TITLE 4: POWERS OF CORPORATION

A corporation exercises its powers through its board of SECTION 35: Corporate Powers and Capacity
directors and/or its duly authorized officers and
agents¸ except the instances where Corporation Code
requires stockholders’ approval for certain acts

Corporate Powers
- Has no power except those expressly granted
by Corporation Code, and that are implied or
incidental to its existence.
- A corporation exercises its powers through its
board of directors and/or its duly authorized
officers and agents.
- Thus, it has been observed that the power of a
corporation to sue and be sued in any court is
lodged with the board of directors that
exercises its corporate powers
- Physical acts 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

Powers of Corporation
Kinds/Classification of Corporate Power: - These are general powers of corporation which
1. Express Powers — these are powers expressly
are exercised by the board of directors or duly
granted/authorized to a corporation by its
charter. authorized officer and agents
2. Implied Powers — these are powers which are
necessary to carry into effect powers which are Specific Express Powers of a Corporation
expressly granted, and which must therefore be 1. Power to extend or shorten corporate term
presumed to have been the intention in the (Sec. 36).
grant in the franchise. 2. Power to increase or decrease capital stock
3. Incidental Powers — these are the powers that (Sec. 37).
a corporation may exercise by reason of its very 3. Power to incur, create or increase bonded
existence as a corporation. indebtedness (Sec. 37).
4. Power to deny preemptive right (Sec. 38).
Some of the Implied & Incidental Powers of a 5. Sale or other disposition of Assets (Sec. 39).
Corporation 6. Power to acquire own shares (Sec. 40).
Implied Powers: 7. Power to invest corporate funds in another
- Acts in the usual course of business, acts to corporation (Sec. 41).
protect debts due to the corporation, acts 8. Power to declare dividends (Sec. 42).
which involve embarking on a different line of 9. Power to enter into management contract (Sec.
business, acts designed to protect or aid 43).
employees, acts to increase the business of the
corporation.
Power of Corporation to Sue
Incidental Powers: - Derivative suit is an action brought by a
- Power of succession, power to have corporate stockholder on behalf of corporation to enforce
name, power to adopt a corporate seal, power
corporate rights against the corporations,
to acquire, hold or dispose property as its
business may reasonably require, power to directors, officers or other insiders
adopt and amend by-laws. - Directors or officers, as provided under by-laws,
have the right to decide whether or not a
corporations should sue
 - Since these directors or officers will never be
willing to sue themselves, or impugn their
wrongful or fraudulent decisions, stockholders
are permitted by law to bring an action in the
name of corporation to hold these directors or
officers accountable
- In derivative suit, the real party in interest is
the corporation, while the stockholder is a
mere nominal party

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
2/3 of the outstanding capital stock at a
SECTION 36: Power to Extend or Shorten Corporate stockholders meeting duly called for the
Term purpose
- A private corporation may extend or shorten its - Written notice of the proposed action and the
corporate term as stated in the articles of time and place of the meeting shall be sent to
incorporation when approved by a majority stockholders or members at their respective
vote of the board of directors/ trustees or at place of residence as shown in the books of the
least members representing 2/3 of outstanding corporation, and must be deposited to the
capital stock or of its members addressee in the post office with postage
- Written notice of the proposed action and the prepaid, served personally, or when allowed by
time and place of the meeting shall be sent to bylaws or done with the consent of
stockholders or members at their respective stockholder, sent electronically data messages
place of residence as shown in the books of the - Certificate must be signed by a majority of the
corporation, and must be deposited to the directors of the corporation and countersigned
addressee in the post office with postage by the chairperson and secretary of the
prepaid, served personally, or when allowed by stockholder’s meeting, setting forth
bylaws or done with the consent of
stockholder, sent electronically 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

Power to Extend or Shorten Corporate Term

Requirements
1. Approval by a majority vote of the board of
directors or trustees
2. Ratification by the stockholders representing at
least 2/3 of the outstanding capital stock or at
least 2/3 of the members in case of non-stock
corporation - Any increase or decrease in the capital stock or
the incurring, creating or increasing of any
Appraisal Right bonded indebtedness shall require prior
- Means that stockholder who dissented and approval of the Commission, and where
voted against the proposed corporate action, appropriate, of the Philippine Competition
may choose to get out of the corporation by Commission
demanding payment of the FMV of his shares
- The application with the Commission shall be - Nonstock corporation may incur, create, or
made within 6 months from the date of increase bonded indebtedness when approved
approval of the board of directors and by a majority of the board of trustees of at least
stockholders, which period may be extended for 2/3 of the members in a meeting duly called for
justifiable reasons the purpose
- Copies of the certificate shall be kept on file in
the office of the corporation and file with the
Commission and attached to the original articles
of incorporation
- After the approval by the Commission and the - Bonds issued by a corporation shall be
issuance by the Commission of its certificate of registered with the Commission, which shall
filing, the capital stock shall be deemed have the authority to determine sufficiency of
increased or increased and the incurring, the terms
creating or increasing of any bonded
indebtedness authorized, as the certificate of Three Instances of Distribution of Corporate Capital
filing may declare: Provided that

Trust Fund Doctrine

- Provides that subscriptions to the capital stock

of the corporation constitute a fund to which
the creditors have a right to look for the
satisfaction of their claims
- This doctrine is underlying principle in the
procedure for the distribution of capital assets,
embodied in the Corporation Code, which
allows the distribution of corporate capital
only in three instances
1. Amendment of articles of incorporation to
reduce the authorized capital stock
2. Purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings
3. Dissolution and eventual liquidation of the
corporation

- Corporation engaged in increasing its

authorized capital stock, with the required vote
of its Board of Directors and of its stockholders,
must file a sworn statement of the treasurer of
the corporation showing that at least 25% of
such increased capital stock has been
 subscribed and 25% paid either in cash or Note: Preemptive right must be exercised within the
property transferred to corporation
- In contrast, after the approval by the SEC of the
increase of its authorize capital stock, and from
time to time, the corporation, by a vote of its
Board of Directors, and without need of either
stockholder or SEC approval, may issue and sell
shares of its authorized but still unissued
capital stock to existing shareholders or to
members of the general public period stated in the articles of incorporation or the by-
- laws

Increase or Decrease of Authorized Capital Stock Right of pre-emption of stockholders.

Requirements Whenever the capital stock of a corporation is increased
and new shares of stock are issue4, the new issue must
Incurring, Creating or Increasing Bonded Indebtedness

Bonded Indebtedness

- A long term indebtedness secured usually by

real property

Registration of the Bonds

- Bonds issued by a corporation shall be be offered first to the stockholders who are such at the
time the increase was made in proportion to their
registered with the SEC, which shall have the
existing shareholdings and on equal terms with other
authority to determine the sufficiency of the holders of the original stocks before the subscriptions
terms are received from the general public. The principle is
known as the right of pre-emption or pre-emptive right
SECTION 38: Power to Deny Preemptive Right
of stockholders.
- 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 amended: Provided that

Preemptive Right

- It is the preferential right of all stockholders of a

stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion
to their respective shareholdings

Purpose: To enable the shareholder to retain his

proportionate control in the corporation

Preemptive right is not available (Power to deny

preemptive right)
 1. Shares to be issued in compliance with laws 1. If the same is necessary in the usual and
requiring stock offerings or minimum stock regular course of business of said corporation
ownership by the public 2. If the proceeds of sale or other disposition of
2. Shares to be issued in good faith with the such property and assets be appropriated for
approval of stockholders representing 2/3 of the conduct of its remaining business
the outstanding capital stock, in exchange for
SECTION 40: Power to Acquire Own Shares
property needed for corporate purposes or in
payment of a previously contracted debt - Provided that corporation has unrestricted
retained earnings in its book to cover the
Note: A suit to enforce preemptive rights in a
shares to be purchased, a stock corporation
corporation is not a derivative suit. Thus, a temporary
shall have the power to purchase for a
restraining order enjoining a person from representing
legitimate corporate purpose.
the corporation will not bar such action, because it is
instituted on behalf and for the benefit of the Instances when a corporation may acquire its own
shareholder, not the corporation shares

SECTION 39: Sale or Other Disposition of Assets

- While the corporation Code allows the transfer

of all or substantially all the properties and
assets of a corporation, the transfer should not
prejudice the creditors of the assignor
- The only way the transfer can proceed without
prejudice to the creditors is to hold the
assignee liable for the obligations of the
assignor.
- The acquisition by the assignee of all or
substantially all of the assets of the assignor Fractional Shares – Shares which are less than
necessarily includes the assumption of the one share
assignor’s liabilities, unless the creditors who
did not consent to the transfer choose to GR: Corporation may only acquire its own stocks in the
rescind the transfer on the ground of fraud presence of unrestricted retained earnings
- To allow an assignor to transfer all of its
business, properties and assets without the
consent of its creditors and without requiring EXPN
the assignee to assume the assignor’s 1. Redeemable shares may be acquired even
obligations will defraud the creditors. The without surplus profit for as long as it will not
assignment will place the assignor’s assets result to the insolvency of the Corporation
beyond the reach of its creditors 2. In a close corporation
Note: SEC approval is not required Basis of unrestricted retained earnings
Note: 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, as shown in its latest financial statements

Substantially all the Corporate Assets

- A sale or other disposition shall be deemed to

cover substantially all the corporate property
and assets if the corporation would be
rendered incapable of continuing the business
or accomplishing the purpose for which it was
incorporated

Ratification not required Trust Fund Doctrine, Concept:

 Under this doctrine, the capital stock, property
and other assets of a corporation are regarded
 as equity in trust for the payment of a corporate
creditors.
• In PLDT v. NTC GR. No. 152685, Dec, 4, 2007, The SC
held that the Trust Fund Doctrine considered the
subscribed capital as trust fund for the payment of
debts of the corporation, to which the creditor may look
for satisfaction.
• The doctrine is the underlying principle in the
procedure for the distribution of assets, embodied in
the Corporation Code, which allows the distribution of
corporate capital only in three Instances:

Three (3) Instances of Distribution of Corporate

Capital.
1. Amendments of the Articles of Incorporation to
reduce the authorized capital stock;
2. Purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings; and
3. Dissolution and eventual liquidation of the
corporation.
 Coverage of the Doctrine:
• The Trust Fund Pertains to the subscription to the
capital stock of the corporation. However when the
Corp. is insolvent, the Trust Fund encompasses not only
the subscription to the capital stock, but also other
property and asset of the corporation

SECTION 41: Power to Invest Corporate Funds in

Another Corporation or Business or for Any Other
Purpose

- Private corporation may invest its funds in any

other corporation, business, or for any purpose
other than primary purpose for which it is
organized, when approved by majority of the
board of directors or trustees and ratifies by
the stockholders representing at least 2/3 of
outstanding capital stock, or 2/3 of members
for nonstock, at a meeting duly called for the
purpose
- Notice of the proposed investment and the
time and place of the meeting shall be
addressed to each stockholder or member at
the place 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 electronically in
accordance with the rules and regulation of the
Commission on the use of electronic data
message, when allowed by the bylaws or done
with the consent of the stockholders: Provided
Requisites Dividends – Corporate profits set aside, declared, and
ordered to be paid by the directors for distribution
among stockholders at a fixed time

Requirements for the declaration of dividends

Differences between Cash Dividends and Stock

Dividends

Funds – Includes any corporate property to be used

in furtherance of business

SECTION 42: Power to Declare Dividends

- 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

Payment of dividends is not a matter of right

- 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 or programs approved by the board of
directors
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
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

Retained Earnings

- Accumulated profits realized out of normal and

- SEC 42 prohibit the issuance of any stock
continuous operations of the business after
dividend without the approval of stockholders,
deducting distributions to stockholders and
representing not less than 2/3 of the
transfers to capital or other accounts
outstanding capital stock at a regular or special
Unrestricted Retained Earning meeting duly called for the purpose. These
provisions underscore the fact that payment of
- RE which have not been reserved or set aside
dividends to a stockholder is not a matter of
by the board of directors for some corporate
right by a matter of consensus
purpose
Dividends is dependent upon the availability of EXPN:
unrestricted retained earnings
a. When justified by definite corporate expansion
- Corporation Code provided that the board of projects or programs approved by the board of
directors may declare dividends only out of directors
unrestricted retained earning b. When the corporation is prohibited under any
- Now, it adopts the change made in the loan agreement, with any financial institution
accounting terminology, substituted the phrase or creditor, whether local or foreign, from
“unrestricted retained earning,” which may be declaring dividends without its/his consent, and
more precise term, in place of “surplus profits such consent has not yet been secured
arising from its business” in the former law c. When it can be clearly shown that such
- Thus, the declaration of dividends is dependent retention is necessary under special
upon the availability of surplus profit or circumstances obtaining in the corporation,
unrestricted retained earnings such as when there is need for special reserve
- Preferences granted to preferred stockholders, for probable contingencies
do not give them lien upon the property of the
Concept of Dividends
corporation nor make them creditors of the
 A Dividend is that part or portion of profits of a
corporation, the right of the former being corporation, set aside, declared and ordered by
always subordinate to the latter the directors to be paid ratably to the
- Dividends are thus payable only when there stockholders on demand or at a fixed time.
are profits earned by the corporation and as a It is a payment to the stockholders of a
general rule, even if there are existing profits, corporation as a return upon their investment.
 Dividend is the portion of the accumulated
board of directors has the discretion to
profits of a corporation which is set aside by the
determine whether or not the dividends are to directors for distribution to Stockholders.
be declared
Retained Earnings, Unrestricted Retained Earnings,
Dividends valued at the amount of the declared
Dividends
dividend

- Dividends, regardless of the form these are

declared, cash, property or stock, are valued at
the amount of the declared dividend taken
from the unrestricted retained earnings of a
corporation
- Thus, the value of the declaration in the case of
a stock dividend is the actual value of the
Retained Earnings
original issuance of said stocks
- The accumulated profits realized out of a
- In the case of stock dividends, it is the amount
normal and continuous operations of the
that the corporation transfer from its surplus business after deducting therefrom
profit account to its capital account or it is the distributions to stockholders and transfers to
amount that the corporation receives in capital or other accounts.
consideration of the original issuance of the Unrestricted Retained Earnings
shares - The retained earnings which have not been
reserved or set aside by the board of directors
- It is the distribution of current for accumulated
for some corporate purpose.
earnings to the shareholders of a corporation Dividends
pro rata based on the number of shares owned - Corporate profits set aside, declared, and
- Such distribution in whatever form is valued at ordered to be paid by the directors for
the declared amount or monetary equivalent distribution among stockholders at a fixed time

Unrestricted Retained Earnings

1. The retained earnings of a corporation is the
Capital and Stock Dividend
"difference between the total present value of
Limitations on Dividends

GR: Stock corporations are prohibited from retaining

surplus profits in excess of 100% of their paid-in capital
stock
 its assets after deducting losses and liabilities or by at least a majority of the members in the
and the amount of its capital stock." case of a nonstock corporation, of both the
2. Such earnings or portions thereof are said to be managing and the managed corporation, at a
unrestricted and, therefore, available for
meeting duly called for the purpose: Provided
dividend distribution, if they have not been
reserved or set aside by the board of directors
for some corporate purpose nor are required by
law to be earmarked for some other purpose - These shall apply to any contract whereby a
specified by such law. corporation undertakes to manage or operate
all or substantially all of the business of another
Dividends vs. Profits corporation, whether such contracts are called
1. A dividend, as applied to corporate stock, is that
service contracts, operating agreeements or
portion of the profit or net earnings which the
corporation has set aside for ratable otherwise: Provided
distribution among the stockholder. Thus, - No management contract shall be entered into
Dividends come from profits, while Profits are a for a period longer than 5 years for any one
source of dividends. term
2. Profits are not dividends until so declared or set
aside by the corporation. In the meantime, all Management Contract

- It is an agreement whereby a corporation

delegates the management of its affairs to
another corporation for a certain period of
time.
- No management contract shall be entered into
for a period longer than 5 years for any one
term
- Any contract whereby a corporation undertakes
to mange or operate all or substantially all of
the business of another corporation, whether
such contracts are called service contracts,
operating agreements or otherwise

Note: The above section refers only to a management

contract with another corporation. Hence, it does not
apply to management contracts entered into by a
corporation with natural persons

Requirements

profits are a part of the assets of the

corporation and do not belong to the SECTION 44: Ultra Vires Acts of Corporation
stockholders individually. and - No corporation shall possess or exercise
corporate powers other than those conferred
Kinds of Dividends
1. Cash dividends by this Code or by its articles of incorporation
2. Property dividends and except as necessary or incidental to the
3. Stocks dividends exercise of the powers conferred
4. Bond dividends
5. Scrip dividends Ultra Vires Act
6. Liquidating dividends
Act outside or beyond corporate powers, including
7. Composite dividends
those that may be ostensibly be within powers by
general or special laws, prohibited or declared illegal
SECTION 43: Power to Enter into Management
Contract - It is defined by Corporation Code as an act
outside the powers conferred by the Code or
- No corporation shall conclude a management by the articles of incorporation, or beyond
contract with another corporation unless such what is necessary or incidental to the exercise
contract is approved by the majority of board of the powers.
of directors and by stockholders owning at least
the majority of the outstanding capital stock, Types of Ultra Vires Acts
 1. Acts done BEYOND the powers of the
corporation as provided in the law or its
2. Acts or Contracts entered into in behalf of a
corporation by persons who have (Note: This is
technically ultra vires acts of officers and not oh
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 Acts On:

1. Executed contract — courts will not set aside or
interfere with such contracts;
2. Executory contracts — no enforcement even at
the suit of either party (void and
unenforceable);
3. Part executed and part executory — principle
of "no unjust enrichment at the expense of
another" shall apply; and
4. Executory contracts apparently authorized but
ultra vires — the principle of estoppel shall
apply

Ratification of Ultra Vires Acts

1. Where the contract is illegal per se, it is wholly
void or inexistent. It cannot be ratified or
validated (Art. 1409, Civil Code).
2. Where the contract is not illegal per se but
merely beyond the power of a corporation, the
same is merely voidable and may be enforced
by performance, ratification or by estoppel, or
on equitable ground.