Corpo Finals Reviewer

7/29/2019 Corpo Finals Reviewer

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CORPORATION LAW

FINALS 09

A. By-laws

1. Definition ofby-laws

These are regulations, ordinances, rules or laws adopted by an associationor corporation or the like for its internal governance. By laws define therights and obligations of various officers, persons or groups within thecorporate structure and provide rules for routine matters such as callingmeetings.

Every corporation under this code shall have the power and capacity: (5)to adopt by-laws not contrary to law, morals, or public policy, and toamend or repeal the same in accordance with this code (Sec 36)

2. When to adopt by-laws (Section 46)

Every corporation formed under this code must within 1 month afterreceipt of official notice of the issuance of its certificate of incorporation bythe SEC adopt a code of by-laws for its government not inconsistent withthis code. (Sec 46)

May be adopted and filed prior to incorporation, in such case, shall beapproved and signed by all incorporators submitted to SEC together withAI (Sec 46)

Loyola Grand Villas Homeowners Ass v. CA

The Supreme Court held that although the Corporation Code requires thefiling of by-laws within one month after the issuance of the Certificate ofIncorporation, it does not expressly provide for the consequences of non-filing within the said period.

It should be noted, however, that under Section 6 of PD 902-A, the SECcan revoke the certificate of registration of corporations for failure to filethe by-laws within the required period but only after proper notice orhearing.

There is no automatic dissolution for failure to file by-laws within therequired period.

Fleischer v. Botica Nolasco The by-laws of the Corporation which effectively gives the corporationpreferential right of the shares in question is in direct conflict with theCorporation Law. The owner of the shares, which are personal property, hasthe uncontrollable right to alienate them which attaches to the ownership ofany other species of property.


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The right to impose restrictions on transfer of shares must be conferredupon the corporation by a governing statute or by the AOI. It cannot be doneby a by-law without statutory or charter authority.

Govt of Phils. V. El Hogar

The by-laws provision which empowers the board to cancel shares andreturn to the owner the balance resulting from the liquidation by a vote ofabsolute majority of the members is an ABSOLUTE NULLITY. This is in directconflict with the Corporation Law which declares that the board shall not havethe powers to force the surrender and withdrawal of unmatured stock exceptin case of liquidation or forfeiture of stock. The practice of the directorate filling-up the vacancies by the action of thedirectors themselves is valid. The Corporation Law does not undertake to prescribe the rate ofcompensation for the directors of the corporation. The power to fixcompensation is left to the corporation itself to be determined in the by-laws.

Hence, the distribution to directors of El Hogar of 5% net profit in proportionto their attendance at board meetings is valid. If a mistake has been made or the rule adopted in the by-laws has beenfound to work harmful results, the remedy is in the hands of the SHs who havethe power at any lawful meeting to change the rule. The provisions in the by-laws which require that the persons elected to theboard be holders of shares with paid-up value of P5K and that directors wholoan from the association waive their rights as SHs are VALID. The Codespecifically gives the power to the corporation to provide in its by-laws for thequalifications of directors, and the requirement of security from them for theproper discharge of the duties of their office is highly prudent and in

conformity with good practice. The Code also has safeguards on directorsfrom making loans to themselves, designed to prevent the possibility oflooting of the corporation.

3. How filed

Must be approved by the affirmative vote of the Stockholders representingthe majority of the outstanding capital stock or majority of members (Sec46)

Must be signed by the stockholders or members voting for it (Sec 46) Must be filed with the SEC certified by the majority of directors/trustees

and countersigned by the secretary of the corporation which shall beattached to original AI (Sec 46)

4. Where kept

Must be kept in the principal office of the corporation; subject to inspectionof stockholder or member during office hours (Sec 46)


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5. Effectivity of by-laws

Effective only from the issuance of SEC of certification that bylaw are notinconsistent with the Code (Sec 46)

Cannot bind stockholders / corporation pending approval

By laws, like AI are contracts of adhesion. They will bind the corporationand stockholders including those who vote against as well as those whobecame members after approval

Contracts entered into without strict compliance with by-laws may bebinding on the corporation due to long acquiescence and usage

By laws are mere internal rules among stockholders and cannot affect orprejudice 3rd persons who deal with the corporation unless they haveknowledge of the same

6. Contents (Section 47)

Subject to the provisions of the Constitution, this Code, other special laws,and the articles of incorporation, a private corporation may provide in itsby-laws for:a) The time, place and manner of calling and conducting regular or

special meetings of the directors or trustees;b) The time and manner of calling and conducting regular or special

meetings of the stockholders or members;c) The required quorum in meetings of stockholders or members and the

manner of voting therein;d) The form for proxies of stockholders and members and the manner of

voting them;

e) The qualifications, duties and compensation of directors or trustees,officers and employees;

f) The time for holding the annual election of directors of trustees andthe mode or manner of giving notice thereof;

g) The manner of election or appointment and the term of office of allofficers other than directors or trustees;

h) The penalties for violation of the by-laws;i) In the case of stock corporations, the manner of issuing stock

certificates; andj) Such other matters as may be necessary for the proper or convenient

transaction of its corporate business and affairs.

7. Procedure for amendment of by-laws (Section 48)

Voting Requirement: board of directors or trustees by a majority vote andthe owners of at least a majority of the outstanding capital stock, ormajority of the members of a non-stock corporation, at a regular or specialmeeting duly called for the purpose, may amend or repeal any by-laws oradopt new by-laws


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Delegation of power to amend to the BOD: The owners of two-thirds (2/3)of the outstanding capital stock or two-thirds (2/3) of the members in anon-stock corporation may delegate to the board of directors or trusteesthe power to amend or repeal any by-laws or adopt new by-laws

Revocation of the delegation of power to amend: Any power delegated to

the board of directors or trustees to amend or repeal any by-laws or adoptnew by-laws shall be considered as revoked whenever stockholdersowning or representing a majority of the outstanding capital stock or amajority of the members in non-stock corporations, shall so vote at aregular or special meeting

Whenever any amendment or new by-laws are adopted, such amendmentor new by-laws shall be attached to the original by-laws in the office of thecorporation, and a copy thereof, duly certified under oath by the corporatesecretary and a majority of the directors or trustees, shall be filed with theSecurities and Exchange Commission the same to be attached to theoriginal articles of incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance bythe Securities and Exchange Commission of a certification that the sameare not inconsistent with this Code.

B. Non-use of Charter / Continuous Inoperation1. Non-user for 2 years (non-use of charter)- when the corporation does not

formally organize and commence the transaction of its business or theconstruction of its works within 2 years from the date of its incorporation.Its corporate powers cease and the corporation shall be deemed dissolved(automatic)

Formal organization Not only means adoption of by-laws but also the

organization of the Board. This may consist in the election of new board ofdirectors or trustees and corporate officer

The AOI names the initial members of the Board who are to act until the 1st

set of directors are duly elected and qualified. This interim board canperform the functions of a regular board until the date of the election ofdirectors. Once elected, the directors must complete the organization ofthe corporation by electing the officers.

Commencement of business This is after the approval of the by-laws andthe election of directors and officers elected. This may take the form ofcontracting for lease or sale of properties to be used as business site ofthe corporation and other preparatory acts geared towards fulfillment of

the purpose for which the corporation was established2. Non-user for 5 years (continuous inoperation)- when the corporation has

commenced the transaction of its business but subsequently becomescontinuously inoperative for a period of at least 5 years. The same shallbe a ground for the suspension or revocation of its corporate franchise orCertificate of Incorporation (not automatic). Notice and hearing isrequired.


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3. Exception: cause or non-use or operation was due to causes beyond thecontrol of the corporation as determined by SEC (ex. Mineral lands to bedeveloped by the corporation as per its purpose are the object of courtlitigation and a court injunction against the corporate activities has beenissued)

POWERSOF CORPORATIONS

Primary Rule: All corporate powers shall be exercised and all corporate businessesshall be conducted by the board of directors of the corporation (Sec. 23)Exception: Specific instances when the Code requires the consent and ratification ofthe SHs, particularly where the underlying contractual relationship between theparties: The corporation, the SHs/members, and the State is being amended or alterd

How is consent expressed by the parties?

Corporation: Through the Board

State: Through act of the regulatory body (SEC)

SHs: Through majority or 2/3 vote where applicable (Note: DissentingSHs in certain instances are given the option to withdraw from the

relationship through the exercise of appraisal right)

A. In general (Section 36)1. To sue and be sued in its corporate name;2. 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 withthe provisions of this Code; and to admit members to the corporation if itbe 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 ofthe lawful business of the corporation may reasonably and necessarily

require, subject to the limitations prescribed by law and the Constitution;8. To enter into merger or consolidation with other corporations as provided

in this Code;9. To make reasonable donations, including those for the public welfare or for

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


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10.To establish pension, retirement, and other plans for the benefit of itsdirectors, trustees, officers and employees; and

11. To exercise such other powers as may be essential or necessary to carryout its purpose or purposes as stated in the articles of incorporation. (inthe purpose clause)

Sources of powero Section 36o Purpose clause (Sec. 88-Non stock Corporations): charitable, religious,

educational, professional, cultural, fraternal, literary, scientific, social,civic service, or similar purposes like trade, industry, agriculture andlike chambers or any combination thereof. Recreational is omitted.

Sec 38 par 11 grants such power as are essential or necessary to carry outits purpose or purposes as stated in the AI. A corporation is presumed toact within its powers and when a contract is not on its face necessarilybeyond its authority, it will in the absence of proof to the contrary

presumed valid 2 general restrictions on the power of the corporation to acquire and hold

properties:o that the property must be reasonably and necessarily required by the

transactions of its lawful businesso that the power shall be subject to the limitations prescribed by other

special laws and the constitution (corporation may not acquire morethan 30% of voting stocks of a bank; corporations are restricted fromacquiring public lands except by lease of not more than 1000 hectares)

B. Specific Powers

Extend or shorten the corporate term Increase or decrease capital stock Incur, create or increase bonded indebtedness Deny preemptive right Sell or otherwise dispose of substantially all its assets Acquire its own shares Invest in another corporation or business Declare dividends Enter into management contracts

C. To extend or shorten corporate term (Section 37)

1. Approval and Voting and Notice Requirement:a) Approved by a majority vote of the board of directors or trustees andb) 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.

c) Written notice of the proposed action and of the time and place of themeeting shall be addressed to each stockholder or member at his


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place of residence as shown on the books of the corporation anddeposited to the addressee in the post office with postage prepaid, orserved personally.

2. Appraisal right In case of extension of corporate term, any dissentingstockholder may exercise his appraisal right under the conditions provided

in this code.

D. To increase or decrease capital stock; To incur, create, increase,bonded indebtedness (Section 38)

1. Approval and Voting and Notice Requirement:a) Approved by a majority vote of the board of directorsb) Two-thirds (2/3) of the outstanding capital stock shall favor the

increase or diminution of the capital stock, or the incurring, creating orincreasing of any bonded indebtedness in a meeting duly called for thepurpose

c) Written notice of the proposed increase or diminution of the capitalstock or of the incurring, creating, or increasing of any bondedindebtedness and of the time and place of the stockholder's meeting atwhich the proposed increase or diminution of the capital stock or theincurring or increasing of any bonded indebtedness is to beconsidered, must be addressed to each stockholder at his place ofresidence as shown on the books of the corporation and deposited tothe addressee in the post office with postage prepaid, or servedpersonally

2. Certificate of Filing: A certificate in duplicate must be signed by a majority

of the directors of the corporation and countersigned by the chairman andthe secretary of the stockholders' meeting, setting forth:a) That the requirements of this section have been complied with;b) The amount of the increase or diminution of the capital stock;c) If an increase of the capital stock, the amount of capital stock or

number of shares of no-par stock thereof actually subscribed, thenames, nationalities and residences of the persons subscribing, theamount 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, orthe amount of capital stock or number of shares of no-par stockallotted to each stock-holder if such increase is for the purpose of

making effective stock dividend therefor authorized;d) Any bonded indebtedness to be incurred, created or increased;e) The actual indebtedness of the corporation on the day of the meeting;f) The amount of stock represented at the meeting; andg) The vote authorizing the increase or diminution of the capital stock, or

the incurring, creating or increasing of any bonded indebtedness.


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3. Approval of SEC: Any increase or decrease in the capital stock or theincurring, creating or increasing of any bonded indebtedness shall requireprior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of thecorporation and the other shall be filed with the Securities and Exchange

Commission and attached to the original articles of incorporation.

4. Effectivity: From and after approval by the Securities and ExchangeCommission 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 thecertificate of filing may declare

5. Treasurer Affidavit: Provided, That the Securities and ExchangeCommission shall not accept for filing any certificate of increase of capitalstock unless accompanied by the sworn statement of the treasurer of the

corporation lawfully holding office at the time of the filing of thecertificate, showing that at least twenty-five (25%) percent of suchincreased capital stock has been subscribed and that at least twenty-five(25%) percent of the amount subscribed has been paid either in actualcash to the corporation or that there has been transferred to thecorporation property the valuation of which is equal to twenty-five (25%)percent of the subscription

Decrease of capital stock: No decrease of the capital stock shall beapproved by the Commission if its effect shall prejudice the rights ofcorporate creditors

Non-stock corporations: May incur or create bonded indebtedness, or

increase the same, with the approval by a majority vote of the board oftrustees and of at least two-thirds (2/3) of the members in a meeting dulycalled for the purpose.

Registration of bonds- Bonds issued by a corporation shall be registeredwith the Securities and Exchange Commission, which shall have theauthority to determine the sufficiency of the terms thereof.

No appraisal right here, a dissenting SH can simply sell his shares. A grantof appraisal right would defeat the purpose which is to raise funds.

E. To deny pre-emptive rights (Section 39)

1. Definition ofpre-emptive rights All stockholders of a stock corporationshall enjoy pre-emptive right to subscribe to all issues or disposition ofshares of any class, in proportion to their respective shareholdings, unlesssuch right is denied by the articles of incorporation or an amendmentthereto

This is to prevent dilution in shareholding


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If you increase common stock and some of the stockholders do not want tosubscribe, get from them a waiver of pre-emptive right (There areauthorities saying that the right is applicable when there is reduction ofshares)

Basis of right; common law rule

Preemptive right: option privilege of an existing SH to subscribe to aproportionate part of shares subsequently issued by the corporationbefore the same can be disposed in favor of others

Common-law right granted to SHs of a corporation to be granted the firstoption to subscribe to any opening of the unissued capital stock, or to anyincrease from the authorized capital stock

Economic aspect: right to invest capitalthe right becomes valuablewhen the enterprise has demonstrated that it will earn a higher rate ofreturn on the capital than the SH could get were he to invest it in the openmarket

Limited to shares issued in pursuance of an increase in the authorized

capital stock; does not apply to additional issues of originally authorizedshares forming part of the existing capital stock

An original subscriber is deemed to have taken his shares knowing thatthey form a definite proportionate part of the whole number of authorizedshares

When unsubscribed shares are later reoffered, the SH cannot claim thathis interest would be diluted

Preemptive rights are not statutory rights, but common law rights Preemptive rights are personal rights of the SH Need not be stipulated in the AOI or by-laws May be removed, denied, or altered only through specific provisions in the

AOI or amendment thereto SEC: vote by majority of SHs to waive the right is NULL and VOID; such

waiver must be given individually by the SHs concerned But unanimous vote of all will bind them In close corporations: Balance of power in close corporations may be

disturbed by an indiscriminate issuance of new shares without regard topreemptive right of SHs. In a close corp, exceptions in Sec 39 are notapplicable

2. Limitation to exercise of pre-emptive right:

a) Such pre-emptive right shall not extend to shares to be issued incompliance with laws requiring stock offerings or minimum stockownership by the public;

b) Not extend to shares to be issued in good faith with the approval of thestockholders representing two-thirds (2/3) of the outstanding capitalstock, in exchange for property needed for corporate purposes or inpayment of a previously contracted debt


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c) Shall not take effect if denied in the Articles of Incorporation or anamendment thereto.

Preemptive right option privilege of an existing stockholder to subscribeto a proportionate part of shares subsequently issued by the corp before

same can be disposed of in favor of the others; includes all issues anddisposition of shares of any class Includes not only new shares in pursuance of an increase of capital stock

but would cover the issue of previously unissued shares which form part ofthe existing capital stock as well as treasury shares (Sec. 9 used thephrase, disposition of shares of any class, furthermore since the fundsused in reacquiring T/S come from surplus profits which could have beendeclared instead as dividends, it is desirable policy to recognize the pre-emptive rights of SHs)

Where the shares are issued in exchange for property needed forcorporate purposes or for debt previously granted, SH cannot demand his

pre-emptive right for right may prejudice corporate interest In joint ventures, you can expand pre-emptive rights even in instances

under Sec 39

3. Remedies in case of unwarranted denial:a) Injunctionb) Mandamus

in any case, the suit should be individual and not derivative because thewrong done is to the stockholders individually

Right of First Refusal refers to the offering of the shares first to the otherstockholders before it is sold/transferred to outsiders. As distinguished to

RIGHT OF FIRST REFUSAL, the latter is contractual, while PRE-EMPTIVERIGHT exists even if not stated in AOI, thats why there is a need toexpressly deny it. Furthermore, the right must be exercised within 30days, hence not indefinite. While exercise of pre-emptive right is usuallyfixed by a resolution.

F. To sell or dispose of corporate assets (Section 40)

1. Restrictions: Subject to the provisions of existing laws on illegalcombinations and monopolies

2. Scope of power: To sell, lease, exchange, mortgage, pledge or otherwisedispose of all or substantially all of its property and assets, including itsgoodwill, upon such terms and conditions and for such consideration,which may be money, stocks, bonds or other instruments for the paymentof money or other property or consideration, as its board of directors ortrustees may deem expedient

Meaning of disposition of substantially all of the corporate property andassets- if thereby the corporation would be rendered incapable of


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continuing the business or accomplishing the purpose for which it wasincorporated.

3. Approval, voting and notice requirement:a) Majority vote of its board of directors or trustees,

b) Authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stockcorporation, 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.

c) Written notice of the proposed action and of the time and place of themeeting shall be addressed to each stockholder or member at hisplace of residence as shown on the books of the corporation anddeposited to the addressee in the post office with postage prepaid, orserved personally

When SH approval not necessary - If disposition is necessary in the usual and regular

course of business of said corporation or if the proceeds of the sale or other dispositionof 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 sufficientauthorization for the corporation to enter into any transaction authorizedby this section.

4. Appraisal right: That any dissenting stockholder may exercise his appraisalright under the conditions provided in this Code

5. Abandonment of the sale, lease - 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 tothe rights of third parties under any contract relating thereto, withoutfurther action or approval by the stockholders or members.

G. To acquire own shares (Section 41)

A stock corporation shall have the power to purchase or acquire its ownshares for a legitimate corporate purpose or purposes (treasury shares)

provided, that the corporation has unrestricted retained earnings in itsbooks to cover the shares to be purchased or acquired

Trust Fund doctrine the requirement of unrestricted retained earnings isbecause subscription to the capital of a corporation constitute a fund towhich creditors have a right to look for the satisfaction of their claims

Legitimate purpose includes:a) To eliminate fractional shares arising out of stock dividends;


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b) To collect or compromise an indebtedness to the corporation, arisingout of unpaid subscription, in a delinquency sale, and to purchasedelinquent shares sold during said sale; and

c) To pay dissenting or withdrawing stockholders entitled to payment fortheir shares under the provisions of this Code.

A corporation must have unrestricted retained earnings in acquiring ownshares except:a) shares are acquired in the redemption of redeemable sharesb) shares are re-acquired to effect a decrease in capital stock approved

by the SECc) shares are reacquired by a close corporation pursuant to the order of

the SEC acting to arbitrate a deadlock

H. To invest corporate funds in another corporation or business (Section42)

1. Subject to the provisions of this Code, a private corporation may invest itsfunds in any other corporation or business or for any purpose other thanthe primary purpose for which it was organized

2. Approval, voting and notice requirementa) Majority of the board of directors or trustees andb) 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 themembers in the case of non-stock corporations, at a stockholder's ormember's meeting duly called for the purpose.

c) Written notice of the proposed investment and the time and place of

the meeting shall be addressed to each stockholder or member at hisplace of residence as shown on the books of the corporation anddeposited to the addressee in the post office with postage prepaid, orserved personally

3. Appraisal right - any dissenting stockholder shall have appraisal right asprovided in this Code

4. When SH approval not necessary- where the investment by thecorporation is reasonably necessary to accomplish its primary purpose asstated in the articles of incorporation

To avoid SH approval, include other business undertakings in thesecondary purpose

5. Rules in case a corporation will invest its funds in another corporationa) If it is the same purpose or incidental or related to its primary purpose,

the board can invest the corporate fund without the consent of thestockholders. What is required is only the vote of the majority of theBOD. No appraisal right


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b) If the investment is in another corporation of different business orpurpose, the affirmative vote of majority of the board consented by 2/3OS capital stock is required

To buy the shares of another corporation (36) provided:a. Reasonably necessary for its lawful businessb. 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

Power to enter into a partnership

GR: corporation cannot enter into partnerships with other corporations orwith individuals

Exception: expressly allowed by statute or chartero Joint ventureso Limited partnerships (US Law)

I. To declare dividends (Section 43)

The board of directors of a stock corporation may declare dividends out ofthe unrestricted retained earnings which shall be payable in cash, inproperty, or in stock to all stockholders on the basis of outstanding stockheld by them.

Any cash dividends due on delinquent stock shall first be applied to theunpaid balance on the subscription plus costs and expenses, while stockdividends shall be withheld from the delinquent stockholder until hisunpaid subscription is fully paid

Approval & voting requirement:a) Approval of BODb) In case of stock dividend: It shall be not be issued without the approval

of stockholders representing not less than two-thirds (2/3) of theoutstanding capital stock at a regular or special meeting duly called forthe purpose.

Limitation on retention of surplus profits- Stock corporations are prohibitedfrom retaining surplus profits in excess of one hundred (100%) percent oftheir paid-in capital stock, except:a) when justified by definite corporate expansion projects or programs

approved by the board of directors; orb) when the corporation is prohibited under any loan agreement with anyfinancial institution or creditor, whether local or foreign, from declaringdividends without its/his consent, and such consent has not yet beensecured; or

c) when it can be clearly shown that such retention is necessary underspecial circumstances obtaining in the corporation, such as when thereis need for special reserve for probable contingencies.


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Stock dividends: distribution to stockholders of companys own stock.Corporate profits or earnings are transferred to capital stock and shares ofstock representing the increase in capitalization are distributed. May beissued out of premium surplus.o Limitation on the issue of stock dividends:

there must be unissued shares of the corporation there must be unrestricted retained earnings cannot be issued to non-stockholders even for services rendered

Whether or not there should be a distribution of dividends in whateverform, such matters are always subject to the business judgment of theBOD and the courts will not interfere with the formers discretionexcept:

o when tainted with bad faitho when tainted with fraudo when tainted with gross negligenceo when profits accumulated are in excess of 100% of the corporations

paid-in capital stock unless exempted When right to Dividends Vests:

o General rule: as soon as the same have been lawfully declared by theBOD, becomes a debt owing to the SH. No revocation can be made

o Exceptions: not yet announced or communicated to the public, revocable

before announcement to shareholders when stock dividends are declared since these are not distributions

but merely represent changes in the capital structure, may berevoked prior to actual issuance

Rights of transferee to dividends Right to dividends vests upon

declaration so whoever owns the stock at time or stockholders of recordalso owns the dividend. Subsequent transfer of stock would not carry withit right to dividends

Record date The date on which a stockholder must be registered on acorporations stock and transfer book in order to be entitled to a dividendor voting rights.

J. To enter into management contract (Section 44)

Approval and Voting Requirement:o Approval by the board of directors, and

o Approval by stockholders owning at least the majority of theoutstanding capital stock, or by at least a majority of the members ofboth the managing and the managed corporation

Note: if managing other corporations is the primary purpose,ratificatory vote is not required

o 2/3 vote required when: (SPECIAL RULE)a. where a stockholder or stockholders representing the same interest of

both the managing and the managed corporations own or control more


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than one-third (1/3) of the total outstanding capital stock entitled tovote of the managing corporation; or

b. where a majority of the members of the board of directors of themanaging corporation also constitute a majority of the members of theboard of directors of the managed corporation

Rationale for special rule: entering into a management contract is adeviation from the General Rule that the board manages the corporation

and that the board of the managing company should devote its affairs to

its own corporation

Term of management contract: No management contract shall be enteredinto for a period longer than five years for any one term.

These provisions shall apply to any contract whereby a corporationundertakes to manage or operate all or substantially all of the business ofanother corporation, whether such contracts are called service contracts,operating agreements or otherwise

Service contracts or operating agreements which relate to the exploration,

development, exploitation or utilization of natural resources may beentered into for such periods as may be provided by the pertinent laws orregulations.

Management contract any contract whereby a corporation undertake tomanage or operate all or substantially all of the business of anothercorporation

If managing a partnership or individual not a corporation, not covered

K. Ultravires acts (Section 45)

Definition of ultravires acts These are acts which a corporation is notempowered to do or perform because they are not based on the powersconferred by its AOI or by the Corporation Code on corporations in general,or because they are not necessary or incidental to the exercise of thepowers so conferred.

Rule on Ultravires acts of corporations No Corporation under this Codeshall possess or exercise any corporate powers except those conferred bythis Code or by its articles of incorporation and except such as arenecessary or incidental to the exercise of the powers so conferred.

Based on two (2) principles:1. Corporation is a creature of law and has only such powers and privileges asare granted by the State1

1Corporations 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 corporations 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 corporations powers depends largely on their agreement, and not merely on a


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2. The doctrine upholds the duty of trust and obedience owed by thecorporations 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 toinnocent 3rd parties

There are 3 types of ULTRA-VIRES acts:a. Acts beyond the powers of the corporation as stipulated in law or AOIb. Acts or contracts entered in behalf of the corporation by persons w/ocorporate authority

GR: In the absence of an authority from the board, no person , noteven the officers can validly bind the corporationException: Doctrine of apparent Authority; In dealing with corporations,the public at large is bound to rely upon outward appearances, andrelying on such, if it be found that the directors permitted the agent tohold himself out as having authority to bind or acquiesced in thecontract and accepted the benefits therefrom, the corporation will be

bound. (Ramirez v. Orientalist)

c. Acts or contracts which are per se illegal.i. This cannot be given legal effect and are void

BUT in Harden v. Benguet, SC upheld a patently void contract asbetween the contracting parties. SC said that public policy iscontrolling in the grant of mining rights. The violation of theprohibition against mining corporations from owning stock ofanother corporation though illegal did not in any way affect thecontract. This violation can only be proceeded upon by way of acriminal prosecution or by quo warranto which can be maintained

only by the State. Insofar as the parties are concerned, no civilwrong had been committed between them, and if public wrong hadbeen committed, then the directors of both Balatoc and Hardenwere the active inducers of that wrong. Thus, since the contracthas been performed on both sides and there is no possibility ofundoing what has been done, and though the corporate contractsare illegal per se, when only the public or government policy orinterests are at stake and no private wrong is committed, thecourts will leave the parties as they are, in accordance with theiroriginal contractual stipulations.

ii.Ultra- Vires Acts which are not per se illegal are merely voidablehence can be ratified by SHs. (Pirovano case)

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 reasonablystretched to accommodate the new and unexpected situations, otherwise, a properamendment of the AOI would be necessary.


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In the case of Pirovano v. Dela Rama, which involves the issueof whether or not the donation by the corporation of the proceedsof the insurance is an ultra-vires act, SC held that such donation isnot ultra-vires. SC said that it comes within the broad power underthe AOI that the Corporation may invest and deal with moneys of

the company not immediately required. The word deal is broadenough to include any manner of disposition.Furthermore, assuming that it was ultra-vires, there was

ratification by the SHs. Finally, the donation was alreadyconsummated. The defense of ultra-vires cannot be set-up againstcompleted or consummated transactions.

Form of Ratification:a. Express act of SH(if act is by theBoard) or Board(if act is by the officers)

b. Implied through acceptance of benefitsc. Through estoppel on the part of Board or the officers

Effect/s of Ratification:Cures the infirmity and makes it perfectly valid and enforceable,PROVIDED that it prejudices no creditors and if it has beenpartially executed and not merely executory

Atrium v. CA

Atrium Management Corporation filed with RTC action for collection of the4 postdated checks issued by the Hi-cement Corporation, though itssignatories de Leon, treasurer, and de las Alas, chairman of thecorporation to a certain ET Henry and Co which the latter endorsed toAtrium for rediscounting.

The act of issuing was well within the ambit of a valid corporate act, for itwas for securing a loan to finance the activities of the corporation, hence,not an ultravires act.

An ultravires act is distinguished from illegal act, the former beingvoidable which may be enforced by performance, ratification, or estoppel,while the latter is void and cannot be validated. SC however, held de Leon

negligent.

Republic of the Philippines vs. Acoje Mining Co. The company is estopped from denying liability on the ground that the

board resolution is ultravires. Assuming arguendo that the resolution is anultra vires act, the same is not void for it was approved not incontravention of law, customs, public order and public policy. [In this case,even if the setting up of a post office in the mining camp is outside the


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express powers, it is necessary to promote the interest and welfare of thecorporation]

The term ultravires should be distinguished from an illegal act for theformer is merely voidable which may be enforced while the latter is voidand cannot be validated.

General consequences of ultravires acts are as follows:a) Corporation may be dissolved under a quo warranto proceeding but inmost cases, the court merely enjoins the corporation from commissionof the ultra vires acts

b) Certificate of Registration may be suspended or revoked by SECc) Parties to the ultravires contract if executory on both sides neither

party can ask for specific performance. Will be left as they are if thecontract has been fully executed on both sides. If one party hasperformed his part, the contract will be enforced provided it is notillegal

d) Contract proceeding from an ultra-vires act is voidable

e) Any stockholder may bring either an individual or derivative suit toenjoin a threatened ultravires act or contract. If act or contract hasalready been performed, a derivative suit for damages may be filedagainst the directors, but their liability will depend on whether theyacted in good faith and with reasonable diligence in entering intocontracts. When based on tort, cannot set-up the defense of ultraviresagainst injured party who had no knowledge that such was ultravires

f) May become binding by the ratification of all stockholders unless thirdparties are prejudice thereby or unless the acts is illegal

Legal Consequences of Ultra-Vires Acts (Classified)

1. On the Corporation If the act is ILLEGAL, involuntary dissolution under a quo warrantoproceeding by the SolGen Revocation or suspension of the certificate of registration by SEC

2. On the parties to the ultra-vires contract Parties are left as they are and no rescission would lie Where there has been partial performance by one party and theother has not, the latter having benefited from the performance, isestopped from claiming ultra-vires

3. On the rights of Stockholders A SH can file an individual or derivative suit to enjoin a threatenedultra vires act or contract or a derivative suit for damages if thecontract has been performed Liability would depend on whether the contracting parties acted in GFand with reasonable diligence; an honest mistake would not give riseto liability If action is based on tort, the SHs cannot set up the defense of ultravires against the injured party who had no knowledge that the


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corporation was engaging in an act not included expressly or impliedlyin its purpose clause

Napocor v. Vera The issue in this case is whether or not the act of NPC in taking overSea Lions stevedoring services is an ultra-vires act.

SC held that it is not ultra-vires. NPC is empowered by its charter toundertake such services, it being reasonably necessary to theoperation and maintenance of the power plant. The ruling in AcojeMining was upheld, where the company is not restricted by its expresspowers as long as the act will promote the interests and welfare of thecorporation.

Government of P.I. v. El Hogar1. W/N el Hogar is illegally owning and holding a business lot in excess of thereasonable requirements and in contravention of the Corpo law that everycorporation has the power to purchase hold lease real property as reasonableand necessary required for the transaction of the lawful businessH: The law expressly declares that corporations may acquire such real estate

as is reasonably necessary to enable them to carry out the purposes for whichthey were created; and we are of the opinion that the owning of a business lotupon which to construct and maintain its offices is reasonably necessary to abuilding and loan association such as the respondent was at the time thisproperty was acquired. A different ruling on this point would compel importantenterprises to conduct their business exclusively in leased offices a resultwhich could serve no useful end but would retard industrial growth and beinimical to the best interests of society. We are furthermore of the opinionthat, inasmuch as the lot referred to was lawfully acquired by the respondent,it is entitled to the full beneficial use thereof. No legitimate principle candiscovered 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.2. W/N el Hogar has engaged in activities foreign to the purposes for which

the corporation was created and not reasonably necessary to its legitimateends, specifically: (1) the administration of the offices in the El Hogar buildingnot used by the respondent itself and the renting of such offices to the public;(2) the administration and management of properties belonging to delinquentshareholders of the association; (3) the management of some parcels ofimproved real estate situated in Manila not under mortgage to it, but ownedby shareholders, and has held itself out by advertisement as prepared to dosoH: (1) The activities here criticized clearly fall within the legitimate powers ofthe respondent, as shown in what we have said above relative to the secondcause of action. This matter will therefore no longer detain us. If therespondent had the power to acquire the lot, construct the edifice and hold itbeneficially, as there decided, the beneficial administration by it of such partsof the building as are let to others must necessarily be lawful.(2) The case for the government supposes that the only remedy which therespondent has in case of default on the part of its shareholders is to proceedto enforce collection of the whole loan in the manner contemplated in section185 of the Corporation Law. It will be noted, however, that, according to saidsection, the association may treat the whole indebtedness as due, "at theoption of the board of directors," and this remedy is not made exclusive. Wesee no reason to doubt the validity of the clause giving the association theright to take over the property which constitutes the security for thedelinquent debt and to manage it with a view to the satisfaction of the


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obligations due to the debtor than the immediate enforcement of the entireobligation, and the validity of the clause allowing this course to be takenappears to us to be not open to doubt.(3) The practice described in the passage above quoted from the agreed factsis in our opinion unauthorized by law. The administration of property in themanner 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. Thepractice to which this criticism is directed relates of course solely to themanagement and administration of properties which are not mortgaged to theassociation. The circumstance that the owner of the property may have beenrequired to subscribe to one or more shares of the association with a view toqualifying him to receive this service is of no significance. It is a general ruleof law that corporations possess only such express powers. The managementand administration of the property of the shareholders of the corporation isnot expressly authorized by law, and we are unable to see that, upon any fairconstruction of the law, these activities are necessary to the exercise of any ofthe granted powers. The corporation, upon the point now under the criticism,has clearly extended itself beyond the legitimate range of its powers. But itdoes not result that the dissolution of the corporation is in order, and it willmerely be enjoined from further activities of this sort.

3. W/N the royalty paid to the founder of el Hogar, Antonio Melian, ascompensation for his services rendered by him during the early stages of theorganization of the corporation, is unconscionable, excessive, and thusnecessitates dissolutionH: No possible doubt exists as to the power of a corporation to contract forservices rendered and to be rendered by a promoter in connection withorganizing and maintaining the corporation. It is true that contracts withpromoters must be characterized by good faith; but could it be said withcertainty, in the light of facts existing at the time this contract was made, thatthe compensation therein provided was excessive? If the amount of thecompensation now appears to be a subject of legitimate criticism, this mustbe due to the extraordinary development of the association in recent years. Ifthe Melian contract had been clearly ultra vires which is not charged and iscertainly untrue its continued performance might conceivably be enjoinedin such a proceeding as this; but if the defect from which it suffers is merematter for an action because Melian is not a party. It is rudimentary in lawthat an action to annul a contract cannot be maintained without joining boththe contracting parties as defendants. Moreover, the proper party to bringsuch an action is either the corporation itself, or some shareholder who has aninterest to protect.

4. W/N el Hogar had abused its franchise in issuing special shares, which isalleged to be illegal and inconsistent with the plan and purposes of buildingand loan associations,and that these are held by well-to-do people purely forinvestment purposes and not by wage-earners for savings

H: The ground for supposing the issuance of the "special" shares to beunlawful is that special shares are not mentioned in the Corporation Law asone of the forms of security which may be issued by the association. Uponexamination 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, insome American jurisdictions, are generally known as advance paymentshares; in if close attention be paid to the language used in the last sentenceof section 178 of the Corporation Law, it will be found that special shareswhere evidently created for the purpose of meeting the condition cause by


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the prepayment of dues that is there permitted. The language of this provisionis as follow "payment of dues or interest may be made in advance, but thecorporation shall not allow interest on such advance payment at a greaterrate than six per centum per annum nor for a longer period than one year." Inone sort of special shares the dues are prepaid to the extent of P160 pershare; 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 shallhave been paid.

It will escape notice that the provision quoted say that interest shall not beallowed on the advance payments at a greater rate than six per centum perannum nor for a longer period than one year. The word "interest " as thereused must be taken in its true sense of compensation for the used of moneyloaned, and it not must not be confused with the dues upon which it iscontemplated that the interest may be paid. Now, in the absence of anyshowing to the contrary, we infer that no interest is ever paid by theassociation 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 specialshares in the earnings of the corporation, in accordance with section 188 ofthe Corporation Law, sufficiently compensates the shareholder for theadvance payments made by him; and no other incentive is necessary toinduce inventors to purchase the stock.

It will be observed that the final 20 per centum of the par value of eachspecial 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'sparticipation in the annual earnings. But as the right of every shareholder tosuch participation in the earnings is undeniable, the portion thus annuallyapplied is as much the property of the shareholder as if it were in fact takenout of his pocket. It follows that the mission of the special shares does notinvolve 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, evenin 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 HogarFilipino, supra, that even assuming that the statute has not expresslyauthorized such shares, yet the association has implied authority to issuethem. The complaint consequently fails also as regards the stated in the ninthcause of action.

5. W/n El Hogar is pursuing illegally a policy of depreciating, at an excessiverate at the discretion of its Board, the value of real properties acquired by it atits sales, thereby frustrating the right of SHs to participate annually andequally 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 abusiness corporation. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect todepreciation be well founded, the Legislature should supply the remedy bydefining the extent to which depreciation may be allowed by building and loanassociations. Certainly this court cannot undertake to control the discretion ofthe board of directors of the association about an administrative matter as towhich they have legitimate power of action. The tenth cause of action istherefore not well founded.


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6. W/n el Hogars charter should be revoked because it illegally maintainsexcessive reserve funds and because it pursues a policy, allegedly unlawful, ofpaying a straight annual dividend of 10% regardless of losses suffered andprofits made by the corporation and in violation of the requirement s of thecorpo code.

H: It is insisted in the brief of the Attorney-General that the maintenance ofreserve 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 theCorporation Law. Upon careful consideration of the questions involved we findno reason to doubt the right of the respondent to maintain these reserves. Itis true that the corporation law does not expressly grant this power, but wethink it is to be implied. It is a fact of common observation that all commercialenterprises encounter periods when earnings fall below the average, and theprudent manager makes provision for such contingencies. To regard allsurplus as profit is to neglect one of the primary canons of good businesspractice. Building and loan associations, though among the most solid offinancial institutions, are nevertheless subject to vicissitudes. Fluctuations inthe dividend rate are highly detrimental to any fiscal institutions, whileuniformity in the payments of dividends, continued over long periods, suppliesthe surest foundations of public confidence.

Moreover, it is said that the practice of the association in declaring regularly a10 per cent dividend is in effect a guaranty by the association of a fixeddividend which is contrary to the intention of the statute. The governmentinsists upon an interpretation of section 188 of the Corporation Law that isaltogether too strict and literal. From the fact that the statute provides thatprofits and losses shall be annually apportioned among the shareholders it isargued that all earnings should be distributed without carrying anything to thereserve. But it will be noted that it is provided in the same section that theprofits and losses shall be determined by the board of directors: and thismeans that they shall exercise the usual discretion of good businessmen inallocating a portion of the annual profits to purposes needful to the welfare ofthe association. The law contemplates the distribution of earnings and lossesafter other legitimate obligations have been met. Our conclusion is that therespondent has the power to maintain the reserves criticized in the eleventhand twelfth counts of the complaint; and at any rate, if it be supposed that thereserves referred to have become excessive, the remedy is in the hands ofthe Legislature. It is no proper function of the court to arrogate to itself thecontrol of administrative matters which have been confided to the discretionof the board of directors. The causes of action under discussion must bepronounced to be without merit.

7. W/n el Hogar illegally departed from its charter because it has made loanswhich were intended to be used by the borrowers for other purposes than thebuilding of homes. There is no statute here expressly declaring that loans may

be made by these associations solely for the purpose of building homes. Onthe contrary, the building of homes is mentioned in section 171 of theCorporation Law as only one among several ends which building and loanassociations are designed to promote. Furthermore, section 181 of theCorporation Law expressly authorities the Board of directors of the associationfrom time to time to fix the premium to be charged. In the brief of the plaintiffa number of excerpts from textbooks and decisions have been collated inwhich the idea is developed that the primary design of building and loanassociations should be to help poor people to procure homes of their own.


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This beneficent end is undoubtedly served by these associations, and it is notto be denied that they have been generally fostered with this end in view. Butin this jurisdiction at least the lawmaker has taken care not to limit theactivities of building and loan associations in an exclusive manner, and theexercise of the broader powers must in the end approve itself to the businesscommunity.

8. W/n the el Hogar charter may be revoked because various loans nowoutstanding have been made by the respondent to corporations andpartnerships, and that these entities have in some instances subscribed toshares in the respondent for the sole purpose of obtaining such loans, andthat some of these juridical entities became shareholders merely for thepurpose of qualifying themselves to take loans from the association.H: the Corporation Law declares that "any person" may become a stockholderin building and loan associations. The word "person" appears to be here usedin its general sense, and there is nothing in the context to indicate that theexpression is used in the restricted sense of both natural and artificialpersons, as indicated in section 2 of the Administrative Code. We would notsay that the word "person" or persons," is to be taken in this broad sense inevery part of the Corporation Law. For instance, it would seem reasonable tosay that the incorporators of a corporation ought to be natural persons,although in section 6 it is said that five or more "persons", although in section6 it is said that five or more "persons," not exceeding fifteen, may form aprivate corporation. But the context there, as well as the common sense ofthe situation, suggests that natural persons are meant. When it is said,however, in section 173, that "any person" may become a stockholder in abuilding and loan association, no reason is seen why the phrase may not betaken in its proper broad sense of either a natural or artificial person. At anyrate the question whether these loans and the attendant subscriptions wereproperly made involves a consideration of the power of the subscribingcorporations and partnerships to own the stock and take the loans; and it isnot alleged in the complaint that they were without power in the premises. Ofcourse the mere motive with which subscriptions are made, whether to qualifythe stockholders to take a loan or for some other reason, is of no moment indetermining whether the subscribers were competent to make the contracts.The result is that we find nothing in the allegations of the sixteenth cause ofaction, or in the facts developed in connection therewith, that would justify usin granting the relief.

9. W/n el Hogar, in disposing of real estate purchased in the collection ofdefaulted loans, on credit at first and then sold and mortgaged to el Hogar tosecure payment of the purchase price, had incurred several outstandingloans, and that that the persons and entities to which said properties are soldunder the condition charged are not members or shareholders nor are theymade 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 ofthe Corporation Law requiring loans to be stockholders only and on thesecurity of real estate and shares in the corporation, or of shares alone. Itseems to be supposed that, when the respondent sells property acquired at itsown foreclosure sales and takes a mortgage to secure the deferred payments,the obligation of the purchaser is a true loan, and hence prohibited. But inrequiring the respondent to sell real estate which it acquires in connectionwith the collection of its loans within five years after receiving title to thesame, the law does not prescribe that the property must be sold for cash or


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that the purchaser shall be a shareholder in the corporation. Such sales can ofcourse be made upon terms and conditions approved by the parties; andwhen the association takes a mortgage to secure the deferred payments, theobligation 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 respondentmake 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.Implied or Necessary PowersGR: all acts other than those specified in Sec 36-44 and in other special provisionswould be ultra vires

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 noton its face necessarily beyond its authority, it will, in the absence of proof to thecontrary, presumed to be valid.

Sec 36(11): corporations have the power and capacity to exercise suchother powers as may be essential or necessary to carry out its purpose(s)as provided for in the AOIo Restated: the management of a corporation has discretionary

authority, in the absence of explicit restrictions, to enter into contractsor transactions deemed reasonably necessary or incidental to itsbusiness purposes.

Incidental/Inherent Powers

Sec 2: powers, attributes, and properties expressly authorized by lawor incident to its existence

Incidental powers: those that attach to a corporation at the moment ofits creation without regard to its express powers or particular primarypurpose, and is inherent in it as a legal entity

Examples:i. To sue and be suedii. To grant and receive in the corporate nameiii. To purchase hold and convey real and personal property for its

purposesiv. To have a corporate sealv. To adopt and amend by-laws for its governmentvi. To disenfranchise or remove members

Powers that go into the very nature and extent of a corporationsjuridical entity cannot be presumed to be incidental or inherent powers

CONTROL AND MANAGEMENT

Three levels of control:(1) board of directors or trustees= formulate the corporate policies(2) corporate officers= execute the policies


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(3) stockholders or members= have residual powers over fundamental corporatechanges

Rationale of centralized management one of the advantageous features of the corporationacting through centralized

management

the congruence of authority and responsibility in the same person, committee, orboard always promote efficiency

Who exercises corporate powers?

1. board of directors (for stock corporations) or trustees (for non-stockcorporations)

governing body sole authority to determine the policy and conduct the ordinary business of the

corporation within the scope of the charter so long as the board acts honestly, in GF, and not in defraud of creditors or

abusive of the rights of minority SHs GR: in the absence of an authority from the board of directors, no person, not

even the officers of the corporation, can validly bind the corporation Exception: with respect to 3rd persons, actions of the corporation even without

formal board approval may still bind! (ex. Proof of usage, acquiescence of theboard despite knowledge of the act, receipt of benefits, implied ratification,estoppel

Primary objective of the Board

primary obligation of directors is to seek the maximum amount of profits for thecorporation, and characterized the position as a position of trusto in case directors interest conflict with those of the corporation, he cannot

sacrifice the latter to his own advantage and benefito fiduciary or trust relationship is not a matter of statutory or technical law, but

springs from the control and guidance of corporate affairs and property andhence the property interest of the SHs

BOARDOF DIRECTORS

A. Authority; Repository of corporate powers (Section 23)

The board of directors or trustees are responsible for corporate policies

and general management of the business affairs of the corporation Unless otherwise provided in the Corporation Code, the Board of Directors

control and exercise:o the corporate powers of corporationo all business conducted,o all property of such corporation

The board exercises almost all corporate powers, lays down all businesspolicies and is responsible for the efficiency of management. The


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stockholders have no right to interfere with the boards exercise of itspowers and functions except where the law expressly gives them the finalsay, like in cases of removal of a director, amendment of articles ofincorporation, and other major changes. Their resolutions on mattersother than the exceptions are legally not effective nor binding and may be

treated as merely advisory or may be totally disregarded. Unless Otherwise Provided may pertain to instances where a

management contract is entered hence corporate posers are exercised bythe managing company and not the board

The directors or trustees shall not act individually nor separately but as abody in a lawful meeting. Contracts entered into without a formal boardresolution does not bind the corporation except when majority of theboard has knowledge of the contract and the contract benefited thecorporation.

Directors owe their duties to corporation as a whole rather than toindividual shareholders of classes of shareholders

Ramirez v Orientalist Co & Fernandez

Orientalist Co engaged in the theater business, desired to be the exclusive agent ofRamirez, who is based in Paris, for two film outfitsclair Films and Milano films.Through the active involvement and negotiations of Ramon El PresidenteFernandez, a director of Orientalist and also its treasurer, with Ramirez, Orientalistwas able to secure an offer, the terms of which were acceptable to the Board as wellas to the stockholders. It appears that this acceptance of the terms of the offer wasdecided during an informal meeting of the board, and conveyed to Ramirez in twoletters signed only by Fernandez, both in his individual and his capacity as treasurerof Orientalist. It turns out that the company was not financially capable to comply

with the obligations set forth in the agency contract, and about this time films hadalready been delivered to the company. Two stockholders meetings were organized,the first adopted a resolution approving the action of the board on the offer, thesecond raising the contingency of the lack of funds and the proviso that the fourofficers involved, including Fernandez would continue importing the films using theirown funds. Ramirez sues Orientalist and Fernandez for what is due on the contract.TC ruled Oriental as the principal debtor while Fernandez is subsidiarily liable.

H: (1) it was incumbent upon the corporation if it desired to question the authority ofFernandez to bind it, to deny the due execution of the contract made by him. Inpleading lack of authority of an officer of a corporation to bind the latter through a

contract executed by the former is a special defense which should be speciallypleaded and the answer setting up this defense must be verified under oath. Thedenial shall be specific, and a mere attack on the instrument in general terms isinsufficient, even though under oath. In dealing with corporations the public at largeis bound to rely to a large extent upon outward appearances. If a man is found actingfor a corporation with the external indicia of authority, any person not having noticeof want of authority, may usually rely upon those appearances, and if it be found thatthe directors had permitted the agent to exercise that authority and thereby held him


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out as a competent person to bind the corporation, or had acquiesced in a contractand retained the benefit supposed to have conferred by it, the corporation will bebound, notwithstanding the actual authority may never have been granted. Thepublic is not supposed nor required to know the transactions which happen aroundthe table where the corporate board of directors or the stockholders are from time to

time convoked. It is therefore reasonable, in a case where an officer of a corporationhas made a contract in its name, that the corporation should be required, is it denieshis authority, to state such defense in his answer. This failure of Orientalist to makeany issue in its answer with regard to the authority of Ramon Fernandez to bind itand its failure to deny specifically under oath the genuineness of the due executionof the contracts sued upon, have the effect of eliminating the question of hisauthority from the case.

(2) Fernandez had no authority to bind the corporation. Corporate powers isexercised by the board of directors, and is recognized in the bylaws of Orientalist.The fact that the power to make contracts is thus vested in the borad does not

always signify that a formal vote of the board must always be taken beforecontractual liability can be fixed; the board can create liability, like an individual, byother means than by formal expression of its will. It may be established withoutreference to official records of the proceedings of the board, by proof of the usage towhich the company had permitted to grow up in the business, and of theacquiescence of the board charged with the duty of supervising and controlling thecompanys business. Fernandez was the most active in the effort to secure the films.The negotiations were conducted by him with the knowledge and consent of theother members of the board. The board, before the financial inability of thecorporation was revealed, had already recognized the contracts as being in existenceand had proceeded to take the steps necessary to utilize the films, particularly the

publication of announcements in the papers. In light of this, the contracts in questionwere thus inferentially approved by the board and that the company is bound unlessthe subsequent failure of the stockholders to approve the same had the effect ofabrogating the liability created.

(3) the action of the stockholders, whatever its character, must be ignored.Stockholders or members resolutions dealing with matters other than the exceptionsare not legally effective nor binding on the board, and may be treated as merelyadvisory or may even be completely disregarded. The functions of the stockholdersof a corporation are, of a limited nature. The theory is that the stockholders mayhave all the profits but shall turn over the complete management of the enterprise to

their representatives or agents, called the directors, making by-laws, and exercisingspecial powers defined by law. Thus contracts between a corporation and thirdpersons must be made by the directors and not by the stockholders. The corporationis represented by the directors and not the stockholders. Third persons can have littleor no information as to what occurs in corporate meetings, and must necessarily relyon external manifestations of corporate consent. The integrity of commercialtransactions can only be maintained by holding the corporation strictly to the liabilityfixed upon in by its agents in accordance with law. If a corporation knowingly permits


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one of its officers or any other person to do acts within the scope of an apparentauthority, and thus hold him out to the public as possessing the power to do theseacts, the corporation will be estopped from denying such authority as against anyonewho has dealt with the corporation in GF.

Expertravel & Tours v CA and Korean Airlines.F: Korean Airlines, through Atty. Aguinaldo, filed a Complaint against Expertravel withthe RTC for the collection of the principal amount of P260,150.00, plus attorneysfees and exemplary damages. The verification and certification against forumshopping was signed by Atty. Aguinaldo, who indicated therein that he was theresident agent and legal counsel of KAL and had caused the preparation of thecomplaint. Expertravel filed a motion to dismiss the complaint on the ground thatAtty. Aguinaldo was not authorized to execute the verification and certificate of non-forum shopping as required by the Rules of Court. KAL opposed the motion,contending that Atty. Aguinaldo was its resident agent and was registered as suchwith the Securities and Exchange Commission (SEC) as required by the CorpoCode,and was further alleged that Atty. Aguinaldo was also the corporate secretary of KAL.Atty. Aguinaldo also claimed that he had been authorized to file the complaintthrough a resolution of the KAL Board of Directors approved during a special meetingheld on June 25, 1999, wherein the board of directors conducted a specialteleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was alsoaverred that in that same teleconference, the board of directors approved aresolution authorizing Atty. Aguinaldo to execute the certificate of non-forumshopping and to file the complaint. Suk Kyoo Kim also alleged, however, that thecorporation had no written copy of the aforesaid resolution. TC denies MTD, CAaffirms.

H: It is settled that the requirement to file a certificate of non-forum shopping ismandatory and that the failure to comply with this requirement cannot be excused.The certification is a peculiar and personal responsibility of the party, an assurancegiven to the court or other tribunal that there are no other pending cases involvingbasically the same parties, issues and causes of action. Hence, the certification mustbe accomplished by the party himself because he has actual knowledge of whetheror not he has initiated similar actions or proceedings in different courts or tribunals.Even his counsel may be unaware of such facts. Hence, the requisite certificationexecuted by the plaintiffs counsel will not suffice.

In a case where the plaintiff is a private corporation, the certification may be signed,for and on behalf of the said corporation, by a specifically authorized person,including its retained counsel, who has personal knowledge of the facts required tobe established by the documents. The corporation, such as the petitioner, has nopowers except those expressly conferred on it by the Corporation Code and thosethat are implied by or are incidental to its existence. In turn, a corporation exercisessaid powers through its board of directors and/or its duly-authorized officers andagents. Physical acts, like the signing of documents, can be performed only by

natural persons duly-authorized for the purpose by corporate by-laws or by specificact of the board of directors.

The respondents allegation that its board of directors conducted a teleconference onJune 25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance)is incredible, given the additional fact that no such allegation was made in thecomplaint. If the resolution had indeed been approved on June 25, 1999, long beforethe complaint was filed, the respondent should have incorporated it in its complaint,or at least appended a copy thereof. The respondent failed to do so. It was only on


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January 28, 2000 that the respondent claimed, for the first time, that there was sucha meeting of the Board of Directors held on June 25, 1999; it even represented to theCourt that a copy of its resolution was with its main office in Korea, only to allegelater that no written copy existed. It was only on March 6, 2000 that the respondentalleged, for the first time, that the meeting of the Board of Directors where theresolution was approved was held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed aSecretarys/Resident Agents Certificate alleging that the board of directors held ateleconference on June 25, 1999. No such certificate was appended to the complaint,which was filed on September 6, 1999. More importantly, the respondent did notexplain why the said certificate was signed by Atty. Aguinaldo as early as January 9,1999, and yet was notarized one year later (on January 10, 2000); it also did notexplain its failure to append the said certificate to the complaint, as well as to itsCompliance dated March 6, 2000. It was only on January 26, 2001 when therespondent filed its comment in the CA that it submitted the Secretarys/ResidentAgents Certificate[30] dated January 10, 2000.

The Court is, thus, more inclined to believe that the alleged teleconference on June25, 1999 never took place, and that the resolution allegedly approved by the

respondents Board of Directors during the said teleconference was a mereconcoction purposefully foisted on the RTC, the CA and this Court, to avert thedismissal of its complaint against the petitioner.

Citibank NA v Chua.Velez deposited his unfunded personal checks with his current account with thepetitioner. But prior to depositing said checks, he would present his personal checksto a bank officer asking the latter to have his personal checks immediately creditedas if it were a cash deposit and at the same time assuring the bank officer that hispersonal checks were fully funded. Having already gained the trust and confidence ofthe officers of the bank because of his past transactions, the bank's officer wouldalways accommodate his request. After his requests are granted which is done byway of the bank officer affixing his signature on the personal checks, private

respondent Cresencio Velez would then deposit his priorly approved personal checksto his current account and at the same time withdraw sums of money from saidcurrent account by way of petitioner bank's manager's check. Private respondentwould then deposit petitioner bank's manager's check to his various current accountsin other commercial banks to cover his previously deposited unfunded personalchecks with petitioner bank. Naturally, petitioner bank and its officers neverdiscovered that his personal check deposits were unfunded. On the contrary, it gavethe petitioner bank the false impression that private respondent's constructionbusiness was doing very well and that he was one big client who could be trusted.This deceptive and criminal scheme he did every banking day without fail fromSeptember 4, 1985 up to March 11, 1986. The amounts that he was depositing andwithdrawing during this period (September 4, 1985 to March 11, 1986) progressivelybecame bigger. It started at P46,000.00 on September 4, 1985 and on March 11,

1986 the amount of deposit and withdrawal already reached over P3,000,000.00. Atthis point in time (March 11, 1986), the private respondent Cresencio Velezpresumably already feeling that sooner or later he would be caught and that healready wanted to cash in on his evil scheme, decided to run away with petitioner'smoney. On March 11, 1986, he deposited various unfunded personal checks totalingP3,095,000.00 and requested a bank officer that the same be credited as cash andafter securing the approval of said bank officer, deposited his various personalchecks in the amount of P3,095,000.00 with his current account and at the sametime withdrew the sum of P3,244,000.00 in the form of petitioner's manager's check.Instead of using the proceeds of his withdrawals to cover his unfunded personal
http://www.supremecourt.gov.ph/jurisprudence/2005/may2005/152392.htm#_ftn30http://www.supremecourt.gov.ph/jurisprudence/2005/may2005/152392.htm#_ftn30


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checks, he ran away with petitioner bank's money. Thus, private respondentCresencio Velez's personal checks deposited with petitioner bank on March 11, 1986in the total aggregate amount of P3,095,000.00 bounced. The checks bounced aftersaid personal checks were made the substantial basis of his withdrawing the sum ofP3,244,000.00 from his current account with petitioner bank. Citibank sues on thegrounds of violation of BP 22. Before pre-trial conference, and in pursuance of the

authority granted to him by petitioner bank's by-laws, its Executing Officer appointedWilliam W. Ferguson, a resident alien, as its Attorney-in-Fact empowering the latter,among other things, to represent Citibank in court cases such as the present case. Inturn, William W. Ferguson executed a power of attorney in favor of J.P. Garcia &Associates (petitioner bank's counsel) to represent petitioner bank in the pre-trialconference before the lower court.I: There are thus two issues in this case. First, whether a resolution of the board ofdirectors of a corporation is always necessary for granting authority to an agent torepresent the corporation in court cases.H: In the corporate hierarchy, there are three levels of control: (1) the board ofdirectors, which is responsible for corporate policies and the general management ofthe business affairs of the corporation; (2) the officers, who in theory execute thepolicies laid down by the board, but in practice often have wide latitude indetermining the course of business operations; and (3) the stockholders who havethe residual power over fundamental corporate changes, like amendments of thearticles of incorporation. However, just as a natural person may authorize another todo certain acts in his behalf, so may the board of directors of a corporation validlydelegate some of its functions to individual officers or agents appointed by it.

It is clear that corporate powers may be directly conferred upon corporate officers oragents by statute, the articles of incorporation, the by-laws or by resolution or otheract of the board of directors. In addition, an officer who is not a director may alsoappoint other agents when so authorized by the by-laws or by the board of directors.Such are referred to as express powers. There are also powers incidental to expresspowers conferred. It is a fundamental principle in the law of agency that everydelegation of authority, whether general or special, carries with it, unless the

contrary be express, implied authority to do all of those acts, naturally and ordinarilydone in such cases, which are reasonably necessary and proper to be done in orderto carry into effect the main authority conferred.

Since the by-laws are a source of authority for corporate officers and agents of thecorporation, a resolution of the Board of Directors of Citibank appointing an attorneyin fact to represent and bind it during the pre-trial conference of the case at bar isnot necessary because its by-laws allow its officers, the Executing Officer and theSecretary Pro-Tem, * to execute a power of attorney to a designated bank officer,William W. Ferguson in this case, clothing him with authority to direct and managecorporate affairs.

Since paragraph XXI (of the by-laws) specifically allows Ferguson to delegate his

powers in whole or in part, there can be no doubt that the special power of attorneyin favor, first, of J.P. Garcia & Associates and later, of the bank's employees,constitutes a valid delegation of Ferguson's express power (under paragraph XVIIabove) to represent petitioner bank in the pre-trial conference in the lower court.

I: The second issue is whether the by-laws of the petitioner foreign corporation whichhas previously been granted a license to do business in the Philippines, are effectivein this jurisdiction. If the by-laws are valid and a board resolution is not necessary aspetitioner bank claims, then the declaration of default would have no basis.

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