Law on Philippine Corporations Reviewer

8/12/2019 Law on Philippine Corporations Reviewer

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CORPORATION LAW

FINALS 09

A. By-laws

1. Definitin f by-laws

These are regulations, ordinances, rules or laws adopted by an association or

corporation or the like for its internal governance. By laws define the rights and

obligations of various officers, persons or groups within the corporate structure and

provide rules for routine matters such as calling meetings.

Every corporation under this code shall have the power and capacity: (! to adopt by"

laws not contrary to law, morals, or public policy, and to amend or repeal the same in

accordance with this code (#ec $%!

!. W"en t a#$t %y-laws &Se'tin ()*

Every corporation formed under this code must within & month after receipt of official

notice of the issuance of its certificate of incorporation by the #E' adopt a code of

by"laws for its government not inconsistent with this code. (#ec %!

)ay be adopted and filed prior to incorporation, in such case, shall be approved and

signed by all incorporators submitted to #E' together with A* (#ec %!

+oyola rand -illas omeowners Ass v. 'A

The #upreme 'ourt held that although the 'orporation 'ode re/uires the filing of by"

laws within one month after the issuance of the 'ertificate of *ncorporation, it does

not e0pressly provide for the conse/uences of non"filing within the said period.

*t should be noted, however, that under #ection % of 12 345"A, the #E' can revokethe certificate of registration of corporations for failure to file the by"laws within the

re/uired period but only after proper notice or hearing.

There is no automatic dissolution for failure to file by"laws within the re/uired period.

6leischer v. Botica 7olasco

The by"laws of the 'orporation which effectively gives the corporation preferential

right of the shares in /uestion is in direct conflict with the 'orporation +aw. The owner of

the shares, which are personal property, has the uncontrollable right to alienate them

which attaches to the ownership of any other species of property.

The right to impose restrictions on transfer of shares must be conferred upon thecorporation by a governing statute or by the A8*. *t cannot be done by a by"law without

statutory or charter authority.

ov9t of 1hils. -. El ogar

The by"laws provision which empowers the board to cancel shares and return to the

owner the balance resulting from the li/uidation by a vote of absolute maority of the

members is an AB#8+;TE 7;++*T


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which declares that the board shall not have the powers to force the surrender and

withdrawal of unmatured stock e0cept in case of li/uidation or forfeiture of stock.

The practice of the directorate filling"up the vacancies by the action of the directors

themselves is valid.

The 'orporation +aw does not undertake to prescribe the rate of compensation for

the directors of the corporation. The power to fi0 compensation is left to the corporationitself to be determined in the by"laws. ence, the distribution to directors of El ogar of

= net profit in proportion to their attendance at board meetings is valid.

*f a mistake has been made or the rule adopted in the by"laws has been found to

work harmful results, the remedy is in the hands of the #s who have the power at any

lawful meeting to change the rule.

The provisions in the by"laws which re/uire that the persons elected to the board be

holders of shares with paid"up value of 1> and that directors who loan from the

association waive their rights as #s are -A+*2. The 'ode specifically gives the power

to the corporation to provide in its by"laws for the /ualifications of directors, and the

re/uirement of security from them for the proper discharge of the duties of their office is

highly prudent and in conformity with good practice. The 'ode also has safeguards ondirectors from making loans to themselves, designed to prevent the possibility of looting

of the corporation.

+. ,w file#

)ust be approved by the affirmative vote of the #tockholders representing the

maority of the outstanding capital stock or maority of members (#ec %!

)ust be signed by the stockholders or members voting for it (#ec %!

)ust be filed with the #E' certified by the maority of directors?trustees and

countersigned by the secretary of the corporation which shall be attached to original

A* (#ec %!

(. W"ee e$t

)ust be kept in the principal office of the corporation@ subect to inspection of

stockholder or member during office hours (#ec %!

/. ffe'tiity f %y-laws

Effective only from the issuance of #E' of certification that bylaw are not inconsistent

with the 'ode (#ec %!

'annot bind stockholders ? corporation pending approval By laws, like A* are contracts of adhesion. They will bind the corporation and

stockholders including those who vote against as well as those who became

members after approval

'ontracts entered into without strict compliance with by"laws may be binding on the

corporation due to long ac/uiescence and usage

By laws are mere internal rules among stockholders and cannot affect or preudice $ rd

persons who deal with the corporation unless they have knowledge of the same


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). Cntents &Se'tin (2*

#ubect to the provisions of the 'onstitution, this 'ode, other special laws, and the

articles of incorporation, a private corporation may provide in its by"laws for:

a! The time, place and manner of calling and conducting regular or specialmeetings 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 re/uired /uorum in meetings of stockholders or members and the manner of

voting therein@

d! The form for pro0ies of stockholders and members and the manner of voting

them@

e! The /ualifications, duties and compensation of directors or trustees, officers and

employees@

f! The time for holding the annual election of directors of trustees and the mode or

manner of giving notice thereof@g! The manner of election or appointment and the term of office of all officers other

than directors or trustees@

h! The penalties for violation of the by"laws@

i! *n the case of stock corporations, the manner of issuing stock certificates@ and

! #uch other matters as may be necessary for the proper or convenient transaction

of its corporate business and affairs.

2. P'e#3e f a4en#4ent f %y-laws &Se'tin (5*

-oting e/uirement: board of directors or trustees by a maority vote and the

owners of at least a maority of the outstanding capital stock, or maority of themembers of a non"stock corporation, at a regular or special meeting duly called for

the purpose, may amend or repeal any by"laws or adopt new by"laws

2elegation of power to amend to the B82: The owners of two"thirds (5?$! of the

outstanding capital stock or two"thirds (5?$! of the members in a non"stock

corporation may delegate to the board of directors or trustees the power to amend or

repeal any by"laws or adopt new by"laws

evocation 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 adopt new by"laws shall be

considered as revoked whenever stockholders owning or representing a maority of

the outstanding capital stock or a maority of the members in non"stock corporations,

shall so vote at a regular or special meeting henever any amendment or new by"laws are adopted, such amendment or new by"

laws shall be attached to the original by"laws in the office of the corporation, and a

copy thereof, duly certified under oath by the corporate secretary and a maority of

the directors or trustees, shall be filed with the #ecurities and E0change 'ommission

the same to be attached to the original articles of incorporation and original by"laws.


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The amended or new by"laws shall only be effective upon the issuance by the

#ecurities and E0change 'ommission of a certification that the same are not

inconsistent with this 'ode.

B. Nn-3se f C"ate 6 Cntin33s In$eatin

&. 7on"user for 5 years (non"use of charter!" when the corporation does not formallyorganiCe and commence the transaction of its business or the construction of its

works within 5 years from the date of its incorporation. *ts corporate powers cease

and the corporation shall be deemed dissolved (automatic!

6ormal organiCation D 7ot only means adoption of by"laws but also the organiCation

of the Board. This may consist in the election of new board of directors or trustees

and corporate officer

The A8* names the initial members of the Board who are to act until the & stset of

directors are duly elected and /ualified. This interim board can perform the functions

of a regular board until the date of the election of directors. 8nce elected, the

directors must complete the organiCation of the corporation by electing the officers.

'ommencement of business D This is after the approval of the by"laws and theelection of directors and officers elected. This may take the form of contracting for

lease or sale of properties to be used as business site of the corporation and other

preparatory acts geared towards fulfillment of the purpose for which the corporation

was established

5. 7on"user for years (continuous inoperation!" when the corporation has commenced

the transaction of its business but subse/uently becomes continuously inoperative for

a period of at least years. The same shall be a ground for the suspension or

revocation of its corporate franchise or 'ertificate of *ncorporation (not automatic!.

7otice and hearing is re/uired.

$. E0ception: cause or non"use or operation was due to causes beyond the control of

the corporation as determined by #E' (e0. )ineral lands to be developed by thecorporation as per its purpose are the obect of court litigation and a court inunction

against the corporate activities has been issued!

POWRSOFCORPORATIONS

Pi4ay R3le7 All corporate powers shall be e0ercised and all corporate businesses shall be

conducted by the board of directors of the corporation (#ec. 5$!

8'e$tin7 #pecific instances when the 'ode re/uires the consent and ratification of the #s,

particularly where the underlying contractual relationship between the parties: The corporation,

the #s?members, and the #tate 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 a!ority or "#$ %ote where applicable (&ote: 'issenting SHs in

certain instances are gi%en the option to withdraw fro the relationship through the

exercise of appraisal right)


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A. In eneal(#ection $%!

&. To sue and be sued in its corporate name@

5. #uccession by its corporate name for the period of time stated in the articles of

incorporation and the certificate of incorporation@

$. To adopt and use a corporate seal@

. To amend its articles of incorporation in accordance with the provisions of this 'ode@. To adopt by"laws, not contrary to law, morals, or public policy, and to amend or

repeal the same in accordance with this 'ode@

%. *n 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

'ode@ and to admit members to the corporation if it be a non"stock corporation@

. 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 re/uire, subect to the limitations prescribed by law and

the 'onstitution@

F. To enter into merger or consolidation with other corporations as provided in this'ode@

3. To make reasonable donations, including those for the public welfare or for hospital,

charitable, cultural, scientific, civic, or similar purposes: 1rovided, That no

corporation, domestic or foreign, shall give donations in aid of any political party or

candidate or for purposes of partisan political activity@

&4. To establish pension, retirement, and other plans for the benefit of its directors,

trustees, officers and employees@ and

&&. To e0ercise such other powers as may be essential or necessary to carry out its

purpose or purposes as stated in the articles of incorporation. (in the purpose

clause!

#ources of power

o #ection $%

o 1urpose clause (#ec. FF"7on stock 'orporations!: charitable, religious,

educational, professional, cultural, fraternal, literary, scientific, social, civic

service, or similar purposes like trade, industry, agriculture and like chambers or

any combination thereof. GecreationalH is omitted.

#ec $F par && grants such power as are essential or necessary to carry out its

purpose or purposes as stated in the A*. A corporation is presumed to 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 valid

5 general restrictions on the power of the corporation to ac/uire and hold properties:o that the property must be reasonably and necessarily re/uired by the

transactions of its lawful business

o that the power shall be subect to the limitations prescribed by other special laws

and the constitution (corporation may not ac/uire more than $4= of voting stocks

of a bank@ corporations are restricted from ac/uiring public lands e0cept by lease

of not more than &444 hectares!


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E. T #eny $e-e4$tie i"ts(#ection $3!

&. 2efinition ofpreepti%e rightsD All stockholders of a stock corporation shall enoy

pre"emptive right to subscribe to all issues or disposition of shares of any class, in

proportion to their respective shareholdings, unless such right is denied by the

articles of incorporation or an amendment thereto This is to prevent dilution in shareholding

*f you increase common stock and some of the stockholders do not want to

subscribe, get from them a waiver of pre"emptive right (There are authorities saying

that the right is applicable when there is reduction of shares!

Basis of right@ common law rule

1reemptive right: option privilege of an e0isting # to subscribe to a proportionate

part of shares subse/uently issued by the corporation before the same can be

disposed in favor of others

'ommon"law right granted to #s of a corporation to be granted the first option to

subscribe to any opening of the unissued capital stock, or to any increase from the

authoriCed capital stock JEconomic aspect: right to invest capitalJthe right becomes valuable when the

enterprise has demonstrated that it will earn a higher rate of return on the capital than

the # could get were he to invest it in the open market

J+imited to shares issued in pursuance of an increase in the authoriCed capital

stock@ does not apply to additional issues of originally authoriCed shares forming part

of the e0isting capital stock

JAn original subscriber is deemed to have taken his shares knowing that they form a

definite proportionate part of the whole number of authoriCed shares

Jhen unsubscribed shares are later reoffered, the # cannot claim that his

interest would be diluted

J1reemptive rights are not statutory rights, but common law rights J1reemptive rights are personal rights of the #

7eed not be stipulated in the A8* or by"laws

)ay be removed, denied, or altered only through specific provisions in the A8* or

amendment thereto

#E': vote by maority of #s to waive the right is 7;++ and -8*2@ such waiver must

be given individually by the #s concerned

But unanimous vote of all will bind them

n close corporations: Balance of power in close corporations may be disturbed by an

indiscriminate issuance of new shares without regard to preemptive right of #s. *n a

close corp, e0ceptions in #ec $3 are not applicable

5. +imitation to e0ercise of pre"emptive right:

a! #uch pre"emptive right shall not e0tend to shares to be issued in compliance with

laws re/uiring stock offerings or minimum stock ownership by the public@

b! 7ot e0tend to shares to be issued in good faith with the approval of the

stockholders representing two"thirds (5?$! of the outstanding capital stock, in


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e0change for property needed for corporate purposes or in payment of a

previously contracted debt

c! #hall not take effect if denied in the Articles of *ncorporation or an amendment

thereto.

1reemptive right D option privilege of an e0isting stockholder to subscribe to aproportionate part of shares subse/uently issued by the corp before same can be

disposed of in favor of the others@ includes all issues and disposition of shares of any

class

*ncludes not only new shares in pursuance of an increase of capital stock but would

cover the issue of previously unissued shares which form part of the e0isting capital

stock as well as treasury shares (#ec. 3 used the phrase, Gdisposition of shares of

any classH, furthermore since the funds used in reac/uiring T?# come from surplus

profits which could have been declared instead as dividends, it is desirable policy to

recogniCe the pre"emptive rights of #s!

here the shares are issued in e0change for property needed for corporate purposes

or for debt previously granted, # cannot demand his pre"emptive right for right maypreudice corporate interest

*n oint ventures, you can e0pand pre"emptive rights even in instances under #ec $3

$. emedies in case of unwarranted denial:

a! *nunction

b! )andamus

in any case, the suit should be individual and not derivative because the wrong done

is to the stockholders individually

ight of 6irst efusal refers to the offering of the shares first to the other stockholders

before it is sold?transferred to outsiders. As distinguished to *T 86 6*#T

E6;#A+, the latter is contractual, while 1E"E)1T*-E *T e0ists even if notstated in A8*, that9s why there is a need to e0pressly deny it. 6urthermore, the right

must be e0ercised within $4 days, hence not indefinite. hile e0ercise of pre"emptive

right is usually fi0ed by a resolution.

6. T sell #is$se f '$ate assets(#ection 4!

&. estrictions: #ubect to the provisions of e0isting laws on illegal combinations and

monopolies

5. #cope of power: To sell, lease, e0change, mortgage, pledge or otherwise dispose of

all or substantially all of its property and assets, including its goodwill, upon suchterms 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 e0pedient

)eaning of disposition of substantially all of 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.


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$. Approval, voting and notice re/uirement:

a! )aority vote of its board of directors or trustees,

b! AuthoriCed by the vote of the stockholders representing at least two"thirds (5?$!

of the outstanding capital stock, or in case of non"stock corporation, by the vote

of at least to two"thirds (5?$! of the members, in a stockholderIs or memberIs

meeting duly called for the purpose.c! ritten 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

hen # approval not necessary " *f disposition 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.

*n non"stock corporations where there are no members with voting rights " the vote

of at least a maority of the trustees in office will be sufficient authoriCation for the

corporation to enter into any transaction authoriCed by this section.

. Appraisal right: That any dissenting stockholder may e0ercise his appraisal right

under the conditions provided in this 'ode

. Abandonment of the sale, leaseK " After such authoriCation or approval by the

stockholders or members, the board of directors or trustees may, nevertheless, in its

discretion, abandon such sale, lease, e0change, mortgage, pledge or other

disposition of property and assets, subect to the rights of third parties under any

contract relating thereto, without further action or approval by the stockholders or

members.

. T a'


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A corporation must have unrestricted retained earnings in ac/uiring own shares

e0cept:

a! shares are ac/uired in the redemption of redeemable shares

b! shares are re"ac/uired to effect a decrease in capital stock approved by the #E'

c! shares are reac/uired by a close corporation pursuant to the order of the #E'

acting to arbitrate a deadlock

. T inest '$ate f3n#s in ant"e '$atin %3siness(#ection 5!

&. #ubect to the provisions of this 'ode, 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 organiCed

5. Approval, voting and notice re/uirement

a! )aority of the board of directors or trustees and

b! ratified by the stockholders representing at least two"thirds (5?$! of the

outstanding capital stock, or by at least two thirds (5?$! of the members in thecase of non"stock corporations, at a stockholderIs or memberIs meeting duly

called for the purpose.

c! ritten 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

$. Appraisal right " any dissenting stockholder shall have appraisal right as provided in

this 'ode

. hen # approval not necessary" where the investment by the corporation isreasonably necessary to accomplish its primary purpose as stated in the articles of

incorporation

To avoid # approval, include other business undertakings in the secondary

purpose

. ules in case a corporation will invest its funds in another corporation

a! *f it is the same purpose or incidental or related to its primary purpose, the board

can invest the corporate fund without the consent of the stockholders. hat is

re/uired is only the vote of the maority of the B82. 7o appraisal right

b! *f the investment is in another corporation of different business or purpose, the

affirmative vote of maority of the board consented by 5?$ 8# capital stock isre/uired

T %3y t"e s"aes f ant"e '$atin &+)* $i#e#7a. easonably 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 (5! This means a corporation can enter into a oint venture with another person,

partnership or another corporation


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But a corporation cannot enter into a partnership contract

Pwe t ente int a $atnes"i$

: corporation cannot enter into partnerships with other corporations or withindividuals

E0ception: e0pressly allowed by statute or chartero Loint ventureso +imited partnerships (;# +aw!

*. T #e'lae #ii#en#s(#ection $!

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.

Any cash dividends due on delin/uent stock shall first be applied to the unpaid

balance on the subscription plus costs and e0penses, while stock dividends shall be

withheld from the delin/uent stockholder until his unpaid subscription is fully paid

Approval M voting re/uirement:

a! Approval of B82

b! *n case of stock dividend: *t shall be not be issued without the approval of

stockholders representing not less than two"thirds (5?$! of the outstanding capital

stock at a regular or special meeting duly called for the purpose.

+imitation on retention of surplus profits" #tock corporations are prohibited from

retaining surplus profits in e0cess of one hundred (&44=! percent of their paid"in

capital stock, e0cept:

a! when ustified by definite corporate e0pansion proects or programs approved by

the board of directors@ or

b! 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

c! when it can be clearly shown that such retention is necessary under special

circumstances obtaining in the corporation, such as when there is need for

special reserve for probable contingencies.

Stoc+ di%idends: distribution to stockholders of company9s own stock. 'orporate

profits or earnings are transferred to capital stock and shares of stock representing

the increase in capitaliCation are distributed. )ay be issued out of premium surplus.

o +imitation 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

hether or not there should be a distribution of dividends in whatever form, such

matters are always subect to the business udgment of the B82 and the courts

will not interfere with the former9s discretion e0cept:

o when tainted with bad faith

o when tainted with fraud

o when tainted with gross negligence


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o when profits accumulated are in e0cess of &44= of the corporations paid"in

capital stock unless e0empted

hen right to 2ividends -ests:

o ,eneral rule: as soon as the same have been lawfully declared by the B82,

becomes a debt owing to the #. 7o 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 be revoked prior to

actual issuance

ights of transferee to dividends D ight to dividends vests upon declaration so

whoever owns the stock at time or stockholders of record also owns the dividend.

#ubse/uent transfer of stock would not carry with it right to dividends

ecord date D The date on which a stockholder must be registered on a corporation9s

stock and transfer book in order to be entitled to a dividend or voting rights.

L. T ente int 4anae4ent 'nta't(#ection !

Approval and -oting e/uirement:

o Approval by the board of directors, and

o Approval by stockholders owning at least the maority of the outstanding capital

stock, or by at least a maority of the members of both the managing and the

managed corporation 7ote: if managing other corporations is the primary purpose, ratificatory vote is

not re/uired

o 5?$ vote re/uired when: (#1E'*A+ ;+E!

a. where a stockholder or stockholders representing the same interest of both the

managing and the managed corporations own or control more than one"third

(&?$! of the total outstanding capital stock entitled to vote of the managing

corporation@ or

b. where a maority of the members of the board of directors of the managing

corporation also constitute a maority of the members of the board of directors of

the managed corporation

-ationale for special rule: entering into a anageent contract is a de%iation

fro the ,eneral -ule that the board anages the corporation and that the board of

the anaging copany should de%ote its affairs to its own corporation

Term of management contract: 7o management contract shall be entered into for a

period longer than five years for any one term.

These provisions 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

#ervice contracts or operating agreements which relate to the e0ploration,

development, e0ploitation or utiliCation of natural resources may be entered into for

such periods as may be provided by the pertinent laws or regulations.


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)anagement contract D any contract whereby a corporation undertake to manage or

operate all or substantially all of the business of another corporation

*f managing a partnership or individual not a corporation, not covered

>. =ltaies a'ts(#ection !

2efinition of ultra%ires actsD These are acts which a corporation is not empowered to

do or perform because they are not based on the powers conferred by its A8* or by

the 'orporation 'ode on corporations in general, or because they are not necessary

or incidental to the e0ercise of the powers so conferred.

ule on ;ltravires acts of corporations D 7o 'orporation under this 'ode shall

possess or e0ercise any corporate powers e0cept those conferred by this 'ode or by

its articles of incorporation and e0cept such as are necessary or incidental to the

e0ercise of the powers so conferred.

J Based on two (5! principles:

&. 'orporation is a creature of law and has only such powers and privileges as aregranted by the #tate&

5. The doctrine upholds the duty of trust and obedience owed by the corporation9s

directors and officers to the #s

a. 2efense of ultra vires rests on the violation of trust or duty towards #s, and

should not be entertained where its allowance will do greater wrong to innocent $rd

parties

There are $ types of ;+TA"-*E# acts:

a. Acts beyond the powers of the corporation as stipulated in law or A8*

b. Acts or contracts entered in behalf of the corporation by persons w?o corporate

authority

: *n the absence of an authority from the board, no person , not even the

officers can validly bind the corporation

E0ception: 2octrine of apparent Authority@ *n 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

1 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 lawfulpurpose/s

Sec 3 par 11 allows every corporation the power to e!ercise such other powersas may "e essential or necessary to carry out the purpose/s in the #$%

&he corporation's powers depends on its purpose in the #$%

Since parties are entirely free to insert any num"er of purposes in its #$%(it follows that the e!tent 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)

%nstances where an act can or cannot "e reasona"ly implied from the purposesdue to poor draftsmanship or lac* of foresight of the drafters( the purpose

clause may "e reasona"ly stretched to accommodate the new and une!pected

situations( otherwise( a proper amendment of the #$% would "e necessary)


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authority to bind or ac/uiesced in the contract and accepted the benefits

therefrom, the corporation will be bound. (amireC v. 8rientalist!

c. Acts or contracts which are per se illegal.

i. This cannot be gi%en legal effect and are %oid

B;T in arden v. Benguet, #' upheld a patently void contract as betweenthe contracting parties. #' said that public policy is controlling in the grant of

mining rights. The violation of the prohibition against mining corporations

from owning stock of another corporation though illegal did not in any way

affect the contract. This violation can only be proceeded upon by way of a

criminal prosecution or by /uo warranto which can be maintained only by the

#tate. *nsofar as the parties are concerned, no civil wrong had been

committed between them, and if public wrong had been committed, then the

directors of both Balatoc and arden were the active inducers of that wrong.

Thus, since the contract has been performed on both sides and there is no

possibility of undoing what has been done, and though the corporate

contracts are illegal per se, when only the public or government policy orinterests are at stake and no private wrong is committed, the courts will leave

the parties as they are, in accordance with their original contractual

stipulations.

ii. /ltra 0ires 1cts which are not per se illegal are erely %oidable hence can be

ratified by SHs. (2iro%ano case)

*n the case of 1irovano v. 2ela ama, which involves the issue of

whether or not the donation by the corporation of the proceeds of the

insurance is an ultra"vires act, #' held that such donation is not ultra"vires.

#' said that it comes within the broad power under the A8* that the

'orporation may invest and GdealH with moneys of the company notimmediately re/uired. The word GdealH is broad enough to include any

manner of disposition.

6urthermore, assuming that it was ultra"vires, there was ratification by

the #s. 6inally, the donation was already consummated. The defense of

ultra"vires cannot be set"up against completed or consummated transactions.

6orm of atification:

a. E0press act of #(if act is by the Board! or Board(if act is by the

officers!

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

Effect?s of atification:

'ures the infirmity and makes it perfectly valid and enforceable,

18-*2E2 that it preudices no creditors and if it has been partially

e0ecuted and not merely e0ecutory


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Atrium v. 'A

Atrium )anagement 'orporation filed with T' action for collection of the

postdated checks issued by the i"cement 'orporation, though its signatories de

+eon, treasurer, and de las Alas, chairman of the corporation to a certain ET enry

and 'o which the latter endorsed to Atrium for rediscounting.

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

act.

An ultravires act is distinguished from illegal act, the former being voidable which

may be enforced by performance, ratification, or estoppel, while the latter is void and

cannot be validated. #' however, held de +eon negligent.

epublic of the 1hilippines vs. Acoe )ining 'o.

The company is estopped from denying liability on the ground that the board

resolution is ultravires. Assuming arguendo that the resolution is an ultra vires act,

the same is not void for it was approved not in contravention of law, customs, public

order and public policy. N*n this case, even if the setting up of a post office in themining camp is outside the e0press powers, it is necessary to promote the interest

and welfare of the corporationO

The term ultravires should be distinguished from an illegal act for the former is merely

voidable which may be enforced while the latter is void and cannot be validated.

eneral conse/uences of ultravires acts are as follows:

a! 'orporation may be dissolved under a /uo warranto proceeding but in most

cases, the court merely enoins the corporation from commission of the ultra

vires acts

b! 'ertificate of egistration may be suspended or revoked by #E'

c! 1arties to the ultravires contract if e0ecutory on both sides neither party can ask

for specific performance. ill be left as they are if the contract has been fullye0ecuted on both sides. *f one party has performed his part, the contract will be

enforced provided it is not illegal

d! 'ontract proceeding from an ultra"vires act is voidable

e! Any stockholder may bring either an individual or derivative suit to enoin a

threatened ultravires act or contract. *f act or contract has already been

performed, a derivative suit for damages may be filed against the directors, but

their liability will depend on whether they acted in good faith and with reasonable

diligence in entering into contracts. hen based on tort, cannot set"up the

defense of ultravires against inured party who had no knowledge that such was

ultravires

f! )ay become binding by the ratification of all stockholders unless third parties arepreudice thereby or unless the acts is illegal

Leal Cnse


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evocation or suspension of the certificate of registration by #E'

5. 8n the parties to the ultra"vires contract 1arties are left as they are and no rescission would lie here 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

$. 8n the rights of #tockholders A # can file an individual or derivative suit to enoin a threatened ultra viresact or contract or a derivative suit for damages if the contract has beenperformed +iability would depend on whether the contracting parties acted in 6 and withreasonable diligence@ an honest mistake would not give rise to liability *f action is based on tort, the #s cannot set up the defense of ultra viresagainst the inured party who had no knowledge that the corporation wasengaging in an act not included e0pressly or impliedly in its purpose clause

7apocor v. -era The issue in this case is whether or not the act of 71' in taking over #ea+ion9s stevedoring services is an ultra"vires act. #' held that it is not ultra"vires. 71' is empowered by its charter to undertakesuch services, it being reasonably necessary to the operation and maintenanceof the power plant. The ruling in Acoe )ining was upheld, where the company isnot restricted by its e0press powers as long as the act will promote the interestsand welfare of the corporation.

overnment of 1.*. v. El ogar1. ?7 el ogar is illegally owning and holding a business lot in e0cess of the reasonablere/uirements and in contravention of the 'orpo law that every corporation has the powerto purchase hold lease real property as reasonable and necessary re/uired for thetransaction of the lawful business

: The law e0pressly declares that corporations may ac/uire such real estate as isreasonably necessary to enable them to carry out the purposes for which they werecreated@ and we are of the opinion that the owning of a business lot upon which toconstruct and maintain its offices is reasonably necessary to a building and loanassociation such as the respondent was at the time this property was ac/uired. Adifferent ruling on this point would compel important enterprises to conduct their businesse0clusively in leased offices J a result which could serve no useful end but would retardindustrial growth and be inimical to the best interests of society. e are furthermore ofthe opinion that, inasmuch as the lot referred to was lawfully ac/uired by the respondent,it is entitled to the full beneficial use thereof. 7o legitimate principle can discovered whichwould deny to one owner the right to enoy his (or its! property to the same e0tent that isconceded to any other owner.!. ?7 el ogar has engaged in activities foreign to the purposes for which the

corporation was created and not reasonably necessary to its legitimate ends, specifically:(&! the administration of the offices in the El ogar building not used by the respondentitself and the renting of such offices to the public@ (5! the administration and managementof properties belonging to delin/uent shareholders of the association@ ($! themanagement of some parcels of improved real estate situated in )anila not undermortgage to it, but owned by shareholders, and has held itself out by advertisement asprepared to do so: (&! The activities here criticiCed clearly fall within the legitimate powers of therespondent, as shown in what we have said above relative to the second cause of action.This matter will therefore no longer detain us. *f the respondent had the power to ac/uire


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the lot, construct the edifice and hold it beneficially, as there decided, the beneficialadministration by it of such parts of the building as are let to others must necessarily belawful.(5! The case for the government supposes that the only remedy which the respondenthas in case of default on the part of its shareholders is to proceed to enforce collection ofthe whole loan in the manner contemplated in section &F of the 'orporation +aw. *t willbe noted, however, that, according to said section, the association may treat the wholeindebtedness as due, Pat the option of the board of directors,P and this remedy is notmade e0clusive. e see no reason to doubt the validity of the clause giving theassociation the right to take over the property which constitutes the security for thedelin/uent debt and to manage it with a view to the satisfaction of the obligations due tothe debtor than the immediate enforcement of the entire obligation, and the validity of theclause allowing this course to be taken appears to us to be not open to doubt.($! The practice described in the passage above /uoted from the agreed facts is in ouropinion unauthoriCed by law. The administration of property in the manner described ismore befitting to the business of a real estate agent or trust company than to thebusiness of a building and loan association. The practice to which this criticism is directedrelates of course solely to the management and administration of properties which arenot mortgaged to the association. The circumstance that the owner of the property mayhave been re/uired to subscribe to one or more shares of the association with a view to

/ualifying him to receive this service is of no significance. *t is a general rule of law thatcorporations possess only such e0press powers. The management and administration ofthe property of the shareholders of the corporation is not e0pressly authoriCed by law,and we are unable to see that, upon any fair construction of the law, these activities arenecessary to the e0ercise of any of the granted powers. The corporation, upon the pointnow under the criticism, has clearly e0tended itself beyond the legitimate range of itspowers. But it does not result that the dissolution of the corporation is in order, and it willmerely be enoined from further activities of this sort.

+. ?7 the royalty paid to the founder of el ogar, Antonio )elian, as compensation forhis services rendered by him during the early stages of the organiCation of thecorporation, is unconscionable, e0cessive, and thus necessitates dissolution: 7o possible doubt e0ists as to the power of a corporation to contract for services

rendered and to be rendered by a promoter in connection with organiCing andmaintaining the corporation. *t is true that contracts with promoters must be characteriCedby good faith@ but could it be said with certainty, in the light of facts e0isting at the timethis contract was made, that the compensation therein provided was e0cessiveQ *f theamount of the compensation now appears to be a subect of legitimate criticism, this mustbe due to the e0traordinary development of the association in recent years. *f the )eliancontract had been clearly ultra vires J which is not charged and is certainly untrue J itscontinued performance might conceivably be enoined in such a proceeding as this@ but ifthe defect from which it suffers is mere matter for an action because )elian is not a party.*t is rudimentary in law that an action to annul a contract cannot be maintained without

oining both the contracting parties as defendants. )oreover, the proper party to bringsuch an action is either the corporation itself, or some shareholder who has an interest toprotect.

(. ?7 el ogar had abused its franchise in issuing special shares, which is alleged to beillegal and inconsistent with the plan and purposes of building and loan associations,andthat these are held by well"to"do people purely for investment purposes and not by wage"earners for savings: The ground for supposing the issuance of the PspecialP shares to be unlawful is thatspecial shares are not mentioned in the 'orporation +aw as one of the forms of securitywhich may be issued by the association. ;pon e0amination of the nature of the specialshares in the light of American usage, it will be found that said shares are precisely thesame kind of shares that, in some American urisdictions, are generally known as


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: *t is insisted in the brief of the Attorney"eneral that the maintenance of reserve fundsis unnecessary in the case of building and loan associations, and at any rate the keepingof reserves is inconsistent with section &FF of the 'orporation +aw. ;pon carefulconsideration of the /uestions involved we find no reason to doubt the right of therespondent to maintain these reserves. *t is true that the corporation law does note0pressly grant this power, but we think it is to be implied. *t is a fact of commonobservation that all commercial enterprises encounter periods when earnings fall belowthe average, and the prudent manager makes provision for such contingencies. Toregard all surplus as profit is to neglect one of the primary canons of good businesspractice. Building and loan associations, though among the most solid of financialinstitutions, are nevertheless subect to vicissitudes. 6luctuations in the dividend rate arehighly detrimental to any fiscal institutions, while uniformity in the payments of dividends,continued over long periods, supplies the surest foundations of public confidence.

)oreover, it is said that the practice of the association in declaring regularly a &4 per centdividend is in effect a guaranty by the association of a fi0ed dividend which is contrary tothe intention of the statute. The government insists upon an interpretation of section &FFof the 'orporation +aw that is altogether too strict and literal. 6rom the fact that thestatute provides that profits and losses shall be annually apportioned among theshareholders 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 profitsand losses shall be determined by the board of directors: and this means that they shalle0ercise the usual discretion of good businessmen in allocating a portion of the annualprofits to purposes needful to the welfare of the association. The law contemplates thedistribution of earnings and losses after other legitimate obligations have been met. 8urconclusion is that the respondent has the power to maintain the reserves criticiCed in theeleventh and twelfth counts of the complaint@ and at any rate, if it be supposed that thereserves referred to have become e0cessive, the remedy is in the hands of the+egislature. *t is no proper function of the court to arrogate to itself the control ofadministrative matters which have been confided to the discretion of the board ofdirectors. The causes of action under discussion must be pronounced to be without merit.

2. ?n el ogar 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 e0pressly declaring that loans may be made by theseassociations solely for the purpose of building homes. 8n the contrary, the building ofhomes is mentioned in section && of the 'orporation +aw as only one among severalends which building and loan associations are designed to promote. 6urthermore, section&F& of the 'orporation +aw e0pressly authorities the Board of directors of the associationfrom time to time to fi0 the premium to be charged. *n the brief of the plaintiff a number ofe0cerpts from te0tbooks and decisions have been collated in which the idea is developedthat the primary design of building and loan associations should be to help poor people toprocure homes of their own. This beneficent end is undoubtedly served by theseassociations, and it is not to be denied that they have been generally fostered with thisend in view. But in this urisdiction at least the lawmaker has taken care not to limit theactivities of building and loan associations in an e0clusive manner, and the e0ercise of

the broader powers must in the end approve itself to the business community.5.?n the el ogar charter may be revoked because various loans now outstandinghave been made by the respondent to corporations and partnerships, and that theseentities have in some instances subscribed to shares in the respondent for the solepurpose of obtaining such loans, and that some of these uridical entities becameshareholders merely for the purpose of /ualifying themselves to take loans from theassociation.: the 'orporation +aw declares that Pany personP may become a stockholder in buildingand loan associations. The word PpersonP appears to be here used in its general sense,


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and there is nothing in the conte0t to indicate that the e0pression is used in the restrictedsense of both natural and artificial persons, as indicated in section 5 of the Administrative'ode. e would not say that the word PpersonP or persons,P is to be taken in this broadsense in every part of the 'orporation +aw. 6or instance, it would seem reasonable tosay that the incorporators of a corporation ought to be natural persons, although insection % it is said that five or more PpersonsP, although in section % it is said that five ormore Ppersons,P not e0ceeding fifteen, may form a private corporation. But the conte0tthere, as well as the common sense of the situation, suggests that natural persons aremeant. hen it is said, however, in section &$, that Pany personP may become astockholder in a building and loan association, no reason is seen why the phrase may notbe taken in its proper broad sense of either a natural or artificial person. At any rate the/uestion whether these loans and the attendant subscriptions were properly madeinvolves a consideration of the power of the subscribing corporations and partnerships toown the stock and take the loans@ and it is not alleged in the complaint that they werewithout power in the premises. 8f course the mere motive with which subscriptions aremade, whether to /ualify the stockholders to take a loan or for some other reason, is ofno moment in determining whether the subscribers were competent to make thecontracts. The result is that we find nothing in the allegations of the si0teenth cause ofaction, or in the facts developed in connection therewith, that would ustify us in grantingthe relief.

9.?n el ogar, in disposing of real estate purchased in the collection of defaulted loans,on credit at first and then sold and mortgaged to el ogar to secure payment of thepurchase price, had incurred several outstanding loans, and that that the persons andentities to which said properties are sold under the condition charged are not members orshareholders nor are they made members or shareholders of the defendant.: This part of the complaint is based upon a mere technicality of bookkeeping. Thecentral idea involved in the discussion is the provision of the 'orporation +aw re/uiringloans to be stockholders only and on the security of real estate and shares in thecorporation, or of shares alone. *t seems to be supposed that, when the respondent sellsproperty ac/uired at its own foreclosure sales and takes a mortgage to secure thedeferred payments, the obligation of the purchaser is a true loan, and hence prohibited.But in re/uiring the respondent to sell real estate which it ac/uires in connection with the

collection of its loans within five years after receiving title to the same, the law does notprescribe that the property must be sold for cash or that the purchaser shall be ashareholder in the corporation. #uch sales can of course be made upon terms andconditions approved by the parties@ and when the association takes a mortgage to securethe deferred payments, the obligation of the purchaser cannot be fairly described asarising out of a loan. 7or does the fact that it is carried as a loan on the books of therespondent make it a loan on the books of the respondent make it a loan in law. Thecontention of the overnment under this head is untenable.

I4$lie# Ne'essay Pwes: all acts other than those specified in #ec $%" and in other special provisions would be ultravires

8'e$tin: those which are: necessary or in'i#entalto the e8e'ise f t"e $wesso conferred (!, or essential or ne'essayto carry out its $3$seor $3$sesas stated in the A8*.

($F!

1resumption that a corporation can act within its powers and when a contract is not on its facenecessarily beyond its authority, it will, in the absence of proof to the contrary, presumed to bevalid.


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#ec $%(&&!: corporations have the power and capacity to e0ercise such other powersas may be essential or necessary to carry out its purpose(s! as provided for in the

A8*o estated: the management of a corporation has discretionary authority, in the

absence of e0plicit restrictions, to enter into contracts or transactions deemedreasonably necessary or incidental to its business purposes.

In'i#ental6In"eent Pwes

#ec 5: powers, attributes, and properties e0pressly authoriCed by law or in'i#entt its e8isten'e

*ncidental powers: those that attach to a corporation at the moment of its creationwithout regard to its e0press powers or particular primary purpose, and isinherent in it as a legal entity

E0amples: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

1owers that go into the very nature and e0tent of a corporation9s uridical entitycannot be presumed to be incidental or inherent powers

CONTROL AND ?ANA@?NT

T"ee leels f 'ntl7(&! board of directors or trusteesR formulate the corporate policies(5! corporate officersR e0ecute the policies($! stockholders or membersR have residual powers over fundamental corporate changes

Ratinale f 'entalie# 4anae4ent one of the advantageous features of the corporationJacting through centraliCedmanagement

the congruence of authority and responsibility in the same person, committee, or boardalways promote efficiency

W" e8e'ises '$ate $wes

1. %a# f #ie'ts(for stock corporations! or t3stees(for non"stock corporations!

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 6, and not in defraud of creditors or abusive of the

rights of minority #s : 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 E0ception: with respect to $rdpersons, actions of the corporation even without formal board

approval may still bindS (e0. 1roof of usage, ac/uiescence of the board despite knowledge ofthe act, receipt of benefits, implied ratification, estoppel

Pi4ay %e'tie f t"e Ba#


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primary obligation of directors is to seek the ma0imum amount of profits for the corporation,and characteriCed the position as a position of trusto in case director9s 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 and hence the property interest

of the #s

BOARDOFDIRCTORS

A. A3t"ity: Re$sity f '$ate $wes(#ection 5$!

The board of directors or trustees are responsible for corporate policies and general

management of the business affairs of the corporation

;nless otherwise provided in the 'orporation 'ode, the Board of 2irectors control

and e0ercise:

o the corporate powers of corporation

o all business conducted,

o all property of such corporation

The board e0ercises almost all corporate powers, lays down all business policies and

is responsible for the efficiency of management. The stockholders have no right to

interfere with the board9s e0ercise of its powers and functions e0cept where the law

e0pressly gives them the final say, like in cases of removal of a director, amendment

of articles of incorporation, and other maor changes. Their resolutions on matters

other than the e0ceptions are legally not effective nor binding and may be treated as

merely advisory or may be totally disregarded. G;nless 8therwise 1rovidedH D may pertain to instances where a management

contract is entered hence corporate posers are e0ercised by the managing company

and not the board

The directors or trustees shall not act individually nor separately but as a body in a

lawful meeting. 'ontracts entered into without a formal board resolution does not

bind the corporation e0cept when maority of the board has knowledge of the contract

and the contract benefited the corporation.

2irectors owe their duties to corporation as a whole rather than to individual

shareholders of classes of shareholders

Ra4ie Oientalist C Fenan#e8rientalist 'o engaged in the theater business, desired to be the e0clusive agent of amireC,

who is based in 1aris, for two film outfitsJclair 6ilms and )ilano films. Through the active

involvement and negotiations of amon GEl 1residenteH 6ernandeC, a director of 8rientalist and

also its treasurer, with amireC, 8rientalist was able to secure an offer, the terms of which were

acceptable to the Board as well as to the stockholders. *t appears that this acceptance of the

terms of the offer was decided during an informal meeting of the board, and conveyed to amireC

in two letters signed only by 6ernandeC, both in his individual and his capacity as treasurer of


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8rientalist. *t 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 had already been delivered

to the company. Two stockholders meetings were organiCed, the first adopted a resolution

approving the action of the board on the offer, the second raising the contingency of the lack of

funds and the proviso that the four officers involved, including 6ernandeC would continue

importing the films using their own funds. amireC sues 8rientalist and 6ernandeC for what is dueon the contract. T' ruled 8riental as the principal debtor while 6ernandeC is subsidiarily liable.

: (&! it was incumbent upon the corporation if it desired to /uestion the authority of 6ernandeC to

bind it, to deny the due e0ecution of the contract made by him. *n pleading lack of authority of an

officer of a corporation to bind the latter through a contract e0ecuted by the former is a special

defense which should be specially pleaded and the answer setting up this defense must be

verified under oath. The denial shall be specific, and a mere attack on the instrument in general

terms is insufficient, even though under oath. *n dealing with corporations the public at large is

bound to rely to a large e0tent upon outward appearances. *f a man is found acting for a

corporation with the e0ternal indicia of authority, any person not having notice of want of

authority, may usually rely upon those appearances, and if it be found that the directors hadpermitted the agent to e0ercise that authority and thereby held him out as a competent person to

bind the corporation, or had ac/uiesced in a contract and retained the benefit supposed to have

conferred by it, the corporation will be bound, notwithstanding the actual authority may never

have been granted. The public is not supposed nor re/uired to know the transactions which

happen around the table where the corporate board of directors or the stockholders are from time

to time convoked. *t is therefore reasonable, in a case where an officer of a corporation has made

a contract in its name, that the corporation should be re/uired, is it denies his authority, to state

such defense in his answer. This failure of 8rientalist to make any issue in its answer with regard

to the authority of amon 6ernandeC to bind it and its failure to deny specifically under oath the

genuineness of the due e0ecution of the contracts sued upon, have the effect of eliminating the

/uestion of his authority from the case.

(5! 6ernandeC had no authority to bind the corporation. 'orporate powers is e0ercised by the

board of directors, and is recogniCed in the bylaws of 8rientalist. 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 before contractual liability can be fi0ed@ the board can create liability, like an

individual, by other means than by formal e0pression of its will. *t may be established without

reference to official records of the proceedings of the board, by proof of the usage to which the

company had permitted to grow up in the business, and of the ac/uiescence of the board

charged with the duty of supervising and controlling the company9s business. 6ernandeC was the

most active in the effort to secure the films. The negotiations were conducted by him with the

knowledge and consent of the other members of the board. The board, before the financialinability of the corporation was revealed, had already recogniCed the contracts as being in

e0istence and had proceeded to take the steps necessary to utiliCe the films, particularly the

publication of announcements in the papers. *n light of this, the contracts in /uestion were thus

inferentially approved by the board and that the company is bound unless the subse/uent failure

of the stockholders to approve the same had the effect of abrogating the liability created.


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($! the action of the stockholders, whatever its character, must be ignored. #tockholders or

members resolutions dealing with matters other than the e0ceptions are not legally effective nor

binding on the board, and may be treated as merely advisory or may even be completely

disregarded. The functions of the stockholders of a corporation are, of a limited nature. The

theory is that the stockholders may have 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 e0ercising special powers defined by law. Thus contracts between a corporation and

third persons must be made by the directors and not by the stockholders. The corporation is

represented by the directors and not the stockholders. Third persons can have little or no

information as to what occurs in corporate meetings, and must necessarily rely on e0ternal

manifestations of corporate consent. The integrity of commercial transactions can only be

maintained by holding the corporation strictly to the liability fi0ed upon in by its agents in

accordance with law. *f a corporation knowingly permits one of its officers or any other person to

do acts within the scope of an apparent authority, and thus hold him out to the public as

possessing the power to do these acts, the corporation will be estopped from denying such

authority as against anyone who has dealt with the corporation in 6.

8$etael T3s CA an# Eean Ailines.6: >orean Airlines, through Atty. Aguinaldo, filed a 'omplaint against E0pertravel with the T'for the collection of the principal amount of 15%4,&4.44, plus attorney9s fees and e0emplarydamages. The verification and certification against forum shopping was signed by Atty.

Aguinaldo, who indicated therein that he was the resident agent and legal counsel of >A+ andhad caused the preparation of the complaint. E0pertravel filed a motion to dismiss the complainton the ground that Atty. Aguinaldo was not authoriCed to e0ecute the verification and certificate ofnon"forum shopping as re/uired by the ules of 'ourt. >A+ opposed the motion, contending that

Atty. Aguinaldo was its resident agent and was registered as such with the #ecurities andE0change 'ommission (#E'! as re/uired by the 'orpo'ode, and was further alleged that Atty.

Aguinaldo was also the corporate secretary of >A+. Atty. Aguinaldo also claimed that he hadbeen authoriCed to file the complaint through a resolution of the >A+ Board of 2irectors approved

during a special meeting held on Lune 5, &333, wherein the board of directors conducted aspecial teleconference on Lune 5, &333, which he and Atty. Aguinaldo attended. *t was alsoaverred that in that same teleconference, the board of directors approved a resolution authoriCing

Atty. Aguinaldo to e0ecute the certificate of non"forum shopping and to file the complaint. #uk>yoo >im also alleged, however, that the corporation had no written copy of the aforesaidresolution. T' denies )T2, 'A affirms.

: *t is settled that the re/uirement to file a certificate of non"forum shopping is mandatory andthat the failure to comply with this re/uirement cannot be e0cused. The certification is a peculiarand personal responsibility of the party, an assurance given to the court or other tribunal thatthere are no other pending cases involving basically the same parties, issues and causes ofaction. ence, the certification must be accomplished by the party himself because he has actualknowledge of whether or not he has initiated similar actions or proceedings in different courts ortribunals. Even his counsel may be unaware of such facts. ence, the re/uisite certificatione0ecuted by the plaintiff9s counsel will not suffice.

*n a case where the plaintiff is a private corporation, the certification may be signed, for and onbehalf of the said corporation, by a specifically authoriCed person, including its retained counsel,who has personal knowledge of the facts re/uired to be established by the documents. Thecorporation, such as the petitioner, has no powers e0cept those e0pressly conferred on it by the'orporation 'ode and those that are implied by or are incidental to its e0istence. *n turn, acorporation e0ercises said powers through its board of directors and?or its duly"authoriCed officersand agents. 1hysical acts, like the signing of documents, can be performed only by natural


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persons duly"authoriCed for the purpose by corporate by"laws or by specific act of the board ofdirectors.

The respondent9s allegation that its board of directors conducted a teleconference on Lune 5,&333 and approved the said resolution (with Atty. Aguinaldo in attendance! is incredible, given theadditional fact that no such allegation was made in the complaint. *f the resolution had indeedbeen approved on Lune 5, &333, long before the complaint was filed, the respondent shouldhave incorporated it in its complaint, or at least appended a copy thereof. The respondent failedto do so. *t was only on Lanuary 5F, 5444 that the respondent claimed, for the first time, thatthere was such a meeting of the Board of 2irectors held on Lune 5, &333@ it even represented tothe 'ourt that a copy of its resolution was with its main office in >orea, only to allege later that nowritten copy e0isted. *t was only on )arch %, 5444 that the respondent alleged, for the first time,that the meeting of the Board of 2irectors where the resolution was approved was held %iateleconference.

orse still, it appears that as early as 3anuary 456 4777, Atty. Aguinaldo had signed a#ecretary9s?esident Agent9s 'ertificate alleging that the board of directors held a teleconferenceon 3une "86 4777. 7o such certificate was appended to the complaint, which was filed on#eptember %, &333. )ore importantly, the respondent did not e0plain why the said certificate wassigned by Atty. Aguinaldo as early as Lanuary 3, &333, and yet was notariCed one year later (on

Lanuary &4, 5444!@ it also did not e0plain its failure to append the said certificate to the complaint,as well as to its 'ompliance dated )arch %, 5444. *t was only on Lanuary 5%, 544& when therespondent filed its comment in the 'A that it submitted the #ecretary9s?esident Agent9s'ertificateN$4Odated Lanuary &4, 5444.

The 'ourt is, thus, more inclined to believe that the alleged teleconference on Lune 5, &333never took place, and that the resolution allegedly approved by the respondent9s Board of2irectors during the said teleconference was a mere concoction purposefully foisted on the T',the 'A and this 'ourt, to avert the dismissal of its complaint against the petitioner.

Citi%an NA C"3a.-eleC deposited his unfunded personal checks with his current account with the petitioner. Butprior to depositing said checks, he would present his personal checks to a bank officer asking thelatter to have his personal checks immediately credited as if it were a cash deposit and at the

same time assuring the bank officer that his personal checks were fully funded. aving alreadygained the trust and confidence of the officers of the bank because of his past transactions, thebankIs officer would always accommodate his re/uest. After his re/uests are granted which isdone by way of the bank officer affi0ing his signature on the personal checks, private respondent'resencio -eleC would then deposit his priorly approved personal checks to his current accountand at the same time withdraw sums of money from said current account by way of petitionerbankIs managerIs check. 1rivate respondent would then deposit petitioner bankIs managerIscheck to his various current accounts in other commercial banks to cover his previously depositedunfunded personal checks with petitioner bank. 7aturally, petitioner bank and its officers neverdiscovered that his personal check deposits were unfunded. 8n the contrary, it gave thepetitioner bank the false impression that private respondentIs construction business was doingvery well and that he was one big client who could be trusted. This deceptive and criminalscheme he did every banking day without fail from #eptember , &3F up to )arch &&, &3F%. The

amounts that he was depositing and withdrawing during this period (#eptember , &3F to )arch&&, &3F%! progressively became bigger. *t started at 1%,444.44 on #eptember , &3F and on)arch &&, &3F% the amount of deposit and withdrawal already reached over 1$,444,444.44. Atthis point in time ()arch &&, &3F%!, the private respondent 'resencio -eleC presumably alreadyfeeling that sooner or later he would be caught and that he already wanted to cash in on his evilscheme, decided to run away with petitionerIs money. 8n )arch &&, &3F%, he deposited variousunfunded personal checks totaling 1$,43,444.44 and re/uested a bank officer that the same becredited as cash and after securing the approval of said bank officer, deposited his variouspersonal checks in the amount of 1$,43,444.44 with his current account and at the same timewithdrew the sum of 1$,5,444.44 in the form of petitionerIs managerIs check. *nstead of using
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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the proceeds of his withdrawals to cover his unfunded personal checks, he ran away withpetitioner bankIs money. Thus, private respondent 'resencio -eleCIs personal checks depositedwith petitioner bank on )arch &&, &3F% in the total aggregate amount of 1$,43,444.44 bounced.The checks bounced after said personal checks were made the substantial basis of hiswithdrawing the sum of 1$,5,444.44 from his current account with petitioner bank. 'itibanksues on the grounds of violation of B1 55. Before pre"trial conference, and in pursuance of theauthority granted to him by petitioner bankIs by"laws, its E0ecuting 8fficer appointed illiam .6erguson, a resident alien, as its Attorney"in"6act empowering the latter, among other things, torepresent 'itibank in court cases such as the present case. *n turn, illiam . 6ergusone0ecuted a power of attorney in favor of L.1. arcia M Associates (petitioner bankIs counsel! torepresent petitioner bank in the pre"trial conference before the lower court.*: There are thus two issues in this case. 6irst, whether a resolution of the board of directors of acorporation is always necessary for granting authority to an agent to represent the corporation incourt cases.: *n the corporate hierarchy, there are three levels of control: (&! the board of directors, which isresponsible for corporate policies and the general management of the business affairs of thecorporation@ (5! the officers, who in theory e0ecute the policies laid down by the board, but inpractice often have wide latitude in determining the course of business operations@ and ($! thestockholders who have the residual power over fundamental corporate changes, likeamendments of the articles of incorporation. owever, ust as a natural person may authoriCe

another to do 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.

*t is clear that corporate powers may be directly conferred upon corporate officers or agents bystatute, the articles of incorporation, the by"laws or by resolution or other act of the board ofdirectors. *n addition, an officer who is not a director may also appoint other agents when soauthoriCed by the by"laws or by the board of directors. #uch are referred to as e0press powers.There are also powers incidental to e0press powers conferred. *t is a fundamental principle in thelaw of agency that every delegation of authority, whether general or special, carries with it, unlessthe contrary be e0press, implied authority to do all of those acts, naturally and ordinarily done insuch cases, which are reasonably necessary and proper to be done in order to carry into effectthe main authority conferred.

#ince the by"laws are a source of authority for corporate officers and agents of the corporation, aresolution of the Board of 2irectors of 'itibank appointing an attorney in fact to represent andbind it during the pre"trial conference of the case at bar is not necessary because its by"lawsallow its officers, the E0ecuting 8fficer and the #ecretary 1ro"Tem, to e0ecute a power ofattorney to a designated bank officer, illiam . 6erguson in this case, clothing him withauthority to direct and manage corporate affairs.

#ince paragraph UU* (of the by"laws! specifically allows 6erguson to delegate his powers inwhole or in part, there can be no doubt that the special power of attorney in favor, first, of L.1.arcia M Associates and later, of the bankIs employees, constitutes a valid delegation of6ergusonIs e0press power (under paragraph U-** above! to represent petitioner bank in the pre"trial conference in the lower court.

*: The second issue is whether the by"laws of the petitioner foreign corporation which haspreviously been granted a license to do business in the 1hilippines, are effective in this

urisdiction. *f the by"laws are valid and a board resolution is not necessary as petitioner bankclaims, then the declaration of default would have no basis.

: A careful reading of the #ec % of 'orpo 'ode would show that a corporation can submit itsby"laws, prior to incorporation, or within one month after receipt of official notice of the issuanceof its certificate of incorporation by the #E'. hen the third paragraph of the above provisionmentions Pin all casesP, it can only refer to these two options@ i.e., whether adopted prior to


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incorporation or within one month after incorporation, the by"laws shall be effective only upon theapproval of the #E'. But even more important, said provision starts with the phrase PEverycorporation formed under this 'odeP, which can only refer to corporations incorporated in the1hilippines. ence, #ection %, in so far as it refers to the effectivity of corporate by"laws, appliesonly to domestic corporations and not to foreign corporations. 8n the other hand, #ection &5 ofthe same 'ode re/uires that a foreign corporation applying for a license to transact business inthe 1hilippines must submit, among other documents, to the #E', a copy of its articles ofincorporation and bylaws, certified in accordance with law. ;nless these documents aresubmitted, the application cannot be acted upon by the #E'. #ince under #ec &5% of 'orpo 'odethe #E' will grant a license only when the foreign corporation has complied with all there/uirements of law, it follows that when it decides to issue such license, it is satisfied that theapplicantIs by"laws, among the other documents, meet the legal re/uirements. This, in effect, isan approval of the foreign corporationIs by"laws. *t may not have been made in e0press terms,still it is clearly an approval. Therefore, petitioner bankIs by"laws, though originating from a foreign

urisdiction, are valid and effective in the 1hilippines.

Bye-R8as CA. (idden -alley Apocalypse 7ow case!.The corporation, eirs of Eugenia o0as *nc, was established to engage in agriculture to developthe properties inherited from Eugenia o0as and Eufroncio o0as, which includes the land uponwhich the idden -alley #prings esort was put up, including various improvements thereon,using corporate funds (used as site for filming Apocalypse 7ow!. The A8* of eirs *nc wasamended for this purpose. eirs *nc claims that Boyer"o0as and uillermo o0as had been inpossession of the various properties and improvements in the resort and only upon the toleranceof the corporation. *t was alleged that they committed acts that impeded the corporation9se0pansion and normal operation of the resort. They also did not comply with court and regulatoryorders, and thus the corporation adopted a resolution authoriCing the eectment of thedefendants. T' grants. 'A affirms. Boyer and o0as contend that, being #s, their possession ofthe properties of the corporation must be respected in view of their ownership of an ali/uotportion of all properties of the corporation.

: egarding properties owned by the corporation, the # of uanCon case says that Gpropertiesregistered in the name of the corporation are owned by it as an entity separate and distinct from

its members. hile shares of stock constitute personal property, they do not represent property ofthe corporation. A share of stock only typifies an ali/uot part of the corporation9s property, or theright to share in its proceeds to that e0tent when distributed according to law and e/uity, but itsholder is not the owner of any part of the capital of the corporation, nor is he entitled to thepossession of any definite portion of its property or assets. The # is not a co"owner or tenant incommon of the corporate property.

The corporation has a personality distinct and separate from its members and transacts businessonly through its officers or agents. hatever authority these officers or agents may have derivedfrom the board or other governing body, unless conferred by the charter of the corporation itself.*n this case the elder o0as who then controlled the management of the corporation, being themaority #, consented to the petitioner9s use and stay within the properties. The Board did notobect and were allowed to stay until it adopted a resolution to the effect of authoriCing moves to

eect them. #ince their stay was merely by tolerance, in deference to the wishes of the maority# who controlled the corporation, when o0as died his actions cannot bind the companyforever. There is no provision in the by"laws or any other resolution authoriCing their continuedstay.

Pe'3lia Aen'y Rle f t"e %a#


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in a manner of speaking, the board acts as an agent of the corporation, and is bound by therules applying to agency relationshipo although the board is an agent of the corporation, since the principal is a mere uridical

concept, it realistically is not in a position to countermand the decisions of its agento unlike in an ordinary principal"agent relationship, the corporate principal does not really

have its own mind to allow it to decide matters for itself

o the board stands both as an agent of the corporation, and the very personification of thecorporation in the commercial and legal world

board has sole power to decide whether a corporation could sue, purchase or sell property,enter into a contract, or perform any other act

# resolutions on matters other than the e0ceptionsR not legally effective nor binding on theboard@ may be treated as merely advisory (amireC case!

: to the # go the profits, to the board goes the management for educational institutions:

B. Re


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There is clear indication that to be a director, what is material is legal title and not

beneficial ownership

ith the e0ecution of the voting trust agreement, +ee and +acdao were divested of

their legal title to their shares hence can no longer be directors and are no longer

corporate officers.

Because of this, they are not authoriCed to receive summons

e/uirements?2is/ualifications:

o esidence (#ection 5$! " a maority of the directors or trustees of all corporations

organiCed under this 'ode must be residents of the 1hilippines

o 7ationality no re/uirement for citiCenship of a director or trustee so even an alien

may be elected as such e0cepts in business activities totally closed to aliens

o 2is/ualification of directors, trustees or officers (#ection 5!:

'onvicted by final udgment of an offense punishable by imprisonment for a

period e0ceeding si0 (%! years, or

-iolation of this 'ode committed within five (! years prior to the date of his

election or appointment By laws may provide for additional /ualifications?dis/ualifications as long as

such additional /ualifications?dis/ualifications shall not modify re/uirements

as prescribed in the corporation code or be in conflict with such prescribed

re/uirements

Term:

o 2irectors D shall hold office for & year. owever, incumbent directors shall

continue to be directors?trustees as long as their successors have not been

elected and /ualified (#ection 5$!

C. ,w ele'te#(#ection 5!

)anner of election:

o There must be present in person or by representative maority of the outstanding

capital stock ? member

o *n any form@ or must be by ballot when re/uested by any voting stock holder or

member

o -oting may be in person or by pro0y

At all elections of directors or trustees, there must be present owners of a maority of

the outstanding capital stock, or if there be no capital stock, a maority of the

members entitled to vote.

Every stockholder entitled to vote shall have the right to vote the number of shares of

stock standing, at the time fi0ed in the by"laws, in his own name on the stock booksof the corporation, or where the by"laws are silent, at the time of the election

Time to determine voting right

o As per share standing in one9s name at the time fi0ed by the By"+aws

o here By"laws silent, at time of election

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