Post on 03-Oct-2014
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Chapter VI – Corporate Powers
Section 23. The board of directors or trustees. - Unless
otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall
hold office for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1) share of the capital
stock of the corporation of which he is a director, which share
shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share
of the capital stock of the corporation of which he is a
director shall thereby cease to be a director. Trustees of non-
stock corporations must be members thereof. A majority of the
directors or trustees of all corporations organized under this
Code must be residents of the Philippines.
— Primary rule: all corporate powers shall be exercised
and all corporate businesses shall be conducted by the
board of directors of the corporation
— Exception: specific instances where the Code requires
the consent and ratification of the SHs, particularly
those where the underlying contractual relationship
between the parties: the corporation, the SHs/members,
and the State, is being amended or altered
— How is consent expressed by the parties?
o
Corporation= through the Board
o
State= through act of the regulatory body
o
SHs= through majority or 2/3 vote where applicable
�
But dissenting SHs in certain instances are
given the option to withdraw from the
relationship through the exercise of his
appraisal right
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)
1. A corporation has only three (3) types of power:
a. Express (Sec 36)
b. Implied or Necessary
c. Incidental
General Powers of Corporations
a. Express Powers
General
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
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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
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in the articles of incorporation. (13a)
— Sources of express powers are provided for by law and those
enumerated in its charter
— Other express powers are in its AOI
— These are exercised by the Board
— In the absence of authority from the Board, no person, not
even the officers, can validly bind the corporation in the
exercise of express powers
— Code laws down two (2) general restrictions on the power of
any corporation to purchase and hold properties
o
(1) property must be reasonable and necessarily required
by the transaction of its lawful business
�
depends on the nature of the business
o
(2) must be subject to limitations prescribed by law and
the Constitution
�
cannot acquire available public lands except by
lease of not more than 1000 hectares (consti Art XII
Sec 3)
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exploration, development, exploitation, etc, of
natural resources= 60% Filipino-owned, and only in
JV with the state
— General powers in Sec 36 are to be exercised by the Board of
Directors in accordance with Sec 23 (except where otherwise
provided)
Specific Powers
1. To extend or shorten the corporate term (37)
Section 37. Power to extend or shorten corporate term. - A
private corporation may extend or shorten its term as stated in
the articles of incorporation when approved by a majority vote of
the board of directors or trustees and ratified at a meeting by
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right
under the conditions provided in this code. (n)
— Sec 37: extension or shortening of term of existence
o
Vote required: majority of board
o
Ratification: vote of at least 2/3 of OCS or members
o
Amendment to AOI: YES
o
Appraisal rights? YES (37 & 81)
2. To increase or decrease capital stock (38)
o
Vote required: majority of board
o
Ratification: vote of at least 2/3 of OCS or members
o
Prior approval of SEC required to take effect
o
Amendment to AOI: YES
o
Appraisal rights? NO
�
Dissenting SH can simply sell his shares
�
A grant of appraisal rights would defeat the
purpose—to raise funds
3. To incur, create, or increase bonded indebtedness (38)
Section 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority
vote of the board of directors and, at a stockholder's meeting
duly called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place
of the stockholder's meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of
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any bonded indebtedness is to be considered, must be addressed to
each stockholder at his place of residence as shown on the books
of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman
and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock thereof
actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in
cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if
such increase is for the purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the day
of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the
office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the
Securities and Exchange Commission and the issuance by the
Commission of its certificate of filing, the capital stock shall
stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities
and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by
the sworn statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate,
showing that at least twenty-five (25%) percent of such increased
capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred
to the corporation property the valuation of which is equal to
twenty-five (25%) percent of the subscription: Provided, further,
That no decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create bonded indebtedness,
or increase the same, with the approval by a majority vote of the
board of trustees and of at least two-thirds (2/3) of the members
in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.
(17a)
— Sec 38: incur, create, or increase bonded indebtedness
o
Bonded indebtedness: covers indebtedness of the
corporation which are secured by mortgage on real or
personal property (does not include debentures)
o
Vote required: majority vote of the board
o
Ratification: vote of at least 2/3 OCS or members
o
Prior approval of SEC required
o
Appraisal rights? NONE
4. To deny preemptive right (39)
Section 39. Power to deny pre-emptive right. - All stockholders
of a stock corporation shall enjoy pre-emptive right to subscribe
to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right
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is denied by the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right shall not extend
to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares
to be issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock,
in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.
5. To sell or otherwise dispose of substantially all its
assets (40)
Section 40. Sale or other disposition of assets. - Subject to the
provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and
assets, including its goodwill, upon such terms and conditions
and for such consideration, which may be money, stocks, bonds or
other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at
least to two-thirds (2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose. Written notice of
the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited
to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in
this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless, in
its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to
the rights of third parties under any contract relating thereto,
without further action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is
necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of
its remaining business.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office
will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
— Sec 40: power to sell, dispose, lease, or encumber all
or substantially all assets
o
Vote required: majority vote of the board
o
Ratification: vote of at least 2/3 OCS or members
o
Nature of transactions covered: onerous contracts
o
Transactions no covered by SH vote: (does not
involve the corporate purpose, but the corporate
business)
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Necessary in the usual and regular course of
business, or…
�
… proceeds of disposition is appropriate for
the conduct of remaining business
o
“substantially all” property/assets:
�
if disposition renders corporation incapable
of doing business
�
if disposition renders corporation incapable
of accomplishing its purpose in the AOI
�
appraisal right? YES
6. To acquire its own shares (41)
Section 41. Power to acquire own shares. - A stock corporation
shall have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including but not
limited to the following cases: Provided, That the corporation
has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
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1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code. (a)
— Sec 41: power to purchase own shares
o
Corporation must first have unrestricted retained
earnings
o
But redeemable shares may be acquired even without
unrestricted retained earnings (Sec 8)
7. To invest in another corporation or business (42)
Section 42. Power to invest corporate funds in another
corporation or business or for any other purpose. - Subject to
the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose
other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds
(2/3) of the members in the case of non-stock corporations, at a
stockholder's or member's meeting duly called for the purpose.
Written notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in
this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval
of the stockholders or members shall not be necessary. (17 1/2a)
— Sec 42: power to invest in another corporation
o
Vote required: majority of the board
o
Ratification: vote of at least 2/3 OCS or members
�
EXCEPT: where the investment is reasonably
necessary to accomplish its PRIMARY PURPOSE
�
If secondary purpose, ratificatory vote is
required
o
Effect of ratification: corporation can now legally
invest its funds OUTSIDE of its primary purpose, but
LIMITED to its secondary purpose
o
Coverage of “funds”—any corporate property to be
used to further its business
o
No ratificatory vote: ULTRA VIRES
8. To declare dividends (43)
Section 43. Power to declare dividends. - The board of directors
of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly
called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits
in excess of one hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be clearly
shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies. (n)
— Sec 43: power to declare dividends out of restricted
retained earnings
o
Payable in cash, property, or stock
o
Cash dividends due on unpaid stock shall be applied
to the unpaid balance on the subscription plus costs
and expenses
o
Primary of SHs to DEMAND dividends
o
Vote required: majority of the board
o
Ratification: vote of at least 2/3 of OCS or members
o
Cannot retain surplus profits in excess of 100% of
paid up capital stock
o
Exception:
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�
When justified by definite corporate
expansion projects approved by the board
�
When prohibited under any loan agreement
�
When it is clear that the retention is
necessary under special circumstances
o
Surplus profits in excess of 100%= distribute as
dividends
9. To enter into management contracts (44)
Section 44. Power to enter into management contract. - No
corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the
board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a
majority of the members in the case of a non-stock corporation,
of both the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital stock
entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-
thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate
all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service
contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural
resources may be entered into for such periods as may be provided
by the pertinent laws or regulations. (n)
— Sec 44: power to enter into a management contract
o
Vote required: majority of the board
o
Ratification: vote of at least 2/3 of OCS or
members, but…
o
Special rule: vote of SH of MANAGED corporation
owning at least 2/3 of TOTAL outstanding stock or
members entitled to vote, iff:
�
SH(s) representing the same interest in both
managed and managing corporations own or
control more than 1/3 of TOTAL outstanding
capital stock, or…
�
… majority of Board of directors of the
MANAGING corporation also constitute a
MAJORITY of the board in the MANAGED
o
rationale for the special rule: entering into a
management contract is a deviation from the GR that
the board manages the corporation and that the
board of the managing company should devote its
affairs to its own corporation
o
Not covered by Sec 44:
�
if managing other corporations is the primary
purpose, ratificatory vote is not required!
�
If managing a partnership or individual not a
corporation, not covered!
10. To buy the shares of another corporation (36) provided:
a. Reasonably necessary for its lawful business
b. The other corporation must be engaged in an allied
business or not alien to the purposes of the
purchasing corporation (42)
— This means a corporation can enter into a joint
venture with another person, partnership or another
corporation
— But a corporation cannot enter into a partnership
contract
11. Power to enter into a partnership
— GR: corporation cannot enter into partnerships with
other corporations or with individuals
— Exception: expressly allowed by statute or charter
o
Joint ventures
o
Limited partnerships (US Law)
b. Implied or Necessary Powers
GR: all acts other than those specified in Sec 36-44 and in other
special provisions would be ultra vires
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Exception: those which are:
— necessary or incidental to the exercise of the powers
so conferred (45), or
— essential or necessary to carry out its purpose or
purposes as stated in the AOI. (38)
Presumption that a corporation can act within its powers and when
a contract is not on its face necessarily beyond its authority,
it will, in the absence of proof to the contrary, presumed to be
valid.
— Sec 36(11): corporations have the power and capacity to
exercise such other powers as may be essential or
necessary to carry out its purpose(s) as provided for
in the AOI
o
Restated: the management of a corporation has
discretionary authority, in the absence of explicit
restrictions, to enter into contracts or
transactions deemed reasonably necessary or
incidental to its business purposes.
c. Incidental Powers
— Sec 2: powers, attributes, and properties expressly
authorized by law or incident to its existence
— Incidental powers: those that attach to a
corporation at the moment of its creation without
regard to its express powers or particular primary
purpose, and is inherent in it as a legal entity
— Examples:
i. To sue and be sued
ii. To grant and receive in the corporate name
iii. To purchase hold and convey real and personal
property for its purposes
iv. To have a corporate seal
v. To adopt and amend by-laws for its government
vi. To disenfranchise or remove members
— Powers that go into the very nature and extent of a
corporation’s juridical entity cannot be presumed to
be incidental or inherent powers
The Ultra Vires Doctrine
Section 45. Ultra vires acts of corporations. - No corporation
under this Code shall possess or exercise any corporate powers
except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to
the exercise of the powers so conferred. (n)
— Sec 45 embodies the ultra vires doctrine
— Based on two (2) principles:
1. Corporation is a creature of law and has only such powers
and privileges as are granted by the State
2. The doctrine upholds the duty of trust and obedience owed by
the corporation’s directors and officers to the SHs
a. Defense of ultra vires rests on the violation of
trust or duty towards SHs, and should not be
entertained where its allowance will do greater wrong
to innocent 3rd parties
Three (3) types of ultra vires acts:
(1) acts beyond the powers of the corporation as stipulated in
the law or AOI. The TEST: logical relation of the act to
the corporate purpose:
a. W/N the act is in direct and immediate furtherance
of the corporation’s business
b. W/N the act is fairly incident to the express powers
and reasonably necessary for its exercise
(2) acts or contracts entered in behalf of the corporation by
persons without corporate authority
a. GR: only acts of corporate officers within the scope
of their authority are binding on the corporation;
acts beyond the authority cannot bind the
corporation
b. Exception: ratification by the Board or estoppel
c. Primary rule: In the absence of an authority from
the board, no person, not even the officers, can
validly bind the corporation
d. Exception:
i. Doctrine of apparent authority: in dealing
with corporations, the public at large is
bound to rely upon outward appearances, and
relying on such, if it be found that the
directors permitted the agent to hold himself
out as having authority to bind or acquiesced
in the contract and accepted the benefits
therefrom, the corporation will be bound.
(Ramirez v Orientalist)
1. Public is not expected to know what
goes on inside the boardroom, or
cannot be required to look beyond the
officers acting for a corporation
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2. If the corporation desires to set up
the defense of lack of authority, it
must plead and prove it…
3. …but once it discharges that duty,
then the burden of proof shifts to the
agent to proof that by previous acts
of the corporation he had been clothed
with apparent authority
(3) acts or contracts which are per se illegal
a. cannot be given effect and are void
i. but in Harden, the Court upheld a patently
void contract as between the contracting
parties; a narrow exception is made in that
since the violation of the particular law
pertains to public policy concerns and may
only be proceeded through a quo warranto, not
by any of the parties
ii. thus if no civil wrong was committed, the
courts will leave the parties as they were
(Harden)
b. ultra vires acts which are NOT per se illegal are
merely voidable can be ratified by the SHs
(Pirovano)
i. it cures the infirmity and makes it perfectly
valid and enforceable, provided that it
prejudices no creditors and if it has been
partially executed and not merely executory
1. ratification may be by express act of
the SH (if the act is by the Board) or
the Board (if the act is by the
officers)…
2. …or impliedly through acceptance of
benefits…
3. …or through estoppel on the part of
the Board or the officers
Corporations are now more of a product of the agreement of the
incorporating parties rather than a mere “creature of the State:”
— Sec 10 allows 5 or more persons to form a private
corporation for any lawful purpose/s
— Sec 36 par 11 allows every corporation the power to
exercise such other powers as may be essential or
necessary to carry out the purpose/s in the AOI
— The corporation’s powers depends on its purpose in the
AOI
— Since parties are entirely free to insert any number of
purposes in its AOI, it follows that the extent of the
corporation’s powers depends largely on their
agreement, and not merely on a direct grant from the
State, unless of course the purposes are illegal.
— Instances where an act can or cannot be reasonably
implied from the purposes due to poor draftsmanship or
lack of foresight of the drafters, the purpose clause
may be reasonably stretched to accommodate the new and
unexpected situations, otherwise, a proper amendment of
the AOI would be necessary.
Legal consequences of acts clearly beyond the powers of the
corporation or ultra vires?
— On the corporation:
o
if the act is illegal, involuntary dissolution under
a quo warranto proceeding by the SolGen
o
revocation or suspension of the certificate of
registration by the SEC
— On the parties to the ultra vires contract:
o
Parties are “left as they are” and no rescission
would lie.
o
Where there has been partial performance by one
party, and the other has not, the latter, having
benefited from the performance, is estopped from
claiming ultra vires
— On the rights of stockholders:
o
A stockholder can file an individual or derivative
suit to enjoin a threatened ultra vires act or
contract or a derivative suit for damages if the
contract has been performed
o
Liability would depend on whether the contracting
parties acted in GF and with reasonable diligence;
an honest mistake would not give rise to liability
— If action is based on tort, the stockholders cannot set
up the defense of ultra vires against the injured party
who had no knowledge that the corporation was engaging
in an act not included expressly or impliedly in its
purpose clause.
RP v Acoje Mining. F: Acoje Mining requested the opening of a
post office at its mining camp in Zambales to service employees
living in the camp. The Director of Posts agreed to set up the
office, provided that in the meantime that funds are not
available, the company would provide for all essential equipment
and assign a responsible employee to perform the duties of a
postmaster. He also added that the company shall assume direct
responsibility for whatever pecuniary loss may be suffered by the
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Bureau of Posts by reason of the dishonesty or negligence of the
employee assigned. A Resolution by the Acoje Board of Directors
was passed. The postmaster assigned, Hilario Sanchez, went on
leave and never returned. It was soon discovered that a shortage
was incurred iao P13,867.24, apparently embezzled by Sanchez.
Bureau of Posts sues for the shortage. Acoje denied its liability
contending that the resolution issued by the board was ultra
vires, and its liability if any would only be that of a
guarantor.
H: It should be noted that it was Acoje itself that requested for
the setting up of a post office for the convenience of its
employees, which the SC held to cover a subject which is “a
reasonable and proper adjunct to the conduct of the business of
Acoje Mining.” An ultra vires act is one committed outside the
object for which a corporation is created, but there are certain
corporate acts that may be performed outside the scope of the
powers expressly conferred if they are necessary to promote the
interest and welfare of the corporation.”
Even in the case of ultra vires acts which are not illegal per
se, a corporation cannot be heard to complain that it is not
liable for the acts of its board, because of estoppel by
representation. The term ultra vires should be distinguished from
an illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the
latter is void and cannot be invalidated. It being merely
voidable, an ultra vires act can be enforced or validated if
there are equitable grounds for taking such action. In this case,
it is fair that the resolution be upheld at least on the ground
of estoppel.
The defense of ultra vires rests on violation of trust or duty
towards the stockholders, and should not be entertained where its
allowance will do greater wrong to innocent parties dealing with
the corporation. The acceptance of benefits arising from the
performance of the other party gives rise to an estoppel
precluding the repudiation of the contract.
Napocor v Vera. Sea Lion is a port and arrastre operator with a contract for
stevedoring services with NPC which had already expired. Its PPA permit for cargo
handling services at the NPC Calaca pier had expired as well. Napocor did not
renew Sea Lion’s contract for Stevedoring Services for Coal-Handling Operations at
Calaca plant, and took over its stevedoring services pursuant to a provision in its
charter, “[t[o exercise such powers and do such things as may be reasonably
necessary to carry out the business and purposes for which it was organized, or
which, from time to time, may be declared by the Board to be necessary, useful,
incidental or auxiliary to accomplish said purpose.” Sea Lion sues, alleging that
NPC had acted in bad faith and with grave abuse of discretion in not renewing its
Contract for Stevedoring Services for Coal-Handling Operations at the Calaca plant,
and in taking over its stevedoring services. Judge Vera, acting on Sea Lion’s suit,
issued a writ of preliminary injunction enjoining NPC from further undertaking
stevedoring and arrastre services in its pier located at the Batangas Coal-Fired
Thermal Power Plant at Calaca, Batangas and directing it either to enter into a
contract for stevedoring and arrastre services or to conduct a public bidding therefor.
Sea Lion was also allowed to continue stevedoring and arrastre services at the pier.
H: In determining whether or not the act of NPC falls within the purview of the
charter which creates it, the Court must decide whether or not a logical and
necessary relation exists between the act questioned and the corporate purpose
expressed in the NPC charter. For if that act is one which is lawful in itself and not
otherwise prohibited, and is done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those ends in a substantial and not in a
remote and fanciful sense, it may be fairly considered within the corporation's
charter powers. A pier located at Calaca, Batangas, which is owned by NPC, receives
the various shipments of coal which is used exclusively to fuel the Batangas Coal-
Fired Thermal Power Plant of the NPC for the generation of electric power. The
stevedoring services which involve the unloading of the coal shipments into the NPC
pier for its eventual conveyance to the power plant are incidental and indispensable
to the operation of the plant. The Court holds that NPC is empowered under its
Charter to undertake such services, it being reasonably necessary to the operation
and maintenance of the power plant. This Court is, guided by the case of Republic of
the Philippines v. Acoje Mining Company, Inc., where the Court affirmed the rule
that a corporation is not restricted to the exercise of powers expressly conferred
upon it by its charter, but has the power to do what is reasonably necessary or
proper to promote the interest or welfare of the corporation. Whether NPC will enter
into a contract for stevedoring and arrastre services to handle its coal shipments to
its pier, or undertake the services itself, is entirely and exclusively within its
corporate discretion. It does not involve a duty the performance of which is enjoined
by law. Thus, the courts cannot direct the NPC in the exercise of this prerogative.
Madrigal & Co v Zamora. Madrigal & Co was engaged in the
management of Rizal Cement Co., Inc. and is also its sister
company, both being owned by the same or practically the same
stockholders. The Madrigal Central Office Employees Union sought
for the renewal of its collective bargaining agreement and
proposed a wage increase of P200.00 a month, an allowance of
P100.00 a month, and other economic benefits. Madrigal requested
for a deferment in the negotiations.
Thereafter, Madrigal on two occasions reduced its capital stock
from 765,000 shares to 267,366 shares and from 267,366 shares to
10
110,085 shares by virtue of two alleged resolutions of its
stockholders, which was effected through the distribution of the
marketable securities owned by the petitioner to its stockholders
in exchange for their shares in an equivalent amount in the
corporation.
The Union filed a case for ULP with the NLRC. Madrigal answered
citing operational losses. Madrigal then informed the Secretary
of Labor that Rizal Cement Co., Inc., "from which it derives
income as the General Manager or Agent" had "ceased operating
temporarily. In addition, because of the desire of the
stockholders to phase out the operations of the Madrigal & Co.,
Inc. due to lack of business incentives and prospects, and in
order to prevent further losses," it had to reduce its capital
stock on two occasions. The labor arbiter, having found that the
petitioner "had been making substantial profits in its operation"
since 1972 through 1975, granted the wage increase, and was
affirmed by NLRC. Meanwhile Madrigal tried to terminate the
services of Union members citing retrenchment but its application
was declared illegal by DOLE. Upon appeal to OP, Ronaldo Zamora
affirmed the decision of DOLE.
H: What clearly emerges from the recorded facts is that the
petitioner, awash with profits from its business operations but
confronted with the demand of the union for wage increases,
decided to evade its responsibility towards the employees by a
devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all
indications, just a mask for the purge of union members, who, by
then, had agitated for wage increases. In the face of the
petitioner company's piling profits, the unionists had the right
to demand for such salary adjustments. That the petitioner made
quite handsome profits is clear from the records. We agree with
the National Labor Relations Commission that "[t]he dividends
received by the company are corporate earnings arising from
corporate investment." 42 Indeed, as found by the Commission, the
petitioner had entered such earnings in its financial statements
as profits, which it would not have done if they were not in fact
profits. 43
Moreover, it is incorrect to say that such profits — in the form
of dividends — are beyond the reach of the petitioner's creditors
since the petitioner had received them as compensation for its
management services in favor of the companies it managed as a
shareholder thereof. As such shareholder, the dividends paid to
it were its own money, which may then be available for wage
increments. It is not a case of a corporation distributing
dividends in favor of its stockholders, in which case, such
dividends would be the absolute property of the stockholders and
hence, out of reach by creditors of the corporation. Here, the
petitioner was acting as stockholder itself, and in that case,
the right to a share in such dividends, by way of salary
increases, may not be denied its employees.
Accordingly, this court is convinced that the petitioner's
capital reduction efforts were, to begin with, a subterfuge, a
deception as it were, to camouflage the fact that it had been
making profits, and consequently, to justify the mass layoff in
its employee ranks, especially of union members. They were
nothing but a premature and plain distribution of corporate
assets to obviate a just sharing to labor of the vast profits
obtained by its joint efforts with capital through the years.
Surely, we can neither countenance nor condone this. It is an
unfair labor practice.
Gov’t of Philippines v El Hogar. This is a quo warranto
proceeding, alleging 17 causes of action, instituted originally
in this court by the Government of the Philippine Islands on the
relation of the Attorney-General against the building and loan
association known as El Hogar Filipino, for the purpose of
depriving it of its corporate franchise, excluding it from all
corporate rights and privileges, and effecting a final
dissolution of said corporation. The respondent, El Hogar
Filipino, was apparently the first corporation organized in the
Philippine Islands under the provisions cited, and the
association has been favored with extraordinary success. The
articles of incorporation bear the date of December 28, 1910, at
which time capital stock in the association had been subscribed
to the amount of P150,000 of which the sum of P10,620 had been
paid in. Under the law as it then stood, the capital of the
Association was not permitted to exceed P3,000,000, but by Act
No. 2092, passed December 23, 1911, the statute was so amended as
to permit the capitalization of building and loan associations to
the amount of ten millions. Soon thereafter the association took
advantage of this enactment by amending its articles so as to
provide that the capital should be in an amount not exceeding the
then lawful limit. From the time of its first organization the
number of shareholders has constantly increased, with the result
that on December 31, 1925, the association had 5,826 shareholders
holding 125,750 shares, with a total paid-up value of
P8,703,602.25. During the period of its existence prior to the
date last above-mentioned the association paid to withdrawing
stockholders the amount of P7,618,257,.72; and in the same period
11
it distributed in the form of dividends among its stockholders
the sum of P7,621,565.81.
I: W/N El Hogar is illegally holding title to real property in
excess of 5 years, in violation of the law that while
corporations may loan funds upon real estate security, they shall
dispose of the same within 5 years after receiving title
H: the corporation has not been shown to have offended against
the law in a manner which would entail forfeiture of its charter.
The evident purpose behind the law restricting the rights of
corporations with respect to the tenure of land was to prevent
the revival of the entail or other similar institution by which
land could be fettered and its alienation hampered. In the case,
El Hogar had in GF disposed of the property at the expiration of
the period fixed by law. Under the circumstances the destruction
of the corporation would bring irreparable loss upon thousands of
innocent shareholders of the corporation without any
corresponding benefit to the public.
I: W/N el Hogar is illegally owning and holding a business lot in
excess of the reasonable requirements and in contravention of the
Corpo law that every corporation has the power to purchase hold
lease real property as reasonable and necessary required for the
transaction of the lawful business
H: The law expressly declares that corporations may acquire such
real estate as is reasonably necessary to enable them to carry
out the purposes for which they were created; and we are of the
opinion that the owning of a business lot upon which to construct
and maintain its offices is reasonably necessary to a building
and loan association such as the respondent was at the time this
property was acquired. A different ruling on this point would
compel
important
enterprises
to
conduct
their
business
exclusively in leased offices — a result which could serve no
useful end but would retard industrial growth and be inimical to
the best interests of society. We are furthermore of the opinion
that, inasmuch as the lot referred to was lawfully acquired by
the respondent, it is entitled to the full beneficial use
thereof. No legitimate principle can discovered which would deny
to one owner the right to enjoy his (or its) property to the same
extent that is conceded to any other owner.
I: W/N el Hogar has engaged in activities foreign to the purposes
for
which
the
corporation
was
created
and
not
reasonably
necessary
to
its
legitimate
ends,
specifically:
(1)
the
administration of the offices in the El Hogar building not used
by the respondent itself and the renting of such offices to the
public; (2) the administration and management of properties
belonging to delinquent shareholders of the association; (3) the
management of some parcels of improved real estate situated in
Manila not under mortgage to it, but owned by shareholders, and
has held itself out by advertisement as prepared to do so
H: (1) The activities here criticized clearly fall within the
legitimate powers of the respondent, as shown in what we have
said above relative to the second cause of action. This matter
will therefore no longer detain us. If the respondent had the
power to acquire the lot, construct the edifice and hold it
beneficially, as there decided, the beneficial administration by
it of such parts of the building as are let to others must
necessarily be lawful.
(2) The case for the government supposes that the only remedy
which the respondent has in case of default on the part of its
shareholders is to proceed to enforce collection of the whole
loan in the manner contemplated in section 185 of the Corporation
Law. It will be noted, however, that, according to said section,
the association may treat the whole indebtedness as due, "at the
option of the board of directors," and this remedy is not made
exclusive. We see no reason to doubt the validity of the clause
giving the association the right to take over the property which
constitutes the security for the delinquent debt and to manage it
with a view to the satisfaction of the obligations due to the
debtor than the immediate enforcement of the entire obligation,
and the validity of the clause allowing this course to be taken
appears to us to be not open to doubt.
(3) The practice described in the passage above quoted from the
agreed
facts
is
in
our
opinion
unauthorized
by
law.
The
administration of property in the manner described is more
befitting to the business of a real estate agent or trust company
than to the business of a building and loan association. The
practice to which this criticism is directed relates of course
solely to the management and administration of properties which
are not mortgaged to the association. The circumstance that the
owner of the property may have been required to subscribe to one
or more shares of the association with a view to qualifying him
to receive this service is of no significance. It is a general
rule of law that corporations possess only such express powers.
The
management
and
administration
of
the
property
of
the
shareholders of the corporation is not expressly authorized by
law, and we are unable to see that, upon any fair construction of
the law, these activities are necessary to the exercise of any of
the granted powers. The corporation, upon the point now under the
criticism, has clearly extended itself beyond the legitimate
range of its powers. But it does not result that the dissolution
of the corporation is in order, and it will merely be enjoined
from further activities of this sort.
I: W/N the royalty paid to the founder of el Hogar, Antonio
12
Melian, as compensation for his services rendered by him during
the early stages of the organization of the corporation, is
unconscionable, excessive, and thus necessitates dissolution
H: No possible doubt exists as to the power of a corporation to
contract for services rendered and to be rendered by a promoter
in connection with organizing and maintaining the corporation. It
is true that contracts with promoters must be characterized by
good faith; but could it be said with certainty, in the light of
facts existing at the time this contract was made, that the
compensation therein provided was excessive? If the amount of the
compensation now appears to be a subject of legitimate criticism,
this
must
be
due
to
the
extraordinary
development
of
the
association in recent years. If the Melian contract had been
clearly ultra vires — which is not charged and is certainly
untrue — its continued performance might conceivably be enjoined
in such a proceeding as this; but if the defect from which it
suffers is mere matter for an action because Melian is not a
party. It is rudimentary in law that an action to annul a
contract
cannot
be
maintained
without
joining
both
the
contracting parties as defendants. Moreover, the proper party to
bring such an action is either the corporation itself, or some
shareholder who has an interest to protect.
I: W/N el Hogar had abused its franchise in issuing special
shares, which is alleged to be illegal and inconsistent with the
plan and purposes of building and loan associations,and that
these
are
held
by
well-to-do
people
purely
for
investment
purposes and not by wage-earners for savings
H: The ground for supposing the issuance of the "special" shares
to be unlawful is that special shares are not mentioned in the
Corporation Law as one of the forms of security which may be
issued by the association. Upon examination of the nature of the
special shares in the light of American usage, it will be found
that said shares are precisely the same kind of shares that, in
some American jurisdictions, are generally known as advance
payment shares; in if close attention be paid to the language
used in the last sentence of section 178 of the Corporation Law,
it will be found that special shares where evidently created for
the purpose of meeting the condition cause by the prepayment of
dues that is there permitted. The language of this provision is
as follow "payment of dues or interest may be made in advance,
but the corporation shall not allow interest on such advance
payment at a greater rate than six per centum per annum nor for a
longer period than one year." In one sort of special shares the
dues are prepaid to the extent of P160 per share; in the other
sort prepayment is made in the amount of P10 per share, and the
subscribers assume the obligation to pay P10 monthly until P160
shall have been paid.
It will escape notice that the provision quoted say that interest
shall not be allowed on the advance payments at a greater rate
than six per centum per annum nor for a longer period than one
year. The word "interest " as there used must be taken in its
true sense of compensation for the used of money loaned, and it
not must not be confused with the dues upon which it is
contemplated that the interest may be paid. Now, in the absence
of any showing to the contrary, we infer that no interest is ever
paid by the association in any amount for the advance payments
made on these shares; and the reason is to be found in the fact
that the participation of the special shares in the earnings of
the
corporation,
in
accordance
with
section
188
of
the
Corporation Law, sufficiently compensates the shareholder for the
advance payments made by him; and no other incentive is necessary
to induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value
of each special share is not paid for by the shareholder with
funds out of the pocket. The amount is satisfied by applying a
portion
of
the
shareholder's
participation
in
the
annual
earnings.
But
as
the
right
of
every
shareholder
to
such
participation in the earnings is undeniable, the portion thus
annually applied is as much the property of the shareholder as if
it were in fact taken out of his pocket. It follows that the
mission of the special shares does not involve any violation of
the principle that the shares must be sold at par.
From what has been said it will be seen that there is express
authority, even in the very letter of the law, for the emission
of advance-payment or "special" shares, and the argument that
these shares are invalid is seen to be baseless. In addition to
this it is satisfactorily demonstrated in Severino vs. El Hogar
Filipino, supra, that even assuming that the statute has not
expressly authorized such shares, yet the association has implied
authority to issue them. The complaint consequently fails also as
regards the stated in the ninth cause of action.
I: W/n El Hogar is pursuing illegally a policy of depreciating,
at an excessive rate at the discretion of its Board, the value of
real properties acquired by it at its sales, thereby frustrating
the right of SHs to participate annually and equally in the
earnings.
H: This count for the complaint proceeds, in our opinion, upon an
erroneous notion as to what a court may do in determining the
internal policy of a business corporation. If the criticism
contained in the brief of the Attorney-General upon the practice
of the respondent association with respect to depreciation be
well
founded,
the
Legislature
should
supply
the
remedy
by
13
defining the extent to which depreciation may be allowed by
building and loan associations. Certainly this court cannot
undertake to control the discretion of the board of directors of
the association about an administrative matter as to which they
have legitimate power of action. The tenth cause of action is
therefore not well founded.
I: W/n el Hogar’s charter should be revoked because it illegally
maintains excessive reserve funds and because it pursues a
policy, allegedly unlawful, of paying a straight annual dividend
of 10% regardless of losses suffered and profits made by the
corporation and in violation of the requirement s of the corpo
code.
H: It is insisted in the brief of the Attorney-General that the
maintenance of reserve funds is unnecessary in the case of
building and loan associations, and at any rate the keeping of
reserves is inconsistent with section 188 of the Corporation Law.
Upon careful consideration of the questions involved we find no
reason to doubt the right of the respondent to maintain these
reserves. It is true that the corporation law does not expressly
grant this power, but we think it is to be implied. It is a fact
of common observation that all commercial enterprises encounter
periods when earnings fall below the average, and the prudent
manager makes provision for such contingencies. To regard all
surplus as profit is to neglect one of the primary canons of good
business practice. Building and loan associations, though among
the
most
solid
of
financial
institutions,
are
nevertheless
subject to vicissitudes. Fluctuations in the dividend rate are
highly detrimental to any fiscal institutions, while uniformity
in the payments of dividends, continued over long periods,
supplies the surest foundations of public confidence.
Moreover, it is said that the practice of the association in
declaring regularly a 10 per cent dividend is in effect a
guaranty by the association of a fixed dividend which is contrary
to the intention of the statute. The government insists upon an
interpretation of section 188 of the Corporation Law that is
altogether too strict and literal. From the fact that the statute
provides that profits and losses shall be annually apportioned
among the shareholders it is argued that all earnings should be
distributed without carrying anything to the reserve. But it will
be noted that it is provided in the same section that the profits
and losses shall be determined by the board of directors: and
this means that they shall exercise the usual discretion of good
businessmen in allocating a portion of the annual profits to
purposes needful to the welfare of the association. The law
contemplates the distribution of earnings and losses after other
legitimate obligations have been met. Our conclusion is that the
respondent has the power to maintain the reserves criticized in
the eleventh and twelfth counts of the complaint; and at any
rate, if it be supposed that the reserves referred to have become
excessive, the remedy is in the hands of the Legislature. It is
no proper function of the court to arrogate to itself the control
of
administrative
matters
which
have
been
confided
to
the
discretion of the board of directors. The causes of action under
discussion must be pronounced to be without merit.
I: W/n el Hogar illegally departed from its charter because it
has made loans which were intended to be used by the borrowers
for other purposes than the building of homes. There is no
statute here expressly declaring that loans may be made by these
associations solely for the purpose of building homes. On the
contrary, the building of homes is mentioned in section 171 of
the Corporation Law as only one among several ends which building
and loan associations are designed to promote. Furthermore,
section 181 of the Corporation Law expressly authorities the
Board of directors of the association from time to time to fix
the premium to be charged. In the brief of the plaintiff a number
of excerpts from textbooks and decisions have been collated in
which the idea is developed that the primary design of building
and loan associations should be to help poor people to procure
homes of their own. This beneficent end is undoubtedly served by
these associations, and it is not to be denied that they have
been generally fostered with this end in view. But in this
jurisdiction at least the lawmaker has taken care not to limit
the activities of building and loan associations in an exclusive
manner, and the exercise of the broader powers must in the end
approve itself to the business community.
I: W/n the el Hogar charter may be revoked because various loans
now outstanding have been made by the respondent to corporations
and partnerships, and that these entities have in some instances
subscribed to shares in the respondent for the sole purpose of
obtaining such loans, and that some of these juridical entities
became
shareholders
merely
for
the
purpose
of
qualifying
themselves to take loans from the association.
H: the Corporation Law declares that "any person" may become a
stockholder in building and loan associations. The word "person"
appears to be here used in its general sense, and there is
nothing in the context to indicate that the expression is used in
the restricted sense of both natural and artificial persons, as
indicated in section 2 of the Administrative Code. We would not
say that the word "person" or persons," is to be taken in this
broad sense in every part of the Corporation Law. For instance,
it would seem reasonable to say that the incorporators of a
corporation ought to be natural persons, although in section 6 it
14
is said that five or more "persons", although in section 6 it is
said that five or more "persons," not exceeding fifteen, may form
a private corporation. But the context there, as well as the
common sense of the situation, suggests that natural persons are
meant. When it is said, however, in section 173, that "any
person"
may
become
a
stockholder
in
a
building
and
loan
association, no reason is seen why the phrase may not be taken in
its proper broad sense of either a natural or artificial person.
At any rate the question whether these loans and the attendant
subscriptions were properly made involves a consideration of the
power of the subscribing corporations and partnerships to own the
stock and take the loans; and it is not alleged in the complaint
that they were without power in the premises. Of course the mere
motive with which subscriptions are made, whether to qualify the
stockholders to take a loan or for some other reason, is of no
moment in determining whether the subscribers were competent to
make the contracts. The result is that we find nothing in the
allegations of the sixteenth cause of action, or in the facts
developed in connection therewith, that would justify us in
granting the relief.
I: W/n el Hogar, in disposing of real estate purchased in the
collection of defaulted loans, on credit at first and then sold
and mortgaged to el Hogar to secure payment of the purchase
price, had incurred several outstanding loans, and that that the
persons and entities to which said properties are sold under the
condition charged are not members or shareholders nor are they
made members or shareholders of the defendant.
H: This part of the complaint is based upon a mere technicality
of bookkeeping. The central idea involved in the discussion is
the provision of the Corporation Law requiring loans to be
stockholders only and on the security of real estate and shares
in the corporation, or of shares alone. It seems to be supposed
that, when the respondent sells property acquired at its own
foreclosure sales and takes a mortgage to secure the deferred
payments, the obligation of the purchaser is a true loan, and
hence prohibited. But in requiring the respondent to sell real
estate which it acquires in connection with the collection of its
loans within five years after receiving title to the same, the
law does not prescribe that the property must be sold for cash or
that the purchaser shall be a shareholder in the corporation.
Such sales can of course be made upon terms and conditions
approved by the parties; and when the association takes a
mortgage to secure the deferred payments, the obligation of the
purchaser cannot be fairly described as arising out of a loan.
Nor does the fact that it is carried as a loan on the books of
the respondent make it a loan on the books of the respondent make
it a loan in law. The contention of the Government under this
head is untenable.
Pirovano v Dela Rama. Under the leadership and management of
Enrico Pirovano, president of Del Rama Steamship, the company
grew and progressed until it became a multi-million corporation,
the assets of which grew and increased from P240K to around P15M.
He was insured by the company for P1M. Esteban dela Rama,
majority stockholder, distributed his shares among his 5
daughters, including the NDC, to which Dela Rama had an
outstanding bonded indebtedness iao P7.5M, through a debt-equity
swap arrangement which also gave the NDC representation in the
Board. Pirovano was killed by the Japanese during the war, and a
Boardres was adopted granting to the Pirovano children the
proceeds of the insurance policies taken on the life of the late
president. However, the policy had lapse because the company was
not able to pay the premiums regularly. The BoardRes authorizes
the allocation of P400K convertible into 4000 shares of stock ifo
of the Pirovano children, as well as a waiver of the preemptive
rights of the former owners, the Dela Rama siblings. This was
submitted to the stockholders which duly approved the same. It
appears, however, that Don Esteban did not realize that the dole
out would actually be giving to the Pirovano children more than
what they intended to give. This was because the value then of
the shares was 3.6 times the par value thereof, thus the donation
iao P400K would amount to a total of P1.44M. Thus the voting
strength of the Pirovano children would be twice as much as that
of the dela Rama sisters. The old Resolution having been
nullified, the Board adopted a new BR changing the form of the
donation from 4000 shares into a renunciation of the Company’s
right and title to the life insurance policies of Pirovano. It
also provides that the proceeds of the policy be retained by the
Company as a loan drawing interest payable to the Pirovano
children whenever the company is in a position to meet this
financial obligation and after the Company settles its bonded
indebtedness ifo NDC. This was ratified by the Dela Rama
stockholders. Mrs Pirovano accepted the donation, and buys
property in the US. Upon inquiry with the Sec, it was found that
the donation was illegal and thus void on the grounds that the
corporation acted ultra vires and that it could not dispose of
its assets through donation. The stockholders then voted to
revoke the donation. Mrs Pirovano sued to demand the credit owed
to them by the Company.
I: w/n the donation by the corporation of the proceeds of the
insurance is an ultra vires act
H: Under the AOI of Dela Rama Steamship it is provided under (g)
that the company may invest and deal with moneys of the company
not immediately required, in such a manner as from time to time
may be determined, and under (i)… to lend money or to aid in any
other manner any person association, or corporation of which any
obligation or in which any interest is held by the corporation or
in the affairs of prosperity of which the corporation has a
15
lawful interest. The corporation was thus given broad and almost
unlimited powers to carry out the purposes for which it was
organized. The word ”deal” is broad enough to include any manner
of disposition, and thus the donation comes within the scope of
this broad power. The company was in fact very much solvent as it
was able to declare and issue dividends to its stockholders, and
shows that the excess funds which were not needed by the company
which was donated to the children was justified under the AOI.
Under the second broad power, the corporation knew well its scope
such that noone lifted a finger to dispute its validity. The
company gave the donation not only because it was indebted to him
but also because it was fit and proper to make provisions for the
children and out of a sense of gratitude.
Even assuming that the donation was ultra vires, still it cannot
be invalidated or declared legally ineffective for that reason
alone, it appearing that the donation represents not only the act
of the Board but also that of the stockholders themselves since
they expressly ratified the resolution. By this ratification, the
infirmity of the corporate act, if any, has been obliterated
thereby making the act perfectly valid and enforceable,
especially so if the donation is not merely executory but
consummated. The defense of ultra vires cannot be set up against
completed or consummated transactions.
An ultra vires act may either be an act performed merely outside
the scope of the powers granted to the corporation by its AOI or
one which is contrary to law or violative of any principle which
would void any contract. A distinction has to be made with
respect to corporate acts which are illegal and those merely
ultra vires. The former are contrary to law, morals, public order
or policy, while the latter are not void ab initio, but merely go
beyond the scope of the powers in the AOI, and which renders the
act merely voidable and thus ratifiable by the stockholders.
Harden v Benguet. Balatoc Mining, engaged in the mining of gold, sorely needed
the infusion of new capital to resuscitate its stalled operations. The officers approached
the Benguet Mining Co, an entity also engaged in gold mining. A contract was executed,
which states that Benguet agrees to construct a milling plant for the Balatoc mine and
erect a power plant, in exchange for Balatoc Mining shares valued at P600K and the
excess in cash to compensate for the cost of the contract. By the time of the complaint,
the value of the stock of Balatoc had soared for a nominal valuation to more than P11 per
share. It was alleged by Harden of Balatoc that the Benguet Mining Co held shares of
stock in another mining corporation, the Balatoc Mining Company, in violation of a
prohibition against mining corporations from owning stock of another mining
corporation in the old Corpo law. The shareholders of Balatoc sued Benguet Mining to
annul stock certificates of Balatoc issued ifo Benguet and to recover money earned from
the transaction. TC dismissed complaint.
H: Although the contract between the two mining companies was illegal for contravening
the old Corpo Law, the Legislature, in adopting such a provision had the intention that
public policy should be controlling in the granting of mining rights. The violation in this
case was of such a nature that it can be proceeded upon only by way of a criminal
prosecution, or by action quo warranto, which can be maintained only by the State.
Insofar as the parties are concerned, no civil wrong had been committed between them
, and if public wrong had been committed, then the directors of Balatoc Mining and
Harden were the active inducers of that wrong. The contract has in fact been perform
ed
on both sides, and there is no possibility of undoing what had been done. Thus even
where corporate contracts are illegal per se, when only public or government policy or
interests are at stake and no private wrong is committed, the courts will leave the parties
as they are, in accordance with their original contractual expectations.
— Corporate powers: WYSIWYG
— AOI related to relevant code
provisions
— Powers are built-in in the AOI,
limited by primary purpose
— 45: all encompassing powers
— Necessary and incidental rule:
necessary is different from
incidental
— Common denominator contained in AOI
— Code sets parameters/requirements
(36-44)
— Statute sets parameters (i.e. banks,
Gen Banking Act)
— Specific powers: dealing with SHs
and 3rd parties
— Cannot divorce exercise of corporate
powers from control and management
— Extent of corporate powers would
limit control and management
— Unlimited discretion cannot be
exercised for furtherance of
secondary purposes in AOI