Corporate Powers and Authority

CORPORATION
LAW REVIEWER (2013-2014)
ATTY. JOSE MARIA G. HOFILEA
CORPORATE POWERS AND AUTHORITY

I. Corporate Power and Capacity (Article 46, Civil Code; Sections 36 and
45)

CIVIL CODE
Article 46.
Juridical persons may acquire and possess property of all kinds, as well
as incur obligations and bring civil or criminal actions, in conformity
with the laws and regulations of their organization. (38a)

This article compliments Section 36(1) of the Corporation Code.

o As such, even if the right to sue and be sued was not
granted in the Corporation Code, the corporation can
still invoke it under the Civil Code.

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

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
CORPORATION LAW REVIEWER (2013-2014)

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 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)

A. Classification of Corporate Powers: Express; Implied, and Incidental
A corporation has only such powers as are expressly granted to

o
it by law and by its articles of incorporation, those which may be

incidental to such conferred powers, those reasonably
necessary to accomplish its purposes and those which may be
incident to its existence. Pilipinas Loan Company v. SEC, 356
SCRA 193 (2001).
o Expressed Those stated in the law, the Code, and the
articles of incorporation/by-laws
The powers granted under the Corporation
Code need not be in the articles of
incorporation or the by-laws to be exercised.
Some of the powers expressly granted under
Section 36 are considered to be inherent or
incidental powers, which means that even when
not granted under the law expressly, such
incidental powers are deemed to be within the
capacity of corporate entities, such as the

power to adopt and amend a set of by-laws.1
Implied Sometimes referred to as necessary; Those
powers exercised necessarily to perform the primary
purpose for which the company was formed.
You can use your common sense to determine
whether your corporation has an implied power
to exercise or pursue certain actions.
Example: you can hire accountants because the
SEC requires you to file financial statements.
Incidental Those powers which the corporation can
exercise by virtue of the purpose of the corporation.
Atty. Hofilea Dont kill yourself trying to find an
objective distinction between implied or incidental
powers. It can be fluid.

Express
Implied
Incidental
Comes from the law,

Flow from the nature
by-laws and articles of of the underlying
Flow from the nature

of the corporation as
incorporation.
business enterprise
a juridical person.
These enumerated
powers constitute
part of the express
powers of every
juridical person
These exist as a
necessary
consequence of the
grant and/or exercise
of the express powers
Powers that attach to

a corporation the
moment of its
creation without
regard to its express
constituted within
of the corporation or
Philippine jurisdiction. the pursuit of its
powers or particular
primary purpose.
Gokongwei v. Securities and Exchange Commission, 89 SCRA 337 (1979).


purposes are provided
in its articles.

B. Where Corporate Power Lodged
A corporation has no power except those expressly conferred

on it by the Corporation Code and those that are implied or
incidental to its existence. In turn, a corporation exercises said
powers through its board of directors and/or its duly authorized
To issue or sell stocks to subscribers or admit members for non-

stock corporations
o Issue v. Sell
Issue (of new shares) Taken from the
unissued/unsubscribed shares, which no one
officers and agentsIn turn, 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 the board of directors. Shipside Inc. v. Court
of Appeals, 352 SCRA 334 (2001).1

C. Powers of the Corporation
The right of succession

o
o
This is possessed for as long as the corporation exists.

This power is the key by which a corporation is deemed
to have a strong juridical personality, and is the
foundation of the primary doctrine that the personality
To adopt and use a corporate seal

o What: It is an emblem or sign that represents the
corporation.
Salenga v. Court of Appeals, 664 SCRA 635 (2012); Ellice Agro-Industrial Corp.
v. Young, 686 SCRA 51 (2012); Fausto C. Ignacio v. Home Bankers Savings and
Trust Co., 689 SCRA 173 (2013).
owns. The company is giving or accepting a

new subscription; an act of the corporation.
Sell (previously issued shares) Taken from
shares which were previously owned; an act of
the corporation OR the owner of shares.
Atty. Hofilea normally a corporation cannot sell
shares to the subscribers. However, there are
exceptions whereby the company can sell shares which
it owns.
A corporation can become the owners of (and
eventually sell) issued shares if it buys it back
from the subscribers. These are TREASURY
SHARES. These do not become unissued shares,
but are still considered as outstanding stocks.
of the corporation is separate and distinct from that of

its stockholders or members.
Function: A corporate signature that may represent

consent or agreement. However, this is not necessary
for validity of agreemets.
Atty. Hofilea this seems to be a remnant of the past
where matters of solemnity were if importance.
To merge and consolidate with other corporations

o It can be done within reasonable bounds.

SUMMARY
Corporations have inherent powers which it may exercise even if it is


not noted in the articles of incorporation or by-laws.
Succeeding articles deal with powers of the corporation.

II. Express Powers

A. Enumerated Powers (Section 36)
To sell, lease, dispose, or encumber assets

o Is there a limitation on the power of the corporation to
deal with property? The Corporation Code provides that
it is in line with the business of the corporation.
Doctrine: The property bought does not
necessarily have to be directly related to the
operations of the business, but it can be
justified by over-all good of the corporation.
Can the company whose main business is to
operate taxis in the Philippines acquire a
condominium unit in New York at a time when

it is considered a bad investment? Such
investment can be justifiable.
Atty. Hofilea This kind of situation is not so
much whether the corporation has the power
or not, but whether it is wise or not. The Court
will allow the board of directors to decide on
wisdom of the matter. The Courts however, can
come in where there is an allegation that the
corporation has no power to do so. This may be
initiated where someone alleges that the act is
ultra vires. In our age (2013), the world has
become smaller and so it can be argued that in
the long run, such investment can be beneficial

to the company so its a matter of argument.
A corporation can own stocks of another corporation.

B. Extend or Shorten Corporate Term (Sections 37 and 81[1])

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
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 81. Instances of appraisal right.
Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following
instances:

1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any respect superior to


those of outstanding shares of any class, or of extending or shortening
the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
amounts to an amendment of the articles of incorporation.

When such amendment takes place, the rules on amending
must be complied with.
2. Appraisal Rights Issues
assets as provided in the Code; and

3. In case of merger or consolidation. (n)
The power to extend corporate life is not a inherent power of a

corporation, since the corporate term is not only a matter that
constitutes an integral clause of the articles of incorporation,
but also the State in granting juridical personality to a
corporation is presumed to have granted only for the period of
time provided in the corporation's charter.
The power to shorten corporate life, although an item that

would cover an amendment of the articles of incorporation, is
for practical purposes, an inherent right on the part of the
corporation, since the decision to shorten the business life of a
business endeavor should really be addressed to the business
decision of the business venturers. Although the State would
have to approve formally the shortening of the original
corporate term of a corporation, for all practical purposes, the
State really compels the underlying enterprise to go on when
the co-venturers have decided to cease operations
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

(2013 ed.). Manila, Philippines: Rex Book Store.
In case of extension of corporate term, any dissenting

stockholder may exercise his appraisal right to have his shares
bought back at fair value by the corporation. Nevertheless,
under Section 81 of the Code, the appraisal right is also
available to a dissenting stockholder even when it covers the
shortening of the term of corporate existence.

1. Nature of Power1
Atty. Hofilea The Corporate Term is embodied in the articles

of incorporation. As such, to change the corporate term

C. Increase or Decrease Capital Stock (Section 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

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.

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
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
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;
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

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

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
7. The vote authorizing the increase or diminution of the capital stock,

or the incurring, creating or increasing of any bonded indebtedness.
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


corporation must not only comply with the provisions of Section
38, but also with the provisions of Section 16 of the Code
governing the amendment of the articles of incorporation.
o Atty. Hofilea decrease of capital stock is not allowed
when it would prejudice creditors. Creditors deal with
the corporation that there would be a specific capital to
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)

Despite the board resolution approving the increase in capital

stock and the receipt of payment on the future issues of the
help back the debt incurred.

2. Appraisal Rights Issues
shares from the increased capital stock, such funds do not

constitute part of the capital stock of the corporation until
approval of the increase by SEC. Central Textile Mills, Inc. v.
NWPC, 260 SCRA368 (1996).
capital stock redefines the contractual relations in the corporate

setting as it requires the approval of stockholders owning or
representing two-thirds (2/3) of the outstanding capital stock,
does not include the appraisal right on the part of the dissenting
stockholders, in the sense that every stockholder should come
into the corporate setting fully aware that the expediencies of
corporate life may require that eventually the corporation may
A reduction of capital to justify the mass layoff of employees,
especially of union members, amounts to 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, and would constitute
unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355
(1987).
1. Nature of Power1
The power to increase or decrease capital stock is not an
inherent power of the corporation, not only because it touches
upon an item expressly required to be provided for in the
articles of incorporation, but also the capital stock of a
corporation is governed by common law doctrines, such as the
trust fund doctrine, and pre-emptive rights. Therefore, in
increasing or decreasing the capital stock of the corporation, the


The policy embodied in Section 38 of the Corporation Code

therefore, although it recognizes that an increase in authorized
need to increase capitalization to fund its operations or

expansions, and needs to look primarily into its equity investors
to fund the same.
3. Effectivity of Increase in Capital Stock
Prior to SEC approval of the increase in the authorized capital

stock of the corporation, and despite the board resolution
approving the increase in capital stock, and the receipt of
payment on the future issues of the shares from the increased
capital stock, such funds do not constitute part of the capital
stock of the corporation until approval of the increase by the
SEC.

4. Special Rules on Listed Shares 1
The SEC Rules in the case of corporations whose securities are

listed in the stock exchange or registered under the then
Revised Securities Act (now covered by the Securities Regulation
Code), is that no announcement of an offer of rights to acquire
share or to issue stock dividends to stockholders shall be made
after an increase of capital stock without a definite fixed date
for the exercise of such right or issuance of stock dividends.
o The rule is meant to avoid delays in the issuance of
rights or distribution of stock dividends after an increase
Atty. Hofilea regardless of the status of the ACS, you can

apply for an increase.
o The law does not require that the unissued shares first
Differentiate between Article 38 or Article 40
Section 1, Rules Requiring Definite Dates for the Exercise of Pre-Emptive or

Other Rights or For the Issuance of Stock Dividends (1973).
2
Debentures are issued on the basis of the general credit of the
Atty. Hofilea Public indebtedness; not similar to debts
secured for the ordinary course of business.

2. Nature of Power
The power to incur, create and increase bonded

indebtedness governed by Section 38 of the Civil Code
should be analyzed from the fact that it constitutes an
aspect of the inherent power of every corporation to
borrow or to incur loan obligations. Ordinarily, this
exercise to borrow falls within the business judgment
In one opinion, the SEC has limited the term "bonded

indebtedness" to cover only indebtedness of the corporation
corporation and are not secured by collaterals, and therefore do

not constitute bonded indebtedness and will not require
approval of the stockholders.

D. Incur, Create or Increase Bonded Indebtedness (Section 38) 2
o
power of the Board of Directors under the doctrine of

centralized management and would not require
stockholders ratification.
The power to incur and create indebtedness under
Section 40 of the Code provides that an encumbrance of
all or substantially all of the assets of the corporation
which are secured by mortgage on real or personal property, as

distinguished from "debentures" which are unsecured
corporate indebtedness.
be released before the corporation can increase its

authorized capital stocks.
would require stockholders ratification.

1. Nature of a Bond 3
of capital stock.
Ordinarily, the incurring, creating or increasing of indebtedness

really does not go into or amend the corporate contractual
relationship between and among the members of the corporate
family. However, when it comes to bonded indebtedness,
Section 38 imposes the same procedural requisites as the
increase or decrease of capital stock, since they create special
SEC Opinion, 29 April 1987, XXI SEC QUARTERLY BULLETIN 21-22 (No. 3, Sept.
1987). See also SEC Opinion, 6 April 1990, XXIV SEC QUARTERLY BULLETIN 28-29
(No. 3, Sept. 1990).


burdens on the corporation, such as the need to provide for a
sinking fund to answer for the maturity value of the bonds and
the creation of first liens of important assets of the corporation.
Usually bonded indebtedness involve very large amounts and
the burdens created on the operations of the corporation
usually covers a long period of time.
The rationale for the rather strict requirements under the Code
for the incurring, creating or increasing of bonded indebtedness
is to ensure that not only the board of directors alone can bind
the corporation to such burdensome affairs, but that the
qualified concurrence of the stockholders or members should
be obtained.
Atty. Hofilea even without Section 38, the 2/3 requirement

would still be necessary because incurring bonded indebtedness
is burdensome.
3. Appraisal Right
No appraisal right is granted to dissenting stockholders when

the corporation either validly incurs, creates or increases
bonded indebtedness since, the granting of such appraisal right
under such circumstances would drain the corporation of
financial resources contrary to the purpose for which the power
is exercise to raise funds for corporate affairs. Also, the
incurring, creation or increasing of bonded indebtedness does
not really go into the original intent or corporate relationship of
the stockholders or members with the corporation. Even when
such indebtedness is not bonded under the principles of the
trust fund doctrine, corporate creditors have priority over the
assets of the corporation; therefore, adding the feature of being
a bonded indebtedness did not really take anything from the
position of the stockholders or members that they would have

had if the indebtedness were not a bonded indebtedness.

E. Sell or Dispose of Assets (Section 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
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
Consequently, nowhere is the consent of the State required or

referred to under Section 40 when the corporation sells or
disposes of all or substantially all of its assets.
2. Nature of Transactions Covered 2
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
between the corporation and the stockholders, other than as if

the corporation were again at the starting point of it business
life. The reason why a stockholders' ratification is required
when the board sells, disposes or encumbers all or substantially
all of the corporate assets is that it recognizes the stockholders
right to the nature and status of the corporate business, as well

as future developments proceeding therefrom, when they put
their investments into the corporation. When the corporation,
through its board, attempts to alter or dispose of such level,
even when the corporation ends up with the same value
covering the cash or other form of consideration received for
the sale or disposition, it must get the confirmation of the
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
stockholders.
o Stockholders have a common law proprietary or
beneficial interests on the corporate business
enterprise, and any sale, transfer, disposition, or
encumbrance thereof would be void if effected by the
Board of Directors without the appropriate
stockholders approval.
sufficient authorization for the corporation to enter into any

transaction authorized by this section. (28 1/2a)

1. Nature of Power 1
Theoretically, there is no change in the basic relationship
In other words, the exercise of such a power really affects the

business enterprise level of corporate set-up, an area much left
by the State to the judgment of the managers, and does not in
any way affect or alter the juridical entity granted by the State.
The property of the corporation is not the property of the

stockholders or members, and as such, may not be sold without




express authority from the Board of Directors. Litonjua v.
Eternit Corp., 490 SCRA 204 (2006).
3. Transactions NOT Covered by Ratificatory Vote Requirements 1
remaining business, since the sale or disposition of "all" assets

or property means there is no remaining business to conduct.2
Section 40(4):
substantially all assets and property of a corporation as one by

which the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which
it was incorporated any sale or disposition short of this will
not need stockholder ratification, and may be pursued by the
majority vote of the Board of Directors. Strategic Alliance Dev.
Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
a. If it is necessary in the usual and regular course of

business of such corporation; or
b. If the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of
its remaining business.
There is a clear distinction between the assets of a corporation

and its business enterprise (which is also termed as the going
concern in other disciplines), which the author would equate
as the capability to earn profit from the business activity.
When the law therefore says all or substantially all of the
assets, it means that what is being sold or encumbered is the

business enterprise, because even if most assets remain after
the transaction, the ability to earn profit may no longer be
present.
4. Sale or Disposition of All Corporate Assets or Property
Such a sale, disposition or encumbrance cannot be covered by

the exemption provided in Section 40 where no stockholders' or
members' approval is necessary because the sale of all of the
assets or property of a business can never be "in the usual and
regular course of business of such corporation," nor can it be
argued that the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its
The Corporation Code defines a sale or disposition of

Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.,

Facts: The Construction Development Corporation of the Philippines
(CDCP) had a 30-year franchise to construct, operate and maintain toll
facilities in the North and South Luzon Tollways. Basay Mining
Corporation (an affiliate of CDCP) obtained loans from Marubeni
Corporation of Japan amounting to P10 billion, which CDCP guaranteed
solidarily. Thereafter, CDCP changed its corporate name to PNCC to
reflect the governments (90.3%) shareholding in the corporation.

The money owed Marubeni remained unpaid and unacknowledged for
20 years. But in October 2000, PNCC recognized this financial obligation
to Marubeni. Barely 3 months after, Marubeni assigned its entire credit
to Radstock Corporation for less than P100 million, who in turn sought
to collect from PNCC. Eventually, Radstock and PNCC entered into the




5. Sale or Disposition of Substantially All of the Corporate Assets
or Property
compromise agreement whereby PNCC shall assign to a third party

assignee (designated by Radstock) all its rights and interests in specified
real properties (amounting to P6Billion - reduced obligation) provided
the assignee shall be duly qualified to own real properties in the
Philippines. PNCC shall also assign to Radstock 20% of the outstanding
to cover substantially all the corporate property and assets, if

thereby the corporation would be rendered incapable of (a)
continuing the business or (b) accomplishing the purposes for
which it was incorporated. Such a sale or disposition must be
understood as valid only if it does not prejudice the creditors of
the assignor, which necessarily implies that the assignee
assumes the debts of the assignor. Caltex (Phils.), Inc. v. PNOC
capital stock of PNCC, and 6% share in the gross toll revenue of the
Manila North Tollways Corporation from 2008-2035.

Issue: Whether or not the compromise agreement is valid.

Held: NO. The assignment of 6% revenues and outstanding capital stock
is not allowed because the franchise of PNCC has already expired and all
Shipping and Transport Corp., 498 SCRA 400 (2006).
its assets turned over to the government. Therefore, the revenues and
stock capital belong to the government. There can be no disbursement
of public funds without appropriation by congress. Public bidding is
required to dispose of governmental property. Mere assignments are
prohibited. PNCC must follow preference of credit. PNCC has other
creditors, among them the national government which should be paid
first, and other creditors who have final and executory judgements
The test on whether a sale or disposition or encumbrance is

substantial is a qualitative, rather than a quantitative test.1
o This means that sale of one piece of machinery, if it is
against PNCC. The loan from Marubeni is unsecured and should be one
of the last to be paid. So the compromise agreement effectively
satisfying the unsecured loan to Marubeni before the preferred
creditors is invalid.

Doctrine: See above. Also, see Legal Effect on Assignee Even When
Contracts Entered into With the Requisites Stockholders or Members
Approval.

The disposition of the assets of a corporation shall be deemed
essential in the continuation of the business, amounts

to sale of substantially all assets.
Approval of qualified majority of the
outstanding capital stock is needed
Sale of several parcels of land, on the other hand, if not
disruptive of the corporations business is not a
substantial sale of all corporation assets.
A mere board resolution would be sufficient.
Sale by Board of Trustees of the only corporate property

without compliance with Section 40 of Corporation Code
requiring ratification of members representing at least two-
thirds of the membership, would make the sale null and void.



Islamic Directorate v. Court of Appeals, 272 SCRA 454 (1997);
Pea v. CA, 193 SCRA 717 (1991).
6. Lease or Encumbrance of All of Substantially All of the Assets1
corporate creditors and the amount and nature of their claims,

giving of notice of the sale, and applying the proceeds of the
sale proportionately to the payment of the listed obligations.
When a corporation decides to lease all or substantially all of its
assets, then it would fall within the ambit of Section 40, because
in effect the corporation can no longer pursue whatever line of
business it has by having contracted away the use of the
business enterprise to a lessee basically they have nothing to
use for the business.
requirements renders the transaction void and fraudulent,

irrespective of the intentions of the parties to the transaction.3
8. Consequences of Contracts Entered Into Without the Requisite
Stockholders Approval
Section 40(3)
When a corporation decides to encumber all or substantially all
Entering into the sale, disposition or encumbrance of all or
of its assets, it continues to retain ownership and possession

thereof and still be in a position to pursue the lines of business
for which the assets have been devoted to. The reason why
ratification by stockholders is necessary:
substantially all of the assets of the corporation should be

treated as being within the governing doctrine of ultra vires
contracts of the third type (i.e., those entered into by
unauthorized officers or representatives of the corporation) and
should be construed and disposed under the doctrine prevailing
on such ultra vires contracts. Such contract would be void.
9. Legal Effect on Assignee Even When Contracts Entered into
With the Requisites Stockholders or Members Approval 4
The encumbrance of all or substantially all assets has

the potential of disrupting the pursuit of the business
especially if foreclosure happens (i.e. dispossession).
o Such encumbrance would fall within the same category
of incurring or creating bonded indebtedness under
Section 38.
7. Bulk Sales Law
o
Aside from the requirements under Section 40, the sale of all or
substantially all of the corporate assets or property may require
compliance with the Bulk Sales Law,2 when the transaction falls
within the classification of the Law as "sale in bulk" and would
require the seller to execute a sworn statement listing the

2
Act No. 3952, as amended by Rep. Act No. 111.
Under the Bulk Sales Law, failure to comply with its
General Rule: When you sell assets, you simply sell it, and the
liability stays with you.
Exception: Unless the buyer/assignee assumes your obligations

concerning the asset.
Actions made pursuant to Section 40 would constitute a species

of business enterprise and the legal effect is to make the
For a more substantive discussions on the applicability of the Bulk Sales Law,
see Chapter 16, VILLANUEVA, LAW ON SALES, Rex Book Store, (1998 ed.).
4


assignee liable for the obligations arising from the business
enterprise.
Strategic v. Radstock the Court stated that the transfer can
only happen if the transferee assumes liability for all the

obligations. This is because, the transfer was essentially done in
fraud of creditors (including the government). This case is a
different animal all together.
10. Appraisal Right 1
The appraisal right is accorded to dissenting stockholders as a

matter of equity and fairness since they should be allowed to
plough their investments into ventures they feel they could get
a better return rather than with a corporation that is no longer
capable of pursuing the business.

duly called for the purpose. Written notice of the proposed investment
and the time and place of the meeting shall be addressed to each
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)

1. Rational of Rule
F. Invest Corporate Funds for Non-Primary Purpose Endeavor (Section

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


Whenever the corporation seeks to engage into a secondary

purpose allowed under its articles of incorporation, although
intra vires, it must seek the approval of the stockholders or
members of the corporation.
The law therefore presumes rather strongly that when
stockholders invest, or members join, a corporation, it is
with the primary expectation that the corporation,
through its board, will only pursue the primary purpose
indicated in the articles of incorporation, and if the
board feels that it is propitious to pursue a secondary
purpose, then it would do so only if the stockholders or
members have had a chance to evaluate and decide

upon such diversion of corporate funds from the
primary business of the corporation.
2. Coverage of Funds
The SEC has ruled that the term funds under Section 42
includes any corporate property to be used in the furtherance of

the business, and consequently when property is devoted in any
business other that pursuit of the primary purpose for which the
corporation was incorporated, it would need the ratificatory
vote of two-thirds (2/3) of the outstanding capital stock of the
corporation.1
3. Investments That Should Be Considered Within Primary
without need of obtaining stockholders' approval; much less

should such investments trigger any appraisal right on the part
of dissenting stockholders.
manufactures the jute bags used in packing sugar falls within

the implied powers of the sugar central as part of its primary
purpose and does not need ratification by the stockholders. De
la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 (1969).

Purpose 2
Section 42 expressly provides 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, since
the matter lies clearly within the business discretion or
judgment of the board of directors of the corporation.
o There are certain investments of the corporation that
would be deemed consistent with the primary purpose
by virtue of the essence of the corporation as a business
enterprise.
All corporations, whatever may be their primary purposes, are

deemed to have the power to invest corporate funds in another
corporation or business, as a means of obtaining the best
returns of their investible funds.
Examples:
A fishing company, through its board, should be allowed to

place say its investible fund of P100,000.00 in PLDT or San
Miguel commercial papers or even perhaps their shares, if they
offer the best return at that point in time for the corporation,
XXIX SEC QUARTERLY BULLETIN 2 (No. 2, June 1995).

2
Investment by a sugar central in the equity of a corporation that
De la Rama v. Ma-ao Sugar Central Co.

Facts: De La Rama and 3 other minority stockholders of Ma-Ao Sugar
Central filed a derivative suit against the Ma-Ao Sugar Central Co., Inc.,
and Amado Araneta and 3 other directors. De La Rama claims that the
directors made an illegal investment in Phil. Fibers Processing Co., Inc.
He contends that since the investment was made NOT in pursuance of
the corporate purpose and without the requisite authority of 2/3 of the
stockholders, then the investment was thus illegal for being in violation
of Section 17-1/2 of the Corporation Law.

Araneta claims that the investment was not illegal as it was
subsequently ratified by the Board of Directors in a resolution. Also
since the company was engaged in the manufacture of sugar bags, it
was thus perfectly legitimate for Ma-Ao Sugar either to manufacture
sugar bags or invest in another corporation engaged in said
manufacture.

Issue: Whether or not the affirmative vote of the stockholders
representing 2/3 of the voting power is necessary


Held: NO. The court held that the affirmative vote of the stockholders
representing 2/3 of the voting power is not necessary.

Doctrine: The corporation code allows a corporation to invest its funds
in another corporation for any other purpose other than the main
purpose.
Provided that the board has been authorized by affirmative vote

of the stockholders representing 2/3 of the voting power.
BUT if the investment is made in a corporation whose business

is important to the investing corporation and would aid it in its
purpose, then to require authority of the stockholders would be
to unduly curtail the power of the board of directors.
incorporation.
BUT when the purchase of shares of another corporation is

done solely for investment and not to accomplish the purpose
of its incorporation, the vote of approval of the stockholders is
necessary.
The non-obtaining of the ratificatory vote of the stockholders or
members under Section 42 of the Code should be construed to

be within the realm of ultra vires contracts of the second type,
having been entered into by representatives of the corporation
not duly authorized.
6. Confirmation of the Business Enterprise Level of
Relationship
4. Investments Outside of Secondary Purposes 1
Under such terms, the ratificatory vote of stockholders or

members to legally allow a corporation to invest funds outside
of its primary purpose (and those which are necessary or
incidental to the exercise of such purpose) would be limited to

pursuing the secondary purposes of the corporation.
5. Consequences of Non-Obtaining of Ratificatory Vote 2
a corporation may exercise such other powers as may

be essential or necessary to carry out its purpose or
purposes "as stated in its articles of incorporation."
Section 45 provides expressly that no corporation shall
possess or exercise any corporate power except those
conferred by the Corporation Code, or by its articles of
If one where to limit the review to the wordings of Section 42,

the answer would seem to be in the affirmative.
The provisions of Section 42 of the Corporation Code recognize
However, the terms of Section 42 are deemed to be

circumscribed by the provisions of Sections 36 and 45 of the
Corporation Code.
o Section 36, after enumerating express powers of
the legal standing of stockholders or members of ever corporate

set-up on matters that affect the business enterprise, as it
grants them standing to vote on matters, and does not leave the
crucial decision of whether or not to invest corporate funds in
corporations, provides an all-encompassing clause that
non-primary business enterprise within the sole business

discretion of the Board.




G. Declare Dividends (Section 43)

declared to creditors as part of the settlement of debts. Nielson

& Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).
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)
Dividends from retained earnings can only be declared to those

who are stockholders of the corporation; dividends cannot be
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. NTC v. CA, 311 SCRA 508 (1999).
When the Board distributes, it is based on the number of shares
and to all stockholders. The Board cannot choose who will
receive or not.
o However, in cases where the stockholder has not fully
paid for his share, his cash dividends will first be applied
to your unpaid subscription (which you should have
paid according to your contract).
(SEC Circular 11, s.2003) Unrestricted Retained Earnings not
allocated for any project or debt of the corporation.
Kinds of Dividends
*Rights to dividends may be affected due to various types of shares
Cash
Property
Stock
All products of your investments

Board Approval is sufficient to execute
Stockholders
approval is required
No meeting is required
Meeting is required
for approval
Issued in cash

Treasury shares which New shares of stocks

have been reissued as issued from unissued
dividends are actually shares
property dividends

Only upon declaration of the board will a
stockholder have a right to claim their cash
or property dividends.
corporation, such as when there is need for special

reserve for probable contingencies.3
of Corporations, where the financial statements of the

corporation show surplus profits in excess of 100% of paid-up
capital, it shall explain by footnotes why the same has not been
declared as dividends; if the explanation is not satisfactory, the
SEC shall direct the corporation to distribute the excess as
dividends.4

1. Retention of Surplus Profit
Section 43 prohibits stock corporations from retaining surplus

profits in excess of one-hundred percent (100%) of their paid-up
capital stock,1 except in the following situations:
a. When justified by definite corporate expansion projects
or programs approved by the board of directors;2
i. Definite Mere possibility of expansion is
insufficient to withhold surplus profit.
b. 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
The power granted to stockholders to demand from the Board

the declaration of dividends under Section 43 is one of the few
instances under the Code where the stockholders themselves
exercise a primary power, instead of the usual ratificatory vote
on actions taken primarily by the board of directors.
2. Report to SEC
been secured; or
c. When it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
Any declaration of dividends, whether cash or stock, shall be

reported to the SEC within fifteen (15) days from the date of
declaration. For corporations whose shares or securities are
listed in the stock exchange or registered and licensed under the

Revised Securities Act (now the Securities Regulation Code), the
report shall be filed with the SEC before or simultaneously with
the release or publication of the notice of declaration of
dividends to stockholders.5
3. Restrictions on Banks
Even under the old Corporation Law, the SEC had issued the Rules Governing
the Distribution of Excess Profits of Corporations (1973), which provides that
"All corporations which have surplus profits in excess of necessary
requirements for capital expansion and reserves shall declare and distribute the
excess profits as dividends to stockholders. (Section 1)
2
SEC RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF CORPORATIONS provides
that the amounts appropriated for such purpose shall be segregated from the
free surplus; and that upon completion of the expansion program, the reserve
established shall be declared as stock dividends.
Under the SEC Rules Governing the Distribution of Excess Profits
SEC RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF CORPORATIONS includes

as justification for non-declaration of dividends when the same is consistent
with policy or requirements of a government office.
4
Section 2 thereof.
5
Section 3, SEC RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF
CORPORATIONS (1973)


Under Section 57 of the General Banking Law of 2000,1 no bank

or quasi-bank shall declare dividends greater than its
accumulated net profits then on hand deducting therefrom its
losses and bad debts. Neither shall the bank or quasi-bank
declare dividends, if at the time of declaration:
a. Its clearing account with the Bangko Sentral is
overdrawn;
b. It is deficient in the required liquidity floor for
government deposits for five (5) or more consecutive
days;
c. It does not comply with the liquidity standards/ratios
prescribed by the Bangko Sentral for purposes of
determining funds available for dividend declaration; or
d. It has committed a major violation as may be
determined by the Bangko Sentral.

H. Management Contracts (Section 44): Why the difference in rule
between entity and individual?

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 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.
(n)

Rep. Act 8791.
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 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
1

Atty. Hofilea While this provision provides substantial basis
for a corporations management of another, the board of the

managed corporation must not abdicate their power
completely. At the end of the day, they must still call the shots.
1. Coverage of Management Contract (Section 44(2))
A management contract is not the same as an agency contract,

and therefore is not revocable at will. Nielson & Co., Inc. v.
Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v.

Moya, 195 SCRA 247 (1991).
2. Rationale for Ratification Requirements1
On Part of the Managed Corporation: Such a management
contractual understanding with the stockholders of such

managing corporation.
3. Ratification Requirements When There is Common Control of
Involved Corporations (Section 44(1))
4. Cases Not Covered by Section 44 2
contract is a deviation from the principle under Section 23 that

the corporate affairs shall be managed by the board of
directors, and thereby a departure from such an arrangement
would require the approval of the stockholders under the
principle that it would vary the contractual corporate
arrangements, by allowing basically an outsider to involve itself
in the management of corporate affairs.
would devote their time and resources for the affairs of the
corporation, and the entering into the management contract
whereby the board, as the direct agents of the managing
corporation, would be devoting their time and resources
towards the operations of another corporation, would be a
deviation from such a contractual relationship, and thereby
would require the confirmation of the stockholders of the
It would seem from the express language of Section 44, that

when it comes to a management contract entered into by the
managed corporation under the definition of Section 44, not
with another corporation but with a partnership or an
individual, the same would not be covered by and thereby need
not comply with the ratificatory requirements of Section 44.
On Part of the Managing Corporation: The rationale for

ratificatory measures on the part of the managing corporation is
that the management arrangement is a deviation from the
principle also that the board of directors in the managing
corporation assumed office with the understanding that they
Exception: Under these principles, the ratificatory

procedure should not therefore be applicable to a
corporation that is organized primarily as a
management company, and its entering into a
management contract is clearly within the primary
purpose of the corporation and in accordance with the

I. Purchase Own Shares (Section 41)
They become treasury shares.
Requisites:
o
o
Legal purpose
Out of unrestricted earnings

III. Implied Powers
managing corporation.
Examples:



water, such corporation cannot engage in the business of land

transportation, which is an entirely different line of business,
and, for which reason, may not acquire any certificate of public
convenience to operate a taxicab service. Luneta Motor Co. v.
A.D. Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric

power has no authority to undertake stevedoring services to
unload coal into its pier since it is not reasonably necessary for
the operation of its power plant. NPC v. Vera, 170 SCRA 721
(1989).
duly-organized corporation, unless specifically revoked by

another law. Umale v. ASB Realty Corp., 652 SCRA 215 (2011).
When the articles expressly provide that the purpose of the

corporation was to engage in the transportation of person by
act, for it as for securing a loan to finance the activities of the

corporation, hence, not an ultra vires act. Atrium Management
Corp. v. Court of Appeals, 353 SCRA 23 (2001).

V. Other Powers (Section 36)

A. Sell Land and Other Properties
A corporation organized to engage as a lending investor cannot

engage in pawnbroker. Philipinas Loan Co. v. SEC, 356 SCRA 193
(2001).
A mining company has no power to engage in real estate
An officer who is authorized to purchase the stock of another

corporation has implied power to perform all other obligations
arising therefrom such as payment of the shares of stock. Inter-
Asia Investments Industries v. Court of Appeals, 403 SCRA 452
(2003).

B. Borrow Funds
ordinary course of business usages and practices of the
As a creature of the law, the powers and attributes of a

corporation are those set out, expressly or implied, in the law.
Among the general powers granted by law to a corporation is
the power to sue in its own name. This power is granted to a
The power to borrow money is one of those cases where even a

special power of attorney is required under Article 1878 of Civil
Code. There is invariably a need of an enabling act of the
corporation to be approved by its Board of Directors. The
argument that the obtaining of loan was in accordance with the

IV. Incidental Powers
When the corporations primary purpose is to market,

distribute, export and import merchandise, the sale of land is
not within the actual or apparent authority of the corporation
acting through its officers, much less when acting through the
treasurer. Articles 1874 and 1878 of Civil Code requires that
when land is sold through an agent, the agents authority must
be in writing, otherwise the sale is void. San Juan Structural v.
CA, 296 SCRA 631 (1998).1
development. Heirs of Antonio Pael v. Court of Appeals, 372

SCRA 587 (2001).
The act of issuing checks is within the ambit of a valid corporate
AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002);
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Cosco
Philippines Shipping, Inc. v. Kemper Insurance Company, 670 SCRA 343 (2012).


corporation is devoid of merit because the prevailing practice in
the corporation was to explicitly authorize an officer to contract
loans in behalf of the corporation. China Banking Corp. v. Court
of Appeals, 270 SCRA 503 (1997).
shopping is necessarya certification not signed by a duly

authorized person renders the petition subject to dismissal.
Gonzales v. Climax Mining Ltd., 452 SCRA 607 (2005);2 such as
the administrator or project manager, Esteban, Jr. v. Vda. de
Onorio, 360 SCRA 230 (2001); or the General Manager, Central
Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).

C. Power to Sue and Be Sued
Under Section 36 in relation to Section 23 of Corporation Code,

where a corporation is an injured party, its power to sue is
lodged with its Board of Directors. A minority stockholder who
is a member of the Board has no such power or authority to sue
on the corporations behalf. Tam Wing Tak v. Makasiar, 350

SCRA 475 (2001).1
1. Power to Bind the Corporation in a Suit
complaint. Median Container Corp. v. Metropolitan Bank and

Trust Co., 561 SCRA 622 (2008); the submission in the motion
for reconsideration of the authority to sign the verification and
certification constitutes substantial compliance with the
procedural requirements. Asean Pacific Planners v. City of
Urdaneta, 566 SCRA 219 (2008).
When the power to sue is delegated by the by-laws to a

particular officer, such officer may appoint counsel to represent
the corporation in a pre-trial hearing without need of a formal
board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620

(2009).
If the petitioner is a corporation, a board resolution authorizing

a corporate officer to execute the certification against forum
Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA
548 (2002); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638
(2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010); Cebu Bionic
Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro-Industrial Corp. v.
Young, 686 SCRA 51 (2012).
When a corporate officers has been granted express power by

the Board of Directors to institute a suit, the same is considered
broad enough to include the power of said corporate officer to
execute the verification and certification against forum
shopping required in initiatory pleadings under the Rules of
For counsel to sign the certification for the corporation, he must
specifically be authorized by the Board of Directors. BPI Leasing

Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA,
415 SCRA 573 (2003).
2. Certificate of Non-Forum Shopping:
Nonetheless, such lack of authority may be cured: even if the

counsel executed the verification and certificate of non-forum
shopping before the board authorized him, the passing of the
board resolution of authorization before the actual filing of the
Also DBP v. Court of Appeals, 440 SCRA 200 (2004); Public Estates Authority v.
Uy, 372 SCRA 180 (2001); Philippine Airlines, Inc. v. Flight Attendance and
Stewards Association of the Philippines (FASAP), 479 SCRA 605 (2006); Metro
Drug Distribution, Inc. v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug
Corp. v. Commissioner of Internal Revenue, 545 SCRA 10 (2008) Mediserv, Inc.
v. Court of Appeals, 617 SCRA 284 (2010); Cosco Philippines Shipping, Inc. v.
Kemper Insurance Company, 670 SCRA 343 (2012).

certification against non-forum shopping in behalf of the

corporation without the benefit of a board resolution. South
Cotabato Communications Corp. v. Sto. Tomas, 638 SCRA 566
(2011).
3. Service of Summons on Corporations
rule that allows service of summons upon an agent50 of the

corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 312
SCRA 65 (1999).

A President of a corporation, among other enumerated

corporate officers and employees, can sign the verification and
To sue and be sued (Additional Notes)

A de facto corporation may also sue and be sued, and their
status as de facto cannot be assailed collaterally unless in a case
duly submitted for that purpose.
General Rule: The rule that the power of the corporation to sue
Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the
term general manager and unlike the old provision in the
Rules of Court, it does not include the term agent.
Consequently, the enumeration of persons to whom summons
may be served is restricted, limited and exclusive following
the rule on statutory construction expressio unios est exclusion
alterius. Therefore, the earlier cases that uphold service of
and be sued in any court is lodged with the Board of Directors

that exercise its corporate powers, is not well-established.
Even if the counsel executed the verification and certificate of

non-forum shopping before the board authorized him, the
passing of the board resolution of authorization before the
actual filing of the complaint, or the submission in the motion
for reconsideration of the authority to sign the verification and
certification constitutes substantial compliance with the
procedure requirements.9
Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).
Gesulgon v. NLRC, 219 SCRA 561 (1993).
3
Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295
(1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988).
4
Summit Trading and Dev. Corp. v. Avendao, 135 SCRA 397 (1985); also
Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999).
5
Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966).
6
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978).
7
Far Corporation v. Francisco, 146 SCRA 197 (1986).
Exception: The only exception to such rule is when the
circumstances allow the filing by a relator-stockholder of a

derivative suit in behalf of the corporation without prior
approval of the Board of Directors or Trustees.8
Example:
summons upon a construction project manager; 1 a

corporations assistant manager; 2 ordinary clerk of a
corporation; 3 private secretary of corporate executives; 4
retained counsel; 5 officials who had charge or control of the
operations of the corporation, like the assistant general
manager;6 or the corporations Chief Finance and Administrative
Officer;7 no longer apply since they were decided under the old

D. Power to Hire Employees and Appoint Agents

9

profits, and would constitute a breach by the Board of

Directors of its fiduciary duties to the stockholders.1
Except where the authority of employing servants and agents is

expressly vested in the board of directors or trustees, an officer
or agent who has general control and management of the
corporations business, or a specific part thereof, may bind the
corporation by the employment of such agents and employees
as are usual and necessary in the conduct of such business. But
the contracts of employment must be reasonable. Yu Chuck v.
Kong Li Po, 46 Phil. 608 (1924).

E. Provide Gratuity Pay for Employees (Section 36[10])
Doctrine of Corporate Social Responsibility 2
Providing gratuity pay for employees is an express power of a

corporation under the Corporation Code, and cannot be
considered to be ultra vires to avoid any liability arising from the
issuance of resolution granting such gratuity pay. Lopez Realty
The limitation: Reasonable it depends

o
v. Fontecha, 247 SCRA 183, 192 (1995).
remain with the corporation, and thereby increase their

productivity and avoid wastage occurring through unnecessary
high turn-over of personnel.
Doctrine of Maximization of Profits

o
o
Definitely this cannot be justified as beneficial for the

corporation because you are parting with property.
Essentially, every donation made by the corporation
would contravene the doctrine of maximization of
The amount should not be so big of an amount such

that it infringes the capacity to conduct business and
the amount necessary to pay back creditors.
If donations constitute merely a wastage or have no
reasonable means of enhancing the business enterprise
(e.g. goodwill), then they would be unreasonable
donations and are ultra vires.3
The underlying rationale for the express power of corporation

to grant gratuities is that they engender loyalty among the
corporations human resources and grants them motivation to

F. Power to Make Donations (Section 36[9])
Corporations being creatures of law and receiving the

protection of the State as well as profiting from society
must bear certain non-profit and social responsibilities.
Under this theory, donations and other contributions
made by the Board of Directors would not constitute
ultra vires acts.
Donations cannot be made in aid of a political party.

o
Atty. Hofilea The Omnibus Election Code amended

the provision of the Corporation Code, and states that
donations can be made to political candidates.

G. Enter Into a Partnership or Joint Venture: Tuason & Co. v. Bolanos,
95 Phil. 106 (1954); SEC Opinion, dated 29 February 1980.

2
3


Tuason & Co. v. Bolanos

Facts: J.M. Tuason & Co. brought an action for the recovery of
possession of real property against Bolanos. Bolanos alleges ownership

Doctrine: The true rule is that though a corporation has no power to
enter into a partnership, it may nevertheless enter into a joint venture
with another where the nature of that venture is in line with the
business authorized by its charter.
of the land by prescription. The case was ruled in favor of Tuason

(prescription does not run against registered property).

On appeal, Bolanos alleges, among others, that the complaint by Tuason
should have been dismissed for not having been brought by the real
party in interest. This is because the action is brought in behalf of JM
Tuason & Co. Inc. by Gregorio Araneta Inc., its managing partner.
why a corporation may become a co-venturer or partner in a

joint venture arrangement, it would seem that the policy behind
the prohibition on why a corporation cannot be made a partner
do not apply in a joint venture arrangement. Being for a
particular project or undertaking, when the board of directors of
a corporation evaluate the risks and responsibilities involved,
they can more or less exercise their own business judgment is

Issue: Whether or not the case should have been dismissed on the
ground that the case was not brought by the proper party in interest

Held: NO. What Section 2, Rule 2 of the Rules of Court provide is that
the action be brought in the name of, but not necessarily by the real
party in interest. While the complaint states that the plaintiff is
represented herein by its Managing Partner Gregorio Araneta, Inc.,
another corporation, there is nothing against one corporation being
represented by another person, natural or juridical, in a suit in court.

The contention that Gregorio Araneta, Inc. cannot act as managing
partner for plaintiff on the theory that it is illegal for two corporations to
enter into a partnership is without merit. There is nothing in the record
to indicate that the venture in which plaintiff is represented by Gregorio
Araneta, Inc. as its managing partner is not in line with the corporate
business of either of them.
A joint venture is essentially a partnership arrangement,

although of a special type, since it pertains to a particular
project or undertaking.1 Although Tuason does not elaborate on
determining the extent by which the corporation would be

involved in the project and the likely liabilities to be incurred.
Unlike in an ordinarily partnership arrangement which may
expose the corporation to any and various liabilities and risks
which cannot be evaluated and anticipated by the board, the
situation therefore in a joint venture arrangement, allows the
board to fully bind the corporation to matters essentially within
the boards business appreciation and anticipation.2
BAUTISTA, supra, at p. 50. In Torres v. Court of Appeals, 278 SCRA 793, 86 SCAD
812 (1997), the Supreme Court held unequivocally that a joint venture
agreement for the development and sale of a subdivision project would
constitute a partnership pursuant to the elements thereof under Article 1767 of
the Civil Code that defines when a partnership exists.
2

exercise of the powers so conferred. (n)
The prevailing rule in the United States is that "unless it is
expressly authorized by statute or charter, a corporation cannot

ordinarily enter into partnerships with other corporations or
with individuals, for, in entering into a partnership, the identity
of the corporation is lost or merged with that of another and
the direction of the affairs is placed in other hands than those
provided by law of its creationA corporation can act only
through its duly authorized officers and agents and is not bound
by the acts of anyone else, while in a partnership each member
binds the firm when acting within the scope of the

partnership."1
The doctrine is grounded on the theory that the stockholders of

a corporation are entitled, in the absence of any notice to the
and therefore beyond the power conferred upon it by law. The

term ultra vires is 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 validated. Atrium Management Corp. v. CA, 353
SCRA 23 (2001).
2. Second Type Ultra Vires: Those which have been executed on
behalf of the corporation without proper authority from the
contrary in the articles of incorporation, to assume that their

directors will conduct the corporate business without sharing
that duty and responsibility with others.2

VI. ULTRA VIRES DOCTRINE

A. Types of Ultra Vires Acts (Section 45)

1
2
on it by the Corporation Code, its charter, and those that are

implied or incidental to its existence. In turn, a corporation
exercises said powers through its Board of Directors and /or its
duly authorized officers and agents. Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
1. First Type Ultra Vires: Those which are outside of the express,
implied and incidental powers of the corporation.
FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520.
BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW (1978 Ed.), at p. 9.

An ultra vires act is one committed outside the object for which
a corporation is created as defined by the law of its organization
Board of Directors.
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
A corporation has no power except those expressly conferred
When the President enters into speculative contracts without

prior board approval, and without subsequent Board
ratification, nor were the transactions included in the reports of
the corporation, such contracts do not bind the corporation. It
must be pointed out that the Board of Directors, not the
President, exercises corporate powers. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
Example:
Contracts or acts of a corporation must be made either by the

Board of Directors or by a corporate agent duly authorized by
the Board absent such valid delegation/ authorization, the

rule is that the declaration of an individual directors relating to
the affairs of the corporation, but not in the course of, or
connected with the performance of authorized duties of such
director, are held not binding on the corporation. Manila Metal
Container Corp. v. PNB, 511 SCRA 444 (2006).
3. Third Type Ultra Vires: Those which are per se contrary to law,
morals and public policy.
Example:
Although the arrangement between the two mining companies

was prohibited under the terms of the old Corporation Law, the
Supreme Court did not declare the nullity of the agreements on
the ground that only private rights and interests, as
distinguished from public interests, were involved in the case.
Harden v. Benguet Consolidated Mining Co., 58 Phil. 140
(1933).

Harden, a stockholder of Balatoc, as well as other stockholders filed a
case against Benguet and Balatoc praying that the contract be declared
unlawful, and subsequently annulled, and that the shares of stock
issued to Benguet be obliterated. They based their complaint on a
provision in the then Corporation Law (adopted from the Act of
Congress of 1916) which states that it shall be unlawful for any
member of a corporation engaged in agriculture or mining (...) to be in
any wise interested in any other corporation engaged in agriculture or in
mining.

Issue: Whether or not the contract should be annulled for illegality.

Held: NO. The provision was enacted based on public policy which
dictates the need to regulate mining rights. The penalties imposed in
what is now section 190 (A) of the Corporation Law for the violation of
the prohibition in question are of such nature that they can be enforced
only by a criminal prosecution or by an action of quo warranto. But
these proceedings can be maintained only by the Attorney-General in

Facts: Benguet Consolidated, a sociedad anonima, and Balatoc Mining
Co., a corporation, were engaged in the business of mining gold. During
its early years, Balatoc was underdeveloped so it entered into a contract
with Benguet Consolidated wherein Benguet will erect power plants and
develop a milling plant for Balatoc. In return, Balatoc gave Benguet
shares with a par value of P600K. The contract was a result of a general
representation of the Government. Moreover, Benguet Company has

committed no civil wrong against the plaintiffs. In this case, Harden has
no legal standing.

Doctrine: Even where corporate contracts are illegal per se, when only
public or government policy is at stake and no private wrong is
committed, the courts will leave the parties as they are, in accordance
with their original contractual expectations.
stockholders meeting held by Balatoc. The project soon after turned

out well, with Benguet profiting from their shares.

B. General Judicial Attitude Towards the Ultra Vires Doctrine
Harden v. Benguet Consolidated Mining Co.

The plea of ultra vires will not be allowed to prevail, whether

interposed for or against a corporation, when it will not advance
donation of 4,000 shares of stock as originally planned into a

renunciation in favor of the children of all the companys right,
title, and interest as beneficiary in and to the proceeds of the
life insurance policies subject to the express condition that said
proceeds should be retained as a loan drawing interest at 5%
justice but, on the contrary, will accomplish a legal wrong to the

prejudice of another who acted in good faith. Zomer Dev. Corp.
v. Intl Exchange Bank, 581 SCRA 115 (2009).

C. Ratification of Ultra Vires Acts:
Acts done by the Board of Directors which are ultra vires cannot
be set-aside if the acts have been ratified by the stockholders.
Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 (1954).

Pirovano v. De la Rama Steamship Co., Inc

Facts: The heirs of Enrico Pirovano filed before CFI of Rizal an action
seeking to enforce some board resolutions which gives his children the
proceeds of the insurance policies taken on the life of the deceased.
Pirovano, former president of steamship corporation, was said to have
contributed greatly to progress of the company by raising its paid-up
capital from P240K to P15.5M. A few years before he died in the hands
of the Japanese, the company insured the life of Pirovano in various
insurance companies for P1M.
The first series of resolutions was issued wherein a sum of

P400k convertible to 4k shares of stock at par shall be set aside
for his heirs. This was later changed because, it was found by
the sister of Estefania de la Rama, Lourdes, that in computing
the actual value of the stocks, the widow of Pirovano as
guardian of the children would have twice as much voting
power as her other 4 sisters.
The board adopted a resolution changing the form of the
per annum and shall be payable after the company shall have
first settled in full the balance of its present remaining bonded
indebtedness to NDC. Estefania as guardian of the children then
acted this donation.
After a few years the stockholders formally ratified the donation stated
in the resolutions.

The president of the corporation, Sergio Osmena filed an inquiry before
SEC alleging that said donation was void because the corporation acted
beyond its scope of powers because a corporation cant dispose of his
assets by gift.

Issue: Whether or not the donation is valid and enforceable.

Held: YES. The resolution is not an ultra-vires act on the part of the
corporation. The corporation was given broad and unlimited powers to
carry out the purpose for which it was organized which includes the
power to (1) invest and deal with corporate money not immediately
required in such manner as from time to time may be determined (2)
aid in any other manner to any person, association or corporation of
which any obligation is held by this corporation. The donation
undoubtedly comes within the scope of this broad power.

The grant or donation is question is remunerative in nature and was


given in consideration of the services rendered by the heirs father or
the corporation. The donation has already been perfected such that the
corporation could no longer rescind it. It was embodied in a Board
Resolution. Representatives of the corporation and even its creditors as
the NDC have given their concurrence. The donation was a corporate
act carried out by the corporation not only with the sanction of the
Board of Directors but also of its stockholders. The donation hasreached
a stage of perfection which is valid and binding upon the corporation
and cannot be rescinded unless there exists legal grounds for doing so.

Doctrine: Said donation even if ultra vires is not void and if voidable, its
infirmity has been cured by ratification and subsequent acts of the
corporation. The corporation is now estopped or prevented from
contesting the validity of the donation. To allow the corporation to undo
what it has done would be most unfair and contravene the well-settled
doctrine that the defense of ultra vires cannot be set up or availed of in
any completed transaction.

Ratification can be both express and implied.
Even when a particular corporate act does not fall within the
express or implied powers of the corporation, nevertheless it
will not be set aside when, not being malum prohibitum, the
corporation, through its senior officers or its Board of Directors,
are estopped from questioning the legality of such act, contract
or transaction. Carlos v. Mindoro Sugar Co., 57 Phil. 343
(1932).1
Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. Court of
Appeals, 177 SCRA 594 (1989).

Acts done in excess of corporate officers scope of

authority cannot bind the corporation. However, when
subsequently a compromise agreement was on behalf
of the corporation being represented by its President
acting pursuant to a Board of Directors resolution, such
constituted as a confirmatory act signifying ratification
of all prior acts of its officers. NPC v. Alonzo-Legasto,
443 SCRA 342 (2004).

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LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA