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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

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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

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depends on the nature of the business

o

(2) must be subject to limitations prescribed by law and

the Constitution

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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

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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…

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… proceeds of disposition is appropriate for

the conduct of remaining business

o

“substantially all” property/assets:

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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

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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:

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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