TITLE IV

POWERS OF THE CORPORATIONS

Section 35. Corporate Powers and Capacity. - Every corporation

incorporated under this Code has the power and capacity:

(a) To sue and be sued in its corporate name;

(b) To have perpetual existence unless the certificate of

incorporation provides otherwise;

(c) To adopt and use a corporate seal;

(d) To amend its articles of incorporation in accordance with

the provisions of this Code;

(e) To adopt bylaws, not contrary to law, morals or public

policy, and to amend or repeal the same in accordance with
this Code;

(f) In case of stock corporations, to issue or sell stocks to

subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the
corporation if it be a nonstock corporation;

(g) To purchase, receive, take or grant, hold, convey, sell, lease,

pledge, mortgage, and otherwise deal with such real and
personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the constitution;

(h) To enter into a partnership, joint venture, merger,

consolidation, or any other commercial agreement with
natural and juridical persons;

(i)To make reasonable donations, including those for the

public welfare or for hospital, charitable, cultural, scientific,
civic, or similar purposes: Provided, That no foreign
corporation shall give donations in aid of any political party or
candidate or for purpose s of partisan political activity;

(j) To establish pension, retirement, and other plans for the

benefit of its directors, trustees, officers, and employees; and
 (k) To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in the
articles of incorporation.

Section 36. 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

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stockholders or members representing at least two-thirds (2/3) of
the outstanding capital stock or of its members. Written notice of
the proposed action and the time and place of the meeting shall be
sent to the stockholders or members at their respective place of
residence as shown in the books of the corporation, and must be
deposited to the addressee in the post office with postage prepaid,
served personally, or when allowed in the bylaws or done with the
consent of the stockholder, sent electronically in accordance with
the rules and regulations of the Commission on the use of electronic
data messages. In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal under the conditions
provided in this Code.

Section 37. 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 by two-thirds (2/3) of the outstanding capital
stock at a stockholders' meeting duly called for the purpose.
Written notice of the time and place of the stockholders' meeting
and the purpose for said meeting must be sent to the stockholders
at their places of residence as shown in the books of the
corporation served on the stockholders personally, or through
electronic means recognized in the corporation's bylaws and/or the
Commission's rules as a valid mode for service of notices.

A certificate must be signed by a majority of the directors of

the corporation and countersigned by the chairperson and secretary
of the stockholders' meeting, setting forth:

(a) That the requirements of this section have been complied

with;

(b) The amount of the increase or decrease of the capital

stock;

(c)In case of an increase of the capital stock, the amount of

capital stock or number of shares of no-par stock thereof
actually subscribed, the names nationalities and addresses of
the persons subscribing, the amount of capital stock or
number of no-par stock subscribed, the names, nationalities
and addresses of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by each,
and the amount paid by each on the subscription in cash or
 property, or the amount of capital stock or number of shares
of no-par stock allotted to each stockholder if such increase is
for the purpose of making effective stock dividend therefor
authorized;

(d) Any bonded indebtedness to be incurred, created or

increased;

(e) The amount of stock represented at the meeting; and

(f) The vote authorizing the increase or decrease of capital

stock, or incurring, creating or increasing of bonded
indebtedness.

Any increase or decrease in the capital stock or the incurring,

creating or increasing of any bonded indebtedness shall require
prior approval of the Commission and where appropriate, of the
Philippine Competition Commission. The application with the
Commission shall be made within six (6) months from the date of
approval of the board of directors and stockholders, which period
may be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the

corporation and filed with the Commission and attached to the
original articles of incorporation. After approval by the Commission
and the issuance by the Commission of its certificate of filing may
declare: Provided, That the Commission shall not accept for filing
any
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certificate of increase of capital stock unless accompanied by a
sworn statement of the treasurer of the corporation accompanied
by a sworn statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate, showing
that at least twenty-five percent (25%) of the increase in capital
stock has been subscribed and that at least twenty-five percent
(25%) of the amount subscribed has been paid in actual cash to the
corporation or that property, the valuation of which is equal to
twenty-five percent (25%) of the subscription, has been transferred
to the corporation: Provided, further, That no decrease in capital
stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.

Nonstock corporations may incur, create or increase bonded

indebtedness when approved by a majority of the board of trustees
and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.

Bonds issued by a corporation shall be registered with the

Commission, which shall have the authority to determine the
sufficiency of the terms thereof.

Section 38. Power to Deny Preemptive Right. - All stockholders

of a stock corporation shall enjoy preemptive right to subscribe to
all issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto: Provided, That such
preemptive right shall not extend to shares issued in compliance
with laws requiring stock offerings or minimum stock ownership by
the public; or to shares issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding
capital stock in exchange for property needed for corporate
purposes or in payment of previously contracted debt.

Section 39. Sale or Other Disposition of Assets. - Subject to the

provisions of Republic Act No. 10667, otherwise known as the
"Philippine Competition Act", and other related laws a corporation
may, by a majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge, or otherwise dispose of its
property and assets, upon such terms and conditions and for such
consideration, which may be money, stock, bonds, or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient.
 A sale of all or substantially all of the corporation's properties
and assets, including its goodwill, must be authorized by the vote of
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
members, meeting duly called for the purpose.

In nonstock corporations where there are no members with

voting rights, the vote of at least a majority of the trustees in office
will be sufficient authorization for the corporation to enter into any
transaction authorized by this section.

The determination of whether or not the sale involves all or

substantially all of the corporation's properties and assets must be
computed based on its net asset value, as shown in its latest
financial statements. 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 of which it was
incorporated.

Written notice of the proposed action and of the time and

place for the meeting shall be addressed to stockholders or
members at their places of residence as shown in the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, served personally, or when allowed by the bylaws
or done with the consent of the stockholder, sent electronically:
Provided, That any dissenting

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stockholder may exercise the right of appraisal under the conditions
provided in this Code.

After such authorization or approval by the stockholders or

members, the board of directors or trustees may, nevertheless, in
its discretion, abandon such sale, lease, exchange, mortgage,
pledge, or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any

corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge, or otherwise
dispose of any of its property and assets if the same is necessary in
the usual and regular course of business of the corporation or if the
proceeds of the sale or other disposition of such property and
assets shall be appropriated for the conduct of its remaining
business.

Section 40. Power to Acquire Own Shares. - Provided, That the

corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired, a stock corporation shall
have the power to purchased or acquired, a stock corporation shall
have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including the following
cases:

(a) To eliminate fractional shares arising out of stock

dividends;

(b) To collect or compromise an indebtedness to the

corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and

(c)To pay dissenting or withdrawing stockholders entitled to

payment for their shares under the provisions of this Code.

Section 41. 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, 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
outstanding capital stock, or by at least two-thirds (2/3) of the
members in the case of nonstock corporations at a meeting duly
called for the purpose. Notice of the proposed investment and the
time place of residence as shown in the books of the corporation
and deposited to the addressee in the post office with the postage
prepaid. Served personally, or sent electronically in accordance with
the rules and regulations of the Commission on the use of electronic
data message, when allowed by the bylaws or done with the
consent of the stockholders: 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.

Section 42. 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, 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 be first be applied to the unpaid balance on the subscription
plus costs and expenses, while stock holders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing at
least

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two-thirds (2/3)of the outstanding capital stock at a regular or
special meeting duly called for the purpose.

Stock corporations are prohibited from restraining surplus

profits in excess of one hundred percent (100%} of their paid-in
capital stock, except: (a) when justified by the 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.

Section 43. Power to Enter into Management Contract. - No

corporation shall conclude a management contract with another
corporation unless such contract is approved by the board of
directors and by the stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the
members in the case of a nonstock corporation, or both the
managing and the managed corporation, at a meeting duly called
for the purpose: Provided, That (a) where a stockholder or
stockholders representing the same interest of both the managing
and the managed corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or (b) where a majority if the members of
the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by
the stockholders of the managed corporation owning at least two-
thirds (2/3) of the total outstanding capital stock entitled to vote, or
by at least two-thirds (2/3) of the members in the case of a nonstock
corporation.

These shall apply to any contract whereby a corporation

undertakes to manage or operate all or substantially all of the called
services 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 entered into such periods as
may be provided by the pertinent laws or regulations.
 No management contracts shall be entered into for period
longer than five (5) years for any one term.

Section 44. Ultra Vires Acts of the Corporations. - 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.
***

POWERS OF THE CORPORATION

1. Express Powers - granted by law, Corporation Code, and its

Articles of Incorporation or Charter

2. Inherent/Incidental Powers – not expressly stated but are

deemed to be within the capacity of the corporation

3.Implied/Necessary Powers – exists as a necessary

consequence of the exercise of the express powers of the
corporation or the pursuit of its purposes as provided for in its
charter

CLASSIFICATION:

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 1. Acts in the usual course of business.
2.Acts to protect debts owing to the corporation.
3.Acts which involve embarking on a different business usually
to collect debts out of
profits.
4. Acts to protect or aid employees.
5.Acts to increase business.

CORPORATE POWERS AND CAPACITY (Sec. 35)

1. To sue and be sued;

2.To have perpetual existence;
3.To adopt and use of corporate seal;
4. To amend its articles of incorporation;
5.To adopt its by-laws;
6. For stock corporations - to issue and sell stocks to
subscribers and treasury stocks. For nonstock corporation – to
admit members;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and deal with real and personal property,
including securities and bonds
8. To enter into a partnership, joint venture, merger or
consolidation or any other commercial agreement;
9. To make reasonable donations, including those for the
public welfare, hospital, charitable, cultural, scientific, civic or
similar purposes. Also donation in aid of any political party or
candidate or partisan political activity, but not a foreign
corporation;
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and
11. To exercise other powers essential or necessary to carry out
its purposes.

SPECIAL/SPECIFIC POWERS (Secs. 37- 43)

1. Power to extend or shorten corporate term;

2.Increase or decrease corporate stock;
3.Incur, create, or increase bonded indebtedness;
4. Deny preemptive right;
5.Sell, dispose, lease, encumber all or substantially all of
corporate assets;
6. Purchase or acquire own shares provided:
a. there is an unrestricted retained earnings, and
b. it is for a legitimate purpose.
 7.Invest corporate funds in another corporation or business
for any purpose other for its primary purpose;
8. Power to declare dividends out of unrestricted retained
earnings;
9.Enter into management contract with another corporation
whereby one corporation undertakes to manage all or substantially
all of the business of the other corporation for a period not longer
than 5 years for any one term.

CORPORATE BOND – an obligation to pay a definite sum of money

at a future time at fixed rate of interest

BONDED INDEBTEDNESS – debts secured by a mortgage on

corporate property

RETAINED EARNINGS - these are assets less liabilities and legal

capital

UNRESTRICTED RETAINED EARNINGS – if the retained earnings have

not been reserved or set aside by the board of directors for some
corporate purpose.

DIVIDENDS - Corporate profits set aside, declared, and ordered to be

paid by the directors for distribution among shareholders at a fixed
time.

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FORMS OF DIVIDENDS:

a. Cash
b. Property
c. Stock

While cash dividends due on delinquent shares can be applied

to the payment of the unpaid balance, stock dividends cannot be
applied as payment for unpaid subscription. The right to dividends is
based on duly recorded stockholdings; accordingly, the corporation
is prohibited from entitling thereto anyone else.

General Rule: Stock corporations are prohibited from retaining

surplus profits in excess of 100% of their paid-in capital stock

Except:

a. When justified by definite corporate expansion

projects approved by the board of directors;

b. When the corporation is prohibited under any loan

agreement with any financial institution or creditor from
declaring dividends without its/his consent and such consent
has not yet been secured;

c. When it can be clearly shown that such retention is

necessary under special circumstances obtaining in the
corporation, such as when there is a need for special reserve
for probable contingencies.

SOURCES OF DIVIDENDS:

GENERAL RULE: Dividends can only be declared and paid out of

actual and bona fide unrestricted retained earnings.

SPECIAL RULES:

a. Where a corporation sold its real property, which is not

being used for business, at a gain, the income derived
therefrom may be availed of for dividend distribution.

b. Increase in the value of a fixed asset as a result of its

revaluation is not retained earnings.

However, increase in the value of fixed assets as a result

of revaluation (“Revaluation surplus”) may be declared as cash
or stock dividends provided that the company:
 (i) Has sufficient income from operations from
which the depreciation on the appraisal increase was
charged;

(ii)Has no deficit at the time the depreciation on the

appraisal increase was charged to operations; and

(iii) Such depreciation on appraisal increase

previously charged to operations has not been impaired
by losses.

c.Dividends can be declared out of the amount received in

excess of the par value of shares (“paid-in surplus”) when:

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 (i) That they be declared only as stock dividends
and not cash;

(ii) No creditors are prejudiced; and

(iii) There is no impairment of capital.

Note that unlike par value shares, when no par value

shares are sold at a premium, the entire consideration paid is
considered capital; hence the same cannot be declared as
dividends.

d. Reduction surplus can be a source of dividends. Rule on

paid-in surplus is applicable.

e. No dividends can be declared out of capital except only

in two instances:

1) liquidating dividends; and

2) dividends from investments in wasting asset

corporation.

It permits corporations solely or principally engaged in

the exploitation of “wasting assets”, such as mines, oil wells,
patents and leaseholds, to distribute the net proceeds derived
from exploitation of their holdings without allowance or
deduction for depletion.

f. Profits realized from sale of treasury shares are part of

capital and cannot be declared as cash or stock dividend as
purchase and sale of such shares are regarded as contractions
and expansions of paid-in capital.

g. Money cannot be borrowed for the payment of

dividends because indebtedness is not retained earnings of the
corporation.

h. Corporate earnings which have not yet been received

even though they consist in money which is due, cannot be
included in the profits out of which dividends may be paid.

CASH DIVIDENDS v. STOCK DIVIDENDS

CASH DIVIDENDS STOCK DIVIDENDS

1. Involves a disbursement to the Does not involve any
stockholders 1. disbursement.
of accumulated earnings.
2. When declared and paid 2 Since it is still part of corporate
becomes the . property,
absolute property of the may be reached by corporate
stockholder. They are creditors.
beyond the reach of corporate
creditors unless
there is fraud.
3. Declared only by the board of 3 Declared by the board with the
directors at its . concurrence
of the stockholders representing
discretion. at least 2/3 of
theoutstandingcapitalstockata
regular/special meeting.
4. Does not increase the 4
corporate capital. . Corporate capital is increased.
5. Its declaration creates a debt 5 No debt is created by its
from the . declaration
corporation to each of its
stockholders.
TRUST FUND
DOCTRINE

This doctrine provides that the subscribed capital stock of the

corporation is a trust fund for the payment of debts of the
corporation which the creditors have the right to look up to

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satisfy their credits, and which the corporation may not dissipate.
The creditors may sue the stockholders directly for the latter’s
unpaid subscription.

APPLICATION OF THE DOCTRINE:

1. Where the corporation has distributed its capital among the

stockholders without providing for the payment of creditors;

2.Where it had released the subscribers to the capital stock

from their subscriptions;

3.Where it has transferred the corporate property in fraud of its

creditors; and

4. Where the corporation is insolvent.

COVERAGE OF THE DOCTRINE:

1. If the corporation is solvent, the TFD extends to the capital

stock represented by the corporation’s legal capital.

2.If the corporation is insolvent, the TFD extends to the capital

stock of the corporation as well as all of its property and assets.

EXCEPTIONS TO THE DOCTRINE:

1. Redemption of redeemable shares (Sec. 8)

2.In close corporation, when there should be a deadlock and

the SEC orders the payment of the appraised value of the
stockholder’s share. (Sec. 104)

EXECUTIVE COMMITTEE v. MANAGEMENT CONTRACT

EXECUTIVE COMMITTEE MANAGEMENT CONTRACT

1. Its creation must be provided
for in the by- 1. Express power of a corporation.
laws
2. A governing body which 2. Management company must
functions as the always be
subject to the superior power of
board itself. the board to
give specific directions from time
to time or to
recall the delegation of
managerial power.
ULTRA VIRES (“beyond
powers”) ACT

“Ultra Vires” – literally means “beyond powers”

An act which is beyond the conferred powers of a corporation

or the purposes or objects for which it is created as defined by the
law of its organization. (Republic vs. Acoje Mining Co., Inc. 7 SCRAS
361).

An act done by a corporation outside of the express and

implied powers vested in it by its charter and by the law.

TYPES OF ULTRA VIRES ACTS:

1. Acts done beyond the powers of the corporation as provided

in the law or its articles of incorporation;

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 2. Acts or contracts entered into in behalf of a corporation by
persons who have no corporate authority (Note: This is technically
ultra vires acts of officers and not of the corporation); and

3.Acts or contracts, which are per se illegal as being contrary to

law.

AN ULTRA VIRES ACT MAY BE THAT OF:

a. The corporation;
b. The Board of Directors; and
c. The corporate officers.

EFFECTS OF ULTRA VIRES ACT ON:

a. Executed contract – courts will not set aside or interfere with

such contracts;

b. Executory contracts – no enforcement even at the suit of

either party (void and unenforceable);

c. Part executed and part executory – principle of “no unjust

enrichment at expense of another” shall apply; and

d. Executory contracts apparently authorized but ultra vires –

the principle of estoppel shall apply.

ULTRA VIRES ACTS AND ILLEGAL ACTS

Ultra vires (“beyond powers”) refers only to an act outside or

beyond corporate powers, including those that may ostensibly be
within such powers but are, by general or special laws, either
prohibited or declared illegal. It is in this context that the Code has
used the term “ultra vires acts”.

ULTRA VIRES ACTS ILLEGAL ACTS

1. Not necessarily unlawful, but Unlawful; against law,
outside the 1. morals, public
powers of the corporation. policy, and public order
2
2. Can be ratified. . Cannot be ratified.
3. Can bind the parties if 3
wholly or partly . Cannot bind the parties.
executed.

REMEDIES IN CASE OF ULTRA VIRES ACTS

1. State
 a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate of
registration

2.Stockholders
a. Injunction; or
b. Derivative suit

3.Creditors - Nullification of contract in fraud of creditors

***
GUIDE QUESTIONS:

1. What are the different powers of the corporation?

2.Explain unrestricted retained earnings.
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3.Distinguish cash dividends from stock dividends.
4. Discuss the trust fund doctrine.
5.Distinguish ultra vires acts from illegal acts.

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