5. Corporate Powers

5. Powers of Corporations; Incidental Powers; Ultra Vires Doctrine

R.A. No. 11232 refers to the Revised Corporation Code of the Philippines. It contains provisions related to the powers of corporations, incidental powers, and the Ultra Vires Doctrine. These sections provide guidelines and regulations for corporate activities and ensure that corporations operate within the scope of their authority.

R.A. No. 11232, Sections 35-44

TITLE IV

POWERS OF THE CORPORATIONS

Section 35. Corporate Powers and Capacity.¹ - Every corporation incorporated under this Code has the power and capacity:

(a) To sue and be sued in its corporate name; (b) To have perpetual existence unless the certificate of incorporation provides otherwise; (c) To adopt and use a corporate seal; (d) To amend its articles of incorporation in accordance with the provisions of this Code; (e) To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the same in accordance with this Code; (f) In case of stock corporations, to issue or 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 nonstock corporation; (g) 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; (h) To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons; (i) To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation shall give donations in aid of any political party or candidate or for purpose s of partisan political activity; (j) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees; and (k) 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.

Section 36. Power to Extend or Shorten Corporate Term.² - 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 or members representing at least two-thirds (2/3) of the outstanding capital stock or of its membrs. Written notice of the proposed action and the time and place of the meeting shall be sent to the stockholders or members at their respective place of residence as shown in the books of the corporation, and must be deposited to the addressee in the post office with postage prepaid, served personally, or when allowed in the bylaws or done with the consent of the stockholder, sent electronically in accordance with the rules and regulations of the Commission on the use of electronic data messages. In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code.

Section 37. Power to increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness.³ - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and by two-thirds (2/3) of the outstanding capital stock at a stockholders' meeting duly called for the purpose. Written notice of the time and place of the stockholders' meeting and the purpose for said meeting must be sent to the stockholders at their places of residence as shown in the books of the corporation served on the stockholders personally, or through electronic means recognized in the corporation's bylaws and/or the Commission's rules as a valid mode for service of notices.

A certificate must be signed by a majority of the directors of the corporation and countersigned by the chairperson and secretary of the stockholders' meeting, setting forth:

(a) That the requirements of this section have been complied with; (b) The amount of the increase or decrease of the capital stock; (c) In case of 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 addresses of the persons subscribing, the amount of capital stock or number of shares of no-par stock subscribed by each, and the amount paid by each on the subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend therefor authorized; (d) Any bonded indebtedness to be incurred, created ot increased; (e) The amount of stock represented at the meeting; and (f) The vote authorizing the increase or decrease of capital stock, or incurring, creating or increasing of 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 Commission and where appropriate, of the Philippine Competition Commission. The application with the Commission shall be made within six (6) months from the date of approval of the board of directors and stockholders, which period may be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the corporation and filed with the Commission and attached to the original articles of incorporation. The increase or decrease of capital stock or the incurring, creating or increasing of bonded indebtedness shall take effect upon approval by the Commission and issuance by the Commission of its certificate of filing: Provided, That the Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by a 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 percent (25%) of the increase in capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-five percent (25%) of the subscription, has been transferred to the corporation: Provided, further, That no decrease in capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Nonstock corporations may incur, create or increase bonded indebtedness when approved by a majority 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 Commission, which shall have the authority to determine the sufficiency of the terms thereof.

Section 38. Power to Deny Preemptive Right. - All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such preemptive right shall not extend to shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares 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 previously contracted debt.

Section 39. Sale or Other Disposition of Assets. - Subject to the provisions of Republic Act No. 10667, otherwise known as the "Philippine Competition Act", and other related laws a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property and assets, upon such terms and conditions and for such consideration, which may be money, stock, bonds, or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient.

A sale of all or substantially all of the corporation's properties and assets, including its goodwill, must be authorized by the vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or at least two-thirds (2/3) of the members, meeting duly called for the purpose.

In nonstock 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.

The determination of whether or not the sale involves all or substantially all of the corporation's properties and assets must be computed based on its net asset value, as shown in its latest financial statemments. 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 of which it was incorporated.

Written notice of the proposed action and of the time and place for the meeting shall be addressed to stockholders or members at their places of residence as shown in the books of the corporation and deposited to the addressee in the post office with postage prepaid, served personally, or when allowed by the bylaws or done with the consent of the stockholder, sent electronically: Provided, That any dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code.

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 the corporation or if the proceeds of the sale or other disposition of such property and assets shall be appropriated for the conduct of its remaining business.

Section 40. Power to Acquire Own Shares. - Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired, a stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including the following cases:

(a) To eliminate fractional shares arising out of stock dividends; (b) 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 (c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.

Section 41. 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, 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 nonstock corporations at a meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be sent to stockholders or members at their respective places of residence as shown in the books of the corporation, deposited to the addressee in the post office with postage prepaid, served personally, or sent electronically in accordance with the rules and regulations of the Commission on the use of electronic data messages when allowed by the bylaws or done with the consent of the stockholder: 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.

Section 42. 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, 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 be first applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholders until their unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing at least two-thirds (2/3)of the outstanding capital stock at a regular or special meeting duly called for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock, except: (a) when justified by the definite corporate expansion projects or programs approved by the board of directors; or (b) when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign, from declaring dividends without their consent, and such consent has not yet been secured; 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.

Section 43. Power to Enter into Management Contract. - No corporation shall conclude a management contract with another corporation unless such contract is approved by the board of directors and by the 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 nonstock corporation, of both the managing and the managed corporations, at a meeting duly called for the purpose: Provided, That (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 (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (b) 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 nonstock corporation.

These 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 contract is called a service contract, operating agreement 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.

No management contract shall be entered into for a period longer than five (5) years for any one term.

Section 44. Ultra Vires Acts of the Corporations. - No corporation shall possess or exercise corporate powers other than those conferred by this Code or by its articles of incorporation and except as necessary or incidental to the exercise of the powers conferred.

General Powers; Theory of General Capacity

The general capacity theory maintains that a corporation is said to hold such powers as are not prohibited or withheld from it by general law.

• Express powers – Those expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation or Charter
• Implied/necessary powers – Those that can be inferred from or necessary for the exercise of the express powers or for the pursuit of its purposes as provided in the Charter. Examples are powers related to the same line of business (e.g. stevedoring services to unload coal to its pier for corporations supplying electric power)
• Incidental/inherent powers – Those that are deemed to be within the capacity of corporate entities. These “necessarily flow” from the business and attach at the moment of creation without regard to express powers or primary purpose.

General Express Powers under the Corporation Code (Sec. 35)

• Sue and be sued in its corporate name;
• Have perpetual existence unless the certificate of incorporation provides otherwise;
• Adopt and use a corporate Seal;
• Amend Articles of Incorporation
• Adopt, amend or repeal By-laws;
• For stock corporations – Issue stocks to subscribers and to sell treasury stocks; for non-stock corporations – admit members;
• Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with real and personal property, pursuant to its lawful business;
• Enter into Partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons;
• Reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civil or similar purposes (Prohibited: for partisan political activity);
• Establish pension, retirement and other Plans for the benefit of directors, trustees, officers and employees; and
• Other powers essential or necessary to carry out its purposes.

Specific Powers: Theory of Specific Capacity

The specific capacity theory maintains that the corporation cannot exercise powers except those expressly/impliedly given.

Specific Powers Granted by the RCC:

• Power to extend or shorten corporate term (Sec. 36)⁶
• Power to increase or decrease capital stock or incur, create, increase bonded indebtedness (Sec. 37)⁷
• Power to deny pre-emptive rights (Sec. 38)⁸
• Power to sell or dispose corporate assets (Sec. 39)⁹
• Power to acquire own shares (Sec. 40)¹⁰
• Power to invest corporate funds in another corporation or business (Sec. 41)¹¹
• Power to declare dividends (Sec. 42)¹²
• Power to enter into management contract (Sec. 43)¹³

Power to Extend or Shorten corporate term (Sec. 36)

There should be a written notice of stockholders/members meeting stating:

• Proposed action and time and place of meeting
• Addressed to each stockholder/ member
• Deposited to the addressee in post office, with postage prepaid or served personally;

Note: When allowed in the by-laws or done with the consent of the stockholder, sent electronically in accordance with the rules and regulations of the SEC on the use of electronic data messages

Corporations as partners in a partnership

Corporations have the power to enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons (Sec. 35(h)¹⁴).

Vote needed:

• Board majority (in board meeting) and
• Ratified by 2/3 of OCS or members in a meeting – mere written assent is not enough

Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness (Sec. 37)

Power to increase or decrease capital stock - provided that in the case of an increase in capital stock, the 25-25 rule is complied with, as approved by the SEC.

Note: in the incorporation stage, no minimum capital stock subscribed and paid (25-25 rule). However, the 25-25 rule applies when the corporation increases its authorized capital stock, not merely when it issues shares within its existing authorized capital.

There shall be no increase or decrease of capital stock unless :

• Approved by majority of the board
• Approved by at least 2/3 of OCS in a meeting
• With notice of the proposal and meeting given to stockholders- given personally or through electronic means if allowed
• With prior approval of the SEC
• The application with the SEC shall be made within six (6) months from the date of approval of the board of directors and stockholders, which period may be extended for justifiable reasons
• Accompanied by a sworn statement of the treasurer showing that the 25-25 rule has been complied with

25-25 Rule

The SEC shall not accept for filing any certificate of increase of capital stock unless accompanied by a 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 percent (25%) of the increase in capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-five percent (25%) of the subscription, has been transferred to the corporation:

Note: No decrease of capital stock shall be approved by the SEC if it will prejudice the rights of corporate creditors

From and after the approval by the SEC and the issuance of its certificate of filing, capital stock shall stand increased or decreased as the certificate may declare

Incur, create, or increase bonded indebtedness (non-stock)- There should be no incurring, creating or increasing any bonded indebtedness unless :

• Approved by majority of the board
• Approved by at least 2/3 of members in a meeting
• With notice of the proposal and meeting given to stockholders

Bonds issued by a corporation shall be registered with the SEC, which shall have the authority to determine the sufficiency of the terms thereof.

Power to Sell or Dispose Corporate Assets (Sec. 39)

This Power is subject to the provisions of the “Philippine Competition Act¹⁵”, and other related laws.

Votes Required:

Power to Sell or Dispose Corporate Assets (Not all or Substantially All)

Majority Vote by Board of Directors or Trustees ONLY

Power to Sell or Dispose All or Substantially All Corporate Assets Including its Goodwill

Needs vote of:

• Majority Vote by Board of Directors or Trustees
• 2/3 of OCS or members

Note: In nonstock 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.

Sale of all or substantially all corporate assets:

Net Asset Value Test- The determination of whether or not the sale involves all or substantially all of the corporation’s properties and assets must be computed based on its net asset value, as shown in its latest financial statements.

Incapacity Test - 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. (Sec. 39)¹⁶

Notice:

Written notice of stockholder/member meeting proposing said action sent by prepaid mail or personal service, or electronically when allowed by the by-laws or with the consent of the stockholder, in accordance with SEC rules

Requirements:

• Corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired,
• It is for a legitimate corporate purpose or purposes, including the following cases:
• To eliminate fractional shares arising out of stock dividends;
• 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;
• To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of the Corporation Code.

Shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or some other lawful means are Treasury Shares. Such shares may again be disposed of for a reasonable price fixed by the board of directors (Sec. 9)¹⁷ subject to stockholders’ preemptive rights.

Power to Invest Corporate Funds in another Corporation or For Non-Primary Purpose (Sec. 41)

Needs vote of:

• Board majority in meeting
• 2/3 of OCS or members - Stockholders/members’ approval not needed if investment in stock of other corporations is reasonably necessary to accomplish primary purpose
• Written notice of proposed investment and time and place of meeting sent to stockholders
• Dissenting stockholders have appraisal rights

Investment by a sugar central in the equity of a jute-bag manufacturing company used in packing sugar, falls within the implied powers of the sugar central as part of its primary purpose (De La Rama v. Ma-Ao Sugar Central Co., Inc., G.R. No. L-17504, 28 February 1969)¹⁸

Power to Declare Dividends (Sec. 42)

Only Board action is needed (except stock dividends where stockholder action is needed)

• Cash dividends due on delinquent stock should first be applied to unpaid balance plus cost and expenses
• Stock dividends shall be withheld from delinquent stockholders until the unpaid subscription is fully paid
• Stock dividends need 2/3 vote of the OCS
• Dividends are payable out of unrestricted retained earnings
• Stock corporations cannot retain surplus profits more than 100% of paid-in capital stock unless:
• Needed for corporate expansion projects approved by the board
• Or prohibited by loan agreement which prohibits declaration of dividends without financial institution’s consent
• Or needed under special circumstances
• Unless otherwise provided in the articles of incorporation, distribution of dividends is done on a pro rata basis.

The power to declare dividends under [Sec. 42 of RCC]¹⁹ is with the Board of Directors, and can be declared only out of its unrestricted retained earnings. Assuming that a corporate director was authorized by the Board to fix the monthly dividends, dividends can be declared only out of unrestricted retained earnings of a corporation, which earnings cannot obviously be fixed and predetermined 5 years in advance.

Power to Enter Into Management Contract (Sec. 43)

Where one corporation undertakes to manage all or substantially all of the business of another corporation, whether the contract is called “service contracts” or “operating agreement”

General Rule: Contract may not exceed 5 yrs per term

Exception: Contracts relating to exploration, development, exploitation or utilization of natural resources, where pertinent laws or regulations will govern

This needs approval of:

• Board of Directors of both managing and managed corporation
• Stockholders owning at least a majority of the outstanding capital stock, or at least a majority of the members of a nonstock corporation, of both managed and managing corporations
• But approval by at least 2/3 of the outstanding capital stock entitled to vote, or members of a nonstock corporation, of the managed corporation is necessary in the ff:
• Where stockholders representing the same interest in both managing and managed corporations own or control more than 1/3 of the managing corporation’s total outstanding capital stock entitled to vote
• Where majority of directors in both corporations are the same

Applicability of Ultra Vires Doctrine

An act not within the express or implied, and incidental powers of the corporation.

Types of Ultra Vires Cases

• First type: Acts done beyond the powers of the corporation as provided for in the law or its articles of incorporation (Sec. 44)²¹
• Second type: Acts or contracts entered into on behalf of the corporation by persons without corporate authority, even though the contract is within the powers of the corporation (Manila Metal Container Corporation v. Philippine National Bank, G.R. No. 166862, 20 December 2006)²² and
• Third type: Acts or contracts, which are per se illegal as being contrary to law.

Consequences of Ultra Vires Acts

• Executed contract – Courts will generally not set aside or interfere with such contracts;
• Executory contracts – Generally cannot be enforced by either party unless validly ratified; contracts that are illegal per se cannot be ratified (RA 11232, Sec. 44);
• Partly executed and partly executory – Principle against unjust enrichment shall apply.

Ultra vires test: It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. (University of Mindanao, Inc. v. Pilipinas, G.R. No. 194964-65, 11 January 2016)²³

However, among the “powers of corporations” only majority vote is needed in:

• Power to enter into management contracts, except in instances mentioned in number (6) of the preceding section