pursuit of the corporate powers, but in contradiction to policy as
declared by the board of directors, it is invalid for being ultra vires. But from another angle, it may not
be ultra vires at all, because it is not official company action. The corporation can disown it, and can
say that it did not do anything that may be beyond its powers. Finally, illegal acts, even if they in the
improbable situation of being listed and approved in the articles, are always ultra vires.

Sec. 36 enumerates mostly inherent or incidental powers, that is, those that attach to the corporation
the moment it is given its certificate of incorporation. It is an artificial person with its own rights, so it
can sue to protect those rights. It can own property and transact on or dispose that property. It can
have a name and its own address, and have a seal to symbolize or represent it. It is an employer and
a going concern, too, so it can adopt bylaws to run its business, partner with other going concerns,
and take care of its employees with benefit and retirement packages.

But the rest of the powers conferred under the law may or may not be inherent. Sec. 36, which
mentions two powers have one of both kinds. The power to extend a term (if the corporation did not
adopt a perpetual term) is not inherent, because the term itself dictates how long the corporation
exists. The corporation must therefore be conferred the power to extend its term, and this is done by
Sec. 36. The second power under Sec. 36 (the power to shorten corporate term), is arguably within
the corporation’s incidental powers. The government cannot force the company to keep doing
business if it can no longer do so, or if no longer wants to. Hence, whether or not to exhaust the
corporate term, perpetual or limited, should be within the corporation’s discretion.

Aside from the power to extend the corporate term, we may argue that increasing or decreasing the
capital stock (Sec. 37), denying the stockholder’s pre-emptive right (Sec. 38), investing in other
companies (Sec. 41), and entering into management contracts are not inherent powers.

A corporation increases its capital stock presumably to have more money to finance its operations or
expansion. The number of shares may also increase and therefore more investors can come in. In this
case, Sec. 38 gives existing stockholders the right to buy first from the new stock created. This is called
the pre-emptive right of stockholders. The corporation, however, is allowed by law to deny the pre-
emptive right in its articles of incorporation, whether as originally approved, or in subsequent
amendments.
The pre-emptive right, therefore, is not an absolute right, and denying makes the corporation not
exclusive to existing stockholders who may have the means to buy all new stock. Instead, the
corporation is able to make its stockholder base as wide as possible. The pre-emptive right is also not
available when its exercise undermines stock ownership limitations imposed by law, such as in the
case of public utilities, which must have a certain percentage of its stocks offered to the public, or in
nationalized corporations, where foreign stockholders exercising the right may exceed the equity cap
under the Constitution. The corporation can also prevent the exercise of the pre-emptive right in case
the increase of capital is being used to finance the purchase of property (which will in effect be paid
for with corporate stocks), or the payment of an existing debt

When you decrease capital stock, meanwhile, it can mean that you no longer need that much capital,
or you are paring down stock that has been unsubscribed. The corporation can also decrease below
subscribed capital. But these levels of decrease also have various effects, thanks to the so-called Trust
Fund doctrine in corporate law. That doctrine states that the corporations capital stock is a trust fund
for creditors. In the simplest – hopefully not too reductionist – terms, creditors will sit easy even if the
company is only breaking even in business, because there is still the capital stock, which is an asset,
to look forward to.

Say, a company was formed with P10M capital, divided into x number of stocks. If half of it has been
subscribed and half of that subscription has been paid up, the company has P2.5M on hand. It uses
that to do business, and only breaks even. In the meantime, the company has loans from banks. When
the company does not make enough to service the loans while spending for operations, the banks can
still look forward to the rest of the capital stock. The company can collect the P2.5M remaining to be
paid for the subscriptions. And of course, the company can invite investors to buy up the rest of the
capital stock until the entire P10M is subscribed to and paid.

But when the company is only breaking even, as we said, and business opportunities are not that
great, it may give up on the P10M capital and amend the articles to decrease it to the level of the
subscriptions, which is half – P5M. Will the banks complain? Arguably, no. The capital that was cut
was still not outstanding because there were still not tied to subscriptions. Thus, there is no expected
collection. But the subscribed capital of P5M is potential cash, if the corporation collects upon the
remaining subscription. It is when the company decides to decrease the capital stock down to the
paid-up capital (P2.5M) that the creditor banks may cry foul, as the company in that situation has
given up even on the collection of another P2.5M.

Speaking of liabilities, Sec. 37 also allows a corporation to borrow money and issuing bonds for them.
The bonds are essentially debt instruments and they evidence the corporation’s indebtedness to the
lenders. Corporations do this to raise money to finance operations without touching the capital stock,
or when the latter is fully paid up. In other words, the lenders do not become part-owners of the
company, unlike when they buy stocks; they are just creditors for the period stated in the bonds.
Borrowing money to finance business is inherent for any going concern.

If that is not enough, the corporation may “sell, lease, mortgage, pledge, or otherwise dispose” its
property, under Sec. 39. The consideration may be money, property, stocks, bonds, or other
instruments for the payment of money, depending on what the board of directors or trustees (with
majority votes) think the company needs. These kinds of transactions, too, are business decisions.
But if the disposition is of all or substantially all of the corporation’s assets, it becomes more
questionable as a routine business decision, so stockholders representing at least 2/3 of the
outstanding capital stock (in non-stock corporations, 2/3 of the members) must vote to approve the
disposition.

Sec. 39 advises that the net asset value of the properties as shown in the latest financial statements
must be used to determine whether the disposition is of all or substantially all of corporate property.
It also provides a simpler test: whether, after the disposition, the company can still proceed with
business as usual, or accomplish its purpose. If it cannot, the sale needs the 2/3 vote of the outstanding
capital stock. But even if the disposition is authorized, the directors can reverse the decision, and this
reversal will no longer need stockholder vote.

The last paragraph of Sec. 39 presents the possibility that selling all assets may just be the kind of
business that the corporation is in, e.g., buy-and-sell or “flipping,” where the company has no other
asset than the inventory that it intends to sell, and nothing prevents it from selling its entire inventory.
In this case, selling the inventory is a normal business decision that can be authorized with only the
majority vote of the directors (it may even be presumed approved and continuing from the moment
it was first exercised), without the authorization of the stockholders.

A corporation may also invest its funds (Sec.41). The investment can be in other corporations, such as
buying the latter’s shares or debt instruments, or it can be in any kind of investment, such as acquiring
appreciating assets, even if such investments are not in pursuit of the corporation’s primary purpose,
as long as all investments are approved by a majority of the board members and ratified by
stockholders holding at least 2/3 of the outstanding capital stock.

Aside from the above business-oriented powers, corporations have inward-looking ones like acquiring
its own shares (Sec. 40) and declaring dividends for stockholders (Sec. 42).

In the first, and for as long as the corporation has unrestricted retained earnings, i.e., earnings not
earmarked for anything such as liabilities or future expansion (pure profit), it can buy its own shares –
removing fractional shares that result from the grant of stock dividends (the quotient of, say, an even
number of stock divided among an odd number of stockholders); collecting or compromising on
unpaid stock subscriptions (it declares the unpaid stock delinquent and then buys the delinquent
shares), and; paying stockholders who exercised their appraisal right.

Dividends are the “reward” of stockholders. They are taken from pure profit as mentioned above and
divided among stockholders, taking care to consider whatever advantageous rights may have been
given to preferred stockholders first before distributing the rest to common stockholders. Dividends
must be declared if there is already profit in excess of 100% of paid-up capital, “except: (a) when
justified by definite corporate expansion projects or programs approved by the board of directors; or
(b) when the corporation is prohibited under any loan agreement with financial institutions or
creditors, whether local or foreign, from declaring dividends without their consent, and such consent
has not yet been secured; or (c) when it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when there is need for special reserve for
probable contingencies (Sec. 42).”

Dividends can be cash, property, or stock. Cash is of course the easiest to divide. But if there is
delinquency, the company can apply the cash dividend on the balance on such stock before giving any
remainder to the stockholder (Ibid.). Property (such as excess or unsold inventory) can be distributed
as such, or liquidated first and distributed as cash. Stock dividends may be declared from unsubscribed
stock or even new stock in the event of an increase in capital when there is no pre-emptive right, or
when that right has been exercised and there is still an excess. In effect, the extra stock is no longer
required to be subscribed and paid; they are distributed to the stockholders, whose part-ownership
in the company naturally increases. When the distribution results in excess or fractions of shares, the
company can use whatever pure profit is remaining to buy them back.

As mentioned in the last lecture material, delinquency happens if the subscription has already been
called for payment and the stockholder fails to pay for 30 days from call (Sec. 66). Within the next 30
days, the board may resolve to have the delinquent shares sold within the third consecutive 30 days,
at the price due on the subscription plus interests and cost of sale (including notices and publication,
infra.). The sale is then put on notices (to which the resolution is attached) which is sent to the
delinquent stockholder and published once a week for 2 consecutive weeks in a newspaper of general
circulation in the place where the company’s principal office is. If there is no bid that offers the
subscription balance plus interests and cost of sale for the smallest number of sale, the corporation
may buy back the shares, thereby converting them into treasury shares.

Meanwhile the appraisal right is the right of stockholders to have their stocks appraised and bought
back from them by the corporation in case such stockholders do not agree with a corporate decision
or action. It is, in a way, getting out of the company whose actions they do not agree with. This right
is available under Sec. 36 (extending/shortening the corporate term), Sec. 39 (disposing
all/substantially all corporate assets), Sec. 41 (investing in another company or business), or the other
situations under Sec. 80 – amending the articles in such a way that the rights of stockholders or an
entire class of them are changed or restricted and merging or consolidating with other corporations.2

If the company is still unsuccessful in business, or if it wants to take a break from it, it may choose to
enter into a management contract under Sec. 43, which allows it to have another corporation manage
its business for a maximum of 5 years per contract3, as long as the majority vote of the directors is
ratified by the stockholders holding at least a majority of the outstanding capital stock. In case there
are interlocking stockholders (at least 1/3 of the voting stock of the managing corporation) or directors
(majority of the two boards are the same persons), the ratificatory vote of stockholders is higher, at
2/3 of the outstanding capital stock.

2 “SEC. 81. How Right is Exercised. – The dissenting stockholder who votes against a proposed corporate action may exercise
the right of appraisal by making a written demand on the corporation for the payment of the fair value of shares held within
thirty (30) days from the date on which the vote was taken: Provided, That failure to make the demand within such period
shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented, the corporation shall pay
the stockholder, upon surrender of the certificate or certificates of stock representing the stockholder’s shares, the fair value
thereof as of the day before the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate
action.

“If, within sixty (60) days from the approval of the corporate action by the stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two (2) thus
chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within
thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover such payment: Provided, further, That upon payment by
the corporation of the agreed or awarded price, the stockholder shall forthwith transfer the shares to the corporation.”

3Unless the business is into the exploration, development, utilization, or exploitation of natural resources, in which case
the periods in pertinent laws are followed (Sec. 43).
The management can be partial or total – part of or all of the operations of the managed company.
It’s like outsourcing, really.

As a final note to this lecture, it is good to remember that all corporate actions that are not run-of-
the-mill or day-to-day operations such as in the powers above discussed, that is, they require a
resolution from the board of directors, the vote required is always a majority of the members. But in
the cases where stockholder ratification is necessary, the vote is usually 2/3 of the outstanding capital
stock, except in management contracts with no interlocking directors or stockholders. The term
“outstanding capital stock” refers to the total shares of stock issued under binding subscription
contracts to subscribers or stockholders, whether fully or partially paid, except treasury shares (Sec.
176).