corporation review

7/30/2019 Corporation Review

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A.

1.

These are regulations, ordinances, rules or laws adopted by an association orcorporation or the like for its internal governance. By laws define the rights andobligations of various officers, persons or groups within the corporate structure andprovide rules for routine matters such as calling meetings.

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

Every corporation formed under this code must within 1 month after receipt ofofficial notice of the issuance of its certificate of incorporation by the SEC adopt acode of by-laws for its government not inconsistent with this code. (Sec 46)

May be adopted and filed prior to incorporation, in such case, shall be approved andsigned by all incorporators submitted to SEC together with AI (Sec 46)

Loyola Grand Villas Homeowners Ass v. CA The Supreme Court held that although the Corporation Code requires the filing of by-

laws within one month after the issuance of the Certificate of Incorporation, it doesnot expressly provide for the consequences of non-filing within the said period.

It should be noted, however, that under Section 6 of PD 902-A, the SEC can revokethe certificate of registration of corporations for failure to file the by-laws within therequired period but only after proper notice or hearing.

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

Fleischer v. Botica Nolasco The by-laws of the Corporation which effectively gives the corporation preferentialright of the shares in question is in direct conflict with the Corporation Law. The owner ofthe shares, which are personal property, has the uncontrollable right to alienate themwhich 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 AOI. It cannot be done by a by-law withoutstatutory or charter authority.

Govt of Phils. V. El Hogar The by-laws provision which empowers the board to cancel shares and return to theowner the balance resulting from the liquidation by a vote of absolute majority of themembers is an ABSOLUTE NULLITY. This is in direct conflict with the Corporation Law


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which declares that the board shall not have the powers to force the surrender andwithdrawal of unmatured stock except in case of liquidation or forfeiture of stock. The practice of the directorate filling-up the vacancies by the action of the directorsthemselves is valid. The Corporation Law does not undertake to prescribe the rate of compensation for

the directors of the corporation. The power to fix compensation is left to the corporationitself to be determined in the by-laws. Hence, the distribution to directors of El Hogar of5% net profit in proportion to their attendance at board meetings is valid. If a mistake has been made or the rule adopted in the by-laws has been found towork harmful results, the remedy is in the hands of the SHs who have the power at anylawful meeting to change the rule. The provisions in the by-laws which require that the persons elected to the board beholders of shares with paid-up value of P5K and that directors who loan from theassociation waive their rights as SHs are VALID. The Code specifically gives the power tothe corporation to provide in its by-laws for the qualifications of directors, and therequirement of security from them for the proper discharge of the duties of their office is

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

Must be approved by the affirmative vote of the Stockholders representing themajority of the outstanding capital stock or majority of members (Sec 46)

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

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

AI (Sec 46)

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

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

Cannot bind stockholders / corporation pending approval By laws, like AI are contracts of adhesion. They will bind the corporation and

stockholders including those who vote against as well as those who becamemembers after approval

Contracts entered into without strict compliance with by-laws may be binding on thecorporation due to long acquiescence and usage

By laws are mere internal rules among stockholders and cannot affect or prejudice3rd persons who deal with the corporation unless they have knowledge of the same


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Subject to the provisions of the Constitution, this Code, other special laws, andthe 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 required quorum in meetings of stockholders or members and the manner of

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

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

employees;f) The time for holding the annual election of directors of trustees and the mode or

manner of giving notice thereof;g) The manner of election or appointment and the term of office of all officers otherthan directors or trustees;

h) The penalties for violation of the by-laws;i) In the case of stock corporations, the manner of issuing stock certificates; andj) Such other matters as may be necessary for the proper or convenient transaction

of its corporate business and affairs.

Voting Requirement: board of directors or trustees by a majority vote and the

owners of at least a majority of the outstanding capital stock, or majority of themembers of a non-stock corporation, at a regular or special meeting duly called forthe purpose, may amend or repeal any by-laws or adopt new by-laws Delegation of power to amend to the BOD: The owners of two-thirds (2/3) of theoutstanding capital stock or two-thirds (2/3) of the members in a non-stockcorporation may delegate to the board of directors or trustees the power to amendor repeal any by-laws or adopt new by-laws Revocation of the delegation of power to amend: Any power delegated to theboard of directors or trustees to amend or repeal any by-laws or adopt new by-lawsshall be considered as revoked whenever stockholders owning or representing amajority of the outstanding capital stock or a majority of the members in non-stock

corporations, shall so vote at a regular or special meeting Whenever any amendment or new by-laws are adopted, such amendment ornew 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 amajority of the directors or trustees, shall be filed with the Securities and ExchangeCommission the same to be attached to the original articles of incorporation andoriginal by-laws.


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The amended or new by-laws shall only be effective upon the issuance by theSecurities and Exchange Commission of a certification that the same are notinconsistent with this Code.

B.

1. Non-user for 2 years (non-use of charter)- when the corporation does not formallyorganize and commence the transaction of its business or the construction of itsworks within 2 years from the date of its incorporation. Its corporate powers ceaseand the corporation shall be deemed dissolved (automatic) Formal organization Not only means adoption of by-laws but also theorganization of the Board. This may consist in the election of new board of directorsor trustees and corporate officer The AOI names the initial members of the Board who are to act until the 1st setof directors are duly elected and qualified. This interim board can perform thefunctions of a regular board until the date of the election of directors. Once elected,the directors must complete the organization of the corporation by electing the

officers. Commencement of business This is after the approval of the by-laws and theelection of directors and officers elected. This may take the form of contracting forlease or sale of properties to be used as business site of the corporation and otherpreparatory acts geared towards fulfillment of the purpose for which the corporationwas established

2. Non-user for 5 years (continuous inoperation)- when the corporation has commencedthe transaction of its business but subsequently becomes continuously inoperative fora period of at least 5 years. The same shall be a ground for the suspension orrevocation of its corporate franchise or Certificate of Incorporation (not automatic).Notice and hearing is required.

3. Exception: cause or non-use or operation was due to causes beyond the control ofthe corporation as determined by SEC (ex. Mineral lands to be developed by thecorporation as per its purpose are the object of court litigation and a court injunctionagainst the corporate activities has been issued)

All corporate powers shall be exercised and all corporate businesses shall beconducted by the board of directors of the corporation (Sec. 23)

Specific instances when the Code requires the consent and ratification of the SHs,particularly where the underlying contractual relationship between the parties: The corporation,

the SHs/members, and the State is being amended or alterdHow is consent expressed by the parties?

Corporation: Through the Board

State: Through act of the regulatory body (SEC)

SHs: Through majority or 2/3 vote where applicable (Note: Dissenting SHs in

certain instances are given the option to withdraw from the relationship through the

exercise of appraisal right)


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A. (Section 36)1. To sue and be sued in its corporate name;2. Succession by its corporate name for the period of time stated in the articles of

incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;4. To amend its articles of incorporation in accordance with the provisions of this Code;5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or

repeal the same in accordance with this Code;6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks

to subscribers and to sell treasury stocks in accordance with the provisions of thisCode; and to admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage andotherwise deal with such real and personal property, including securities and bondsof other corporations, as the transaction of the lawful business of the corporationmay reasonably and necessarily require, subject to the limitations prescribed by law

and the Constitution;8. To enter into merger or consolidation with other corporations as provided in thisCode;

9. To make reasonable donations, including those for the public welfare or for hospital,charitable, cultural, scientific, civic, or similar purposes: Provided, That nocorporation, domestic or foreign, shall give donations in aid of any political party orcandidate or for purposes of partisan political activity;

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

11. To exercise such other powers as may be essential or necessary to carry out itspurpose or purposes as stated in the articles of incorporation. (in the purpose

clause)

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

educational, professional, cultural, fraternal, literary, scientific, social, civicservice, or similar purposes like trade, industry, agriculture and like chambers orany combination thereof. Recreational is omitted.

Sec 38 par 11 grants such power as are essential or necessary to carry out itspurpose or purposes as stated in the AI. A corporation is presumed to act within itspowers 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 2 general restrictions on the power of the corporation to acquire and hold properties:

o that the property must be reasonably and necessarily required by thetransactions of its lawful business

o that the power shall be subject to the limitations prescribed by other special lawsand the constitution (corporation may not acquire more than 30% of votingstocks of a bank; corporations are restricted from acquiring public lands exceptby lease of not more than 1000 hectares)


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B. Extend or shorten the corporate term Increase or decrease capital stock Incur, create or increase bonded indebtedness

Deny preemptive right Sell or otherwise dispose of substantially all its assets Acquire its own shares Invest in another corporation or business Declare dividends Enter into management contracts

C. (Section 37)

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

b) Ratified at a meeting by the stockholders representing at least two-thirds(2/3) of the outstanding capital stock or by at least two-thirds (2/3) of themembers in case of non-stock corporations.c) Written notice of the proposed action and of the time and place of themeeting shall be addressed to each stockholder or member at his place ofresidence as shown on the books of the corporation and deposited to theaddressee in the post office with postage prepaid, or served personally.

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

D.(Section 38)

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

diminution of the capital stock, or the incurring, creating or increasing of anybonded indebtedness in a meeting duly called for the purpose

c) Written notice of the proposed increase or diminution of the capital stock or ofthe incurring, creating, or increasing of any bonded indebtedness and of the timeand place of the stockholder's meeting at which the proposed increase or

diminution of the capital stock or the incurring or increasing of any bondedindebtedness is to be considered, must be addressed to each stockholder at hisplace of residence as shown on the books of the corporation and deposited tothe addressee in the post office with postage prepaid, or served personally

2. Certificate of Filing: A certificate in duplicate must be signed by a majority of thedirectors of the corporation and countersigned by the chairman and the secretary ofthe stockholders' meeting, setting forth:


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a) That the requirements of this section have been complied with;b) The amount of the increase or diminution of the capital stock;c) If an increase of the capital stock, the amount of capital stock or number of

shares of no-par stock thereof actually subscribed, the names, nationalities andresidences of the persons subscribing, the amount of capital stock or number of

no-par stock subscribed by each, and the amount paid by each on hissubscription in cash or property, or the amount of capital stock or number ofshares of no-par stock allotted to each stock-holder if such increase is for thepurpose of making effective stock dividend therefor authorized;

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

incurring, creating or increasing of any bonded indebtedness.

3. Approval of SEC: Any increase or decrease in the capital stock or the incurring,

creating or increasing of any bonded indebtedness shall require prior approval of theSecurities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of thecorporation and the other shall be filed with the Securities and Exchange Commissionand attached to the original articles of incorporation.

4. Effectivity: From and after approval by the Securities and Exchange Commissionand the issuance by the Commission of its certificate of filing, the capital stock shallstand increased or decreased and the incurring, creating or increasing of any bondedindebtedness authorized, as the certificate of filing may declare

5. Treasurer Affidavit: Provided, That the Securities and Exchange Commission shallnot accept for filing any certificate of increase of capital stock unless accompanied bythe sworn statement of the treasurer of the corporation lawfully holding office at thetime of the filing of the certificate, showing that at least twenty-five (25%) percentof such increased capital stock has been subscribed and that at least twenty-five(25%) percent of the amount subscribed has been paid either in actual cash to thecorporation or that there has been transferred to the corporation property thevaluation of which is equal to twenty-five (25%) percent of the subscription Decrease of capital stock: No decrease of the capital stock shall be approved bythe Commission if its effect shall prejudice the rights of corporate creditors Non-stock corporations: May incur or create bonded indebtedness, or increase

the same, with the approval by a majority vote of the board of trustees and of atleast two-thirds (2/3) of the members in a meeting duly called for the purpose. Registration of bonds- Bonds issued by a corporation shall be registered with theSecurities and Exchange Commission, which shall have the authority to determinethe sufficiency of the terms thereof. No appraisal right here, a dissenting SH can simply sell his shares. A grant ofappraisal right would defeat the purpose which is to raise funds.


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E. (Section 39)

1. Definition ofpre-emptive rights All stockholders of a stock corporation shall enjoy

pre-emptive right to subscribe to all issues or disposition of shares of any class, inproportion to their respective shareholdings, unless such right is denied by thearticles of incorporation or an amendment thereto This is to prevent dilution in shareholding If you increase common stock and some of the stockholders do not wantto subscribe, get from them a waiver of pre-emptive right (There are authoritiessaying that the right is applicable when there is reduction of shares) Basis of right; common law rule Preemptive right: option privilege of an existing SH to subscribe to aproportionate part of shares subsequently issued by the corporation before the samecan be disposed in favor of others

Common-law right granted to SHs of a corporation to be granted the firstoption to subscribe to any opening of the unissued capital stock, or to any increasefrom the authorized capital stock Economic aspect: right to invest capitalthe right becomes valuablewhen the enterprise has demonstrated that it will earn a higher rate of return on thecapital than the SH could get were he to invest it in the open market Limited to shares issued in pursuance of an increase in the authorizedcapital stock; does not apply to additional issues of originally authorized sharesforming part of the existing capital stock An original subscriber is deemed to have taken his shares knowing thatthey form a definite proportionate part of the whole number of authorized shares

When unsubscribed shares are later reoffered, the SH cannot claimthat his interest would be diluted Preemptive rights are not statutory rights, but common law rights Preemptive rights are personal rights of the SH Need not be stipulated in the AOI or by-laws May be removed, denied, or altered only through specific provisions inthe AOI or amendment thereto SEC: vote by majority of SHs to waive the right is NULL and VOID; suchwaiver must be given individually by the SHs concerned But unanimous vote of all will bind them In close corporations: Balance of power in close corporations may be

disturbed by an indiscriminate issuance of new shares without regard to preemptiveright of SHs. In a close corp, exceptions in Sec 39 are not applicable

2. Limitation to exercise of pre-emptive right:a) Such pre-emptive right shall not extend to shares to be issued in compliance with

laws requiring stock offerings or minimum stock ownership by the public;


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b) Not extend to shares to be issued in good faith with the approval of thestockholders representing two-thirds (2/3) of the outstanding capital stock, inexchange for property needed for corporate purposes or in payment of apreviously contracted debt

c) Shall not take effect if denied in the Articles of Incorporation or an amendment

thereto.

Preemptive right option privilege of an existing stockholder to subscribe to aproportionate part of shares subsequently issued by the corp before same can bedisposed of in favor of the others; includes all issues and disposition of shares ofany class

Includes not only new shares in pursuance of an increase of capital stock but wouldcover the issue of previously unissued shares which form part of the existing capitalstock as well as treasury shares (Sec. 9 used the phrase, disposition of shares ofany class, furthermore since the funds used in reacquiring T/S come from surplusprofits which could have been declared instead as dividends, it is desirable policy to

recognize the pre-emptive rights of SHs) Where the shares are issued in exchange for property needed for corporate purposes

or for debt previously granted, SH cannot demand his pre-emptive right for right mayprejudice corporate interest

In joint ventures, you can expand pre-emptive rights even in instances under Sec 39

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

in any case, the suit should be individual and not derivative because the wrong doneis to the stockholders individually

Right of First Refusal refers to the offering of the shares first to the otherstockholders before it is sold/transferred to outsiders. As distinguished to RIGHT OFFIRST REFUSAL, the latter is contractual, while PRE-EMPTIVE RIGHT exists even ifnot stated in AOI, thats why there is a need to expressly deny it. Furthermore, theright must be exercised within 30 days, hence not indefinite. While exercise of pre-emptive right is usually fixed by a resolution.

F. (Section 40)

1. Restrictions: Subject to the provisions of existing laws on illegal combinations andmonopolies

2. Scope of power: To sell, lease, exchange, mortgage, pledge or otherwise dispose ofall 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 orconsideration, as its board of directors or trustees may deem expedient


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Meaning of disposition of substantially all of the corporate property and assets- ifthereby the corporation would be rendered incapable of continuing the business oraccomplishing the purpose for which it was incorporated.

3. Approval, voting and notice requirement:

a) Majority vote of its board of directors or trustees,b) Authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation,by the vote of at least to two-thirds (2/3) of the members, in a stockholder's ormember's meeting duly called for the purpose.c) Written notice of the proposed action and of the time and place of themeeting shall be addressed to each stockholder or member at his place ofresidence as shown on the books of the corporation and deposited to theaddressee in the post office with postage prepaid, or served personally

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

business of said corporation or if the proceeds of the sale or other disposition of such property andassets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights - the vote

of at least a majority of the trustees in office will be sufficient authorization for thecorporation to enter into any transaction authorized by this section.

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

5. Abandonment of the sale, lease - After such authorization or approval by thestockholders or members, the board of directors or trustees may, nevertheless, in its

discretion, abandon such sale, lease, exchange, mortgage, pledge or otherdisposition of property and assets, subject to the rights of third parties under anycontract relating thereto, without further action or approval by the stockholders ormembers.

G. (Section 41)

A stock corporation shall have the power to purchase or acquire its own sharesfor a legitimate corporate purpose or purposes (treasury shares) provided, that thecorporation has unrestricted retained earnings in its books to cover the shares to be

purchased or acquired Trust Fund doctrine the requirement of unrestricted retained earnings isbecause subscription to the capital of a corporation constitute a fund to whichcreditors have a right to look for the satisfaction of their claims Legitimate purpose includes:a) To eliminate fractional shares arising out of stock dividends;


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b) To collect or compromise an indebtedness to the corporation, arising out ofunpaid subscription, in a delinquency sale, and to purchase delinquent sharessold during said sale; and

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

A corporation must have unrestricted retained earnings in acquiring own sharesexcept:a) shares are acquired in the redemption of redeemable sharesb) shares are re-acquired to effect a decrease in capital stock approved by the SECc) shares are reacquired by a close corporation pursuant to the order of the SEC

acting to arbitrate a deadlock

H. (Section 42)

1. Subject to the provisions of this Code, a private corporation may invest its funds inany other corporation or business or for any purpose other than the primary purpose

for which it was organized

2. Approval, voting and notice requirementa) Majority of the board of directors or trustees andb) ratified by the stockholders representing at least two-thirds (2/3) of theoutstanding capital stock, or by at least two thirds (2/3) of the members in thecase of non-stock corporations, at a stockholder's or member's meeting dulycalled for the purpose.c) Written notice of the proposed investment and the time and place of themeeting shall be addressed to each stockholder or member at his place ofresidence as shown on the books of the corporation and deposited to the

addressee in the post office with postage prepaid, or served personally

3. Appraisal right - any dissenting stockholder shall have appraisal right as provided inthis Code

4. When SH approval not necessary- where the investment by the corporation isreasonably necessary to accomplish its primary purpose as stated in the articles ofincorporation To avoid SH approval, include other business undertakings in the secondarypurpose

5. Rules in case a corporation will invest its funds in another corporationa) If it is the same purpose or incidental or related to its primary purpose,the board can invest the corporate fund without the consent of the stockholders.What is required is only the vote of the majority of the BOD. No appraisal rightb) If the investment is in another corporation of different business orpurpose, the affirmative vote of majority of the board consented by 2/3 OScapital stock is required


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a. Reasonably necessary for its lawful businessb. The other corporation must be engaged in an allied business or not alien to the

purposes of the purchasing corporation (42) This means a corporation can enter into a joint venture with another person,

partnership or another corporation

But a corporation cannot enter into a partnership contract

GR: corporation cannot enter into partnerships with other corporations or withindividuals

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

I. (Section 43)

The board of directors of a stock corporation may declare dividends out of theunrestricted retained earnings which shall be payable in cash, in property, or in stockto all stockholders on the basis of outstanding stock held by them.

Any cash dividends due on delinquent stock shall first be applied to the unpaidbalance on the subscription plus costs and expenses, while stock dividends shall bewithheld from the delinquent stockholder until his unpaid subscription is fully paid

Approval & voting requirement:a) Approval of BODb) In case of stock dividend: It shall be not be issued without the approvalof stockholders representing not less than two-thirds (2/3) of the outstandingcapital stock at a regular or special meeting duly called for the purpose.

Limitation on retention of surplus profits- Stock corporations are prohibited fromretaining surplus profits in excess of one hundred (100%) percent of their paid-incapital stock, except:

a) when justified by definite corporate expansion projects or programsapproved by the board of directors; orb) when the corporation is prohibited under any loan agreement with anyfinancial institution or creditor, whether local or foreign, from declaring dividendswithout its/his consent, and such consent has not yet been secured; orc) when it can be clearly shown that such retention is necessary underspecial circumstances obtaining in the corporation, such as when there is needfor special reserve for probable contingencies.

Stock dividends: distribution to stockholders of companys own stock. Corporateprofits or earnings are transferred to capital stock and shares of stock representingthe increase in capitalization are distributed. May be issued out of premium surplus.o Limitation on the issue of stock dividends:

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


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Whether or not there should be a distribution of dividends in whatever form,such matters are always subject to the business judgment of the BOD and thecourts will not interfere with the formers discretion except:

o when tainted with bad faitho when tainted with fraud

o when tainted with gross negligenceo when profits accumulated are in excess of 100% of the corporations paid-incapital stock unless exempted

When right to Dividends Vests:o General rule: as soon as the same have been lawfully declared by the BOD,

becomes a debt owing to the SH. No revocation can be madeo Exceptions:

not yet announced or communicated to the public, revocable beforeannouncement to shareholders

when stock dividends are declared since these are not distributions butmerely represent changes in the capital structure, may be revoked prior to

actual issuance Rights of transferee to dividends Right to dividends vests upon declaration so

whoever owns the stock at time or stockholders of record also owns the dividend.Subsequent transfer of stock would not carry with it right to dividends

Record date The date on which a stockholder must be registered on a corporationsstock and transfer book in order to be entitled to a dividend or voting rights.

J. (Section 44)

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

o Approval by stockholders owning at least the majority of the outstanding capitalstock, or by at least a majority of the members of both the managing and themanaged corporation

Note: if managing other corporations is the primary purpose, ratificatory vote isnot required

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

managing and the managed corporations own or control more than one-third(1/3) of the total outstanding capital stock entitled to vote of the managingcorporation; 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 ofthe managed corporationRationale for special rule: entering into a management contract is a deviation

from the General Rule that the board manages the corporation and that the board of

the managing company should devote its affairs to its own corporation

Term of management contract: No management contract shall be entered into for aperiod longer than five years for any one term.


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These provisions shall apply to any contract whereby a corporation undertakes tomanage or operate all or substantially all of the business of another corporation,whether such contracts are called service contracts, operating agreements orotherwise

Service contracts or operating agreements which relate to the exploration,

development, exploitation or utilization of natural resources may be entered into forsuch periods as may be provided by the pertinent laws or regulations. Management contract any contract whereby a corporation undertake to manage or

operate all or substantially all of the business of another corporation If managing a partnership or individual not a corporation, not covered

K. (Section 45)

Definition ofultravires acts These are acts which a corporation is not empoweredto do or perform because they are not based on the powers conferred by its AOI or

by the Corporation Code on corporations in general, or because they are notnecessary or incidental to the exercise of the powers so conferred.

Rule on Ultravires acts of corporations No Corporation under this Code shallpossess or exercise any corporate powers except those conferred by this Code or byits articles of incorporation and except such as are necessary or incidental to theexercise of the powers so conferred.

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

2. The doctrine upholds the duty of trust and obedience owed by the corporationsdirectors and officers to the SHs

a. Defense of ultra vires rests on the violation of trust or duty towards SHs, andshould not be entertained where its allowance will do greater wrong to innocent 3rdparties There are 3 types of ULTRA-VIRES acts:

a. Acts beyond the powers of the corporation as stipulated in law or AOIb. Acts or contracts entered in behalf of the corporation by persons w/o corporateauthority

1Corporations are now more of a product of the agreement of the incorporating parties rather than a mere

creature of the State:

Sec 10 allows 5 or more persons to form a private corporation for any lawful purpose/s Sec 36 par 11 allows every corporation the power to exercise such other powers as may be

essential or necessary to carry out the purpose/s in the AOI The corporations powers depends on its purpose in the AOI Since parties are entirely free to insert any number of purposes in its AOI, it follows that the

extent of the corporations powers depends largely on their agreement, and not merely on adirect grant from the State, unless of course the purposes are illegal.

Instances where an act can or cannot be reasonably implied from the purposes due to poordraftsmanship or lack of foresight of the drafters, the purpose clause may be reasonablystretched to accommodate the new and unexpected situations, otherwise, a properamendment of the AOI would be necessary.


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GR: In the absence of an authority from the board, no person , not even theofficers can validly bind the corporationException: Doctrine of apparent Authority; In dealing with corporations, thepublic at large is bound to rely upon outward appearances, and relying on such,if it be found that the directors permitted the agent to hold himself out as having

authority to bind or acquiesced in the contract and accepted the benefitstherefrom, the corporation will be bound. (Ramirez v. Orientalist)

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

BUT in Harden v. Benguet, SC upheld a patently void contract as betweenthe contracting parties. SC said that public policy is controlling in the grant ofmining rights. The violation of the prohibition against mining corporationsfrom owning stock of another corporation though illegal did not in any wayaffect the contract. This violation can only be proceeded upon by way of acriminal prosecution or by quo warranto which can be maintained only by the

State. Insofar as the parties are concerned, no civil wrong had beencommitted between them, and if public wrong had been committed, then thedirectors of both Balatoc and Harden were the active inducers of that wrong.Thus, since the contract has been performed on both sides and there is nopossibility of undoing what has been done, and though the corporatecontracts are illegal per se, when only the public or government policy orinterests are at stake and no private wrong is committed, the courts willleave the parties as they are, in accordance with their original contractualstipulations.

ii. Ultra- Vires Acts which are not per se illegal are

merely voidable hence can be ratified by SHs. (Pirovano case) In the case of Pirovano v. Dela Rama, which involves the issue ofwhether or not the donation by the corporation of the proceeds of theinsurance is an ultra-vires act, SC held that such donation is not ultra-vires.SC said that it comes within the broad power under the AOI that theCorporation may invest and deal with moneys of the company notimmediately required. The word deal is broad enough to include anymanner of disposition.

Furthermore, assuming that it was ultra-vires, there was ratification bythe SHs. Finally, the donation was already consummated. The defense ofultra-vires cannot be set-up against completed or consummated

transactions.

Form of Ratification:a. Express act of SH(if act is by the Board) or Board(if act is by theofficers)b. Implied through acceptance of benefitsc. Through estoppel on the part of Board or the officers


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Effect/s of Ratification:Cures the infirmity and makes it perfectly valid and enforceable,PROVIDED that it prejudices no creditors and if it has been partially

executed and not merely executory

Atrium v. CA

Atrium Management Corporation filed with RTC action for collection of the 4postdated checks issued by the Hi-cement Corporation, though its signatories deLeon, treasurer, and de las Alas, chairman of the corporation to a certain ET Henryand Co 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 ultraviresact.

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 andcannot be validated. SC however, held de Leon negligent.

Republic of the Philippines vs. Acoje Mining Co. The company is estopped from denying liability on the ground that the boardresolution 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, publicorder and public policy. [In this case, even if the setting up of a post office in themining camp is outside the express powers, it is necessary to promote the interestand welfare of the corporation] 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 bevalidated.

General consequences of ultravires acts are as follows:a) Corporation may be dissolved under a quo warranto proceeding but in most

cases, the court merely enjoins the corporation from commission of the ultravires acts

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

for specific performance. Will be left as they are if the contract has been fullyexecuted on both sides. If one party has performed his part, the contract will beenforced provided it is not illegal

d) Contract proceeding from an ultra-vires act is voidablee) Any stockholder may bring either an individual or derivative suit to enjoin a

threatened ultravires act or contract. If act or contract has already beenperformed, a derivative suit for damages may be filed against the directors, buttheir liability will depend on whether they acted in good faith and withreasonable diligence in entering into contracts. When based on tort, cannot set-up the defense of ultravires against injured party who had no knowledge thatsuch was ultravires


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f) May become binding by the ratification of all stockholders unless third parties areprejudice thereby or unless the acts is illegal

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

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

3. On the rights of Stockholders A SH can file an individual or derivative suit to enjoin a threatened ultra vires

act or contract or a derivative suit for damages if the contract has beenperformed Liability would depend on whether the contracting parties acted in GF and withreasonable diligence; an honest mistake would not give rise to liability If action is based on tort, the SHs cannot set up the defense of ultra viresagainst the injured party who had no knowledge that the corporation wasengaging in an act not included expressly or impliedly in its purpose clause

Napocor v. Vera The issue in this case is whether or not the act of NPC in taking over Sea Lionsstevedoring services is an ultra-vires act. SC held that it is not ultra-vires. NPC is empowered by its charter to undertake

such services, it being reasonably necessaryto the operation and maintenance ofthe power plant. The ruling in Acoje Mining was upheld, where the company isnot restricted by its express powers as long as the act will promote the interestsand welfare of the corporation.

Government of P.I. v. El HogarW/N el Hogar is illegally owning and holding a business lot in excess of the reasonable

requirements and in contravention of the Corpo law that every corporation has the powerto purchase hold lease real property as reasonable and necessary required for thetransaction of the lawful businessH: The law expressly declares that corporations may acquire 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 to

construct and maintain its offices is reasonably necessary to a building and loanassociation such as the respondent was at the time this property was acquired. Adifferent ruling on this point would compel important enterprises to conduct theirbusiness exclusively in leased offices a result which could serve no useful end butwould retard industrial growth and be inimical to the best interests of society. We arefurthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired bythe respondent, it is entitled to the full beneficial use thereof. No legitimate principle candiscovered which would deny to one owner the right to enjoy his (or its) property to thesame extent that is conceded to any other owner.


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W/N el Hogar has engaged in activities foreign to the purposes for which thecorporation was created and not reasonably necessary to its legitimate ends, specifically:(1) the administration of the offices in the El Hogar building not used by the respondentitself and the renting of such offices to the public; (2) the administration andmanagement of properties belonging to delinquent shareholders of the association; (3)the management of some parcels of improved real estate situated in Manila not under

mortgage to it, but owned by shareholders, and has held itself out by advertisement asprepared to do soH: (1) The activities here criticized 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. If the respondent had the power toacquire the lot, construct the edifice and hold it beneficially, as there decided, thebeneficial administration by it of such parts of the building as are let to others mustnecessarily be lawful.(2) 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 185 of the Corporation Law. It willbe noted, however, that, according to said section, the association may treat the wholeindebtedness as due, "at the option of the board of directors," and this remedy is not

made exclusive. We see no reason to doubt the validity of the clause giving theassociation the right to take over the property which constitutes the security for thedelinquent 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 ofthe clause allowing this course to be taken appears to us to be not open to doubt.(3) The practice described in the passage above quoted from the agreed facts is in ouropinion unauthorized 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 required to subscribe to one or more shares of the association with a view to

qualifying him to receive this service is of no significance. It is a general rule of law thatcorporations possess only such express powers. The management and administration ofthe property of the shareholders of the corporation is not expressly authorized by law,and we are unable to see that, upon any fair construction of the law, these activities arenecessary to the exercise of any of the granted powers. The corporation, upon the pointnow under the criticism, has clearly extended itself beyond the legitimate range of itspowers. But it does not result that the dissolution of the corporation is in order, and itwill merely be enjoined from further activities of this sort.

W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation forhis services rendered by him during the early stages of the organization of thecorporation, is unconscionable, excessive, and thus necessitates dissolutionH: No possible doubt exists as to the power of a corporation to contract for services

rendered and to be rendered by a promoter in connection with organizing andmaintaining the corporation. It is true that contracts with promoters must becharacterized by good faith; but could it be said with certainty, in the light of factsexisting at the time this contract was made, that the compensation therein provided wasexcessive? If the amount of the compensation now appears to be a subject of legitimatecriticism, this must be due to the extraordinary development of the association in recentyears. If the Melian contract had been clearly ultra vires which is not charged and iscertainly untrue its continued performance might conceivably be enjoined in such aproceeding as this; but if the defect from which it suffers is mere matter for an action


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because Melian is not a party. It is rudimentary in law that an action to annul a contractcannot be maintained without joining both the contracting parties as defendants.Moreover, the proper party to bring such an action is either the corporation itself, orsome shareholder who has an interest to protect.

W/N el Hogar had abused its franchise in issuing special shares, which is alleged to be

illegal and inconsistent with the plan and purposes of building and loan associations,andthat these are held by well-to-do people purely for investment purposes and not bywage-earners for savingsH: The ground for supposing the issuance of the "special" shares to be unlawful is thatspecial shares are not mentioned in the Corporation Law as one of the forms of securitywhich may be issued by the association. Upon examination 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 jurisdictions, are generally known asadvance payment shares; in if close attention be paid to the language used in the lastsentence of section 178 of the Corporation Law, it will be found that special shareswhere evidently created for the purpose of meeting the condition cause by theprepayment of dues that is there permitted. The language of this provision is as follow"payment of dues or interest may be made in advance, but the corporation shall not

allow interest on such advance payment at a greater rate than six per centum per annumnor for a longer period than one year." In one sort of special shares the dues are prepaidto the extent of P160 per share; in the other sort prepayment is made in the amount ofP10 per share, and the subscribers assume the obligation to pay P10 monthly until P160shall have been paid.

It will escape notice that the provision quoted say that interest shall not be allowed onthe advance payments at a greater rate than six per centum per annum nor for a longerperiod than one year. The word "interest " as there used must be taken in its true senseof compensation for the used of money loaned, and it not must not be confused with thedues upon which it is contemplated that the interest may be paid. Now, in the absence ofany showing to the contrary, we infer that no interest is ever paid by the association in

any amount for the advance payments made on these shares; and the reason is to befound in the fact that the participation of the special shares in the earnings of thecorporation, in accordance with section 188 of the Corporation Law, sufficientlycompensates the shareholder for the advance payments made by him; and no otherincentive is necessary to induce inventors to purchase the stock.

It will be observed that the final 20 per centum of the par value of each special share isnot paid for by the shareholder with funds out of the pocket. The amount is satisfied byapplying a portion of the shareholder's participation in the annual earnings. But as theright of every shareholder to such participation in the earnings is undeniable, the portionthus annually applied is as much the property of the shareholder as if it were in facttaken out of his pocket. It follows that the mission of the special shares does not involveany violation of the principle that the shares must be sold at par.

From what has been said it will be seen that there is express authority, even in the veryletter of the law, for the emission of advance-payment or "special" shares, and theargument that these shares are invalid is seen to be baseless. In addition to this it issatisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assumingthat the statute has not expressly authorized such shares, yet the association has impliedauthority to issue them. The complaint consequently fails also as regards the stated inthe ninth cause of action.


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W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at thediscretion of its Board, the value of real properties acquired by it at its sales, therebyfrustrating the right of SHs to participate annually and equally in the earnings.H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as towhat a court may do in determining the internal policy of a business corporation. If thecriticism contained in the brief of the Attorney-General upon the practice of the

respondent association with respect to depreciation be well founded, the Legislatureshould supply the remedy by defining the extent to which depreciation may be allowedby building and loan associations. Certainly this court cannot undertake to control thediscretion of the board of directors of the association about an administrative matter asto which they have legitimate power of action. The tenth cause of action is therefore notwell founded.

W/n el Hogars charter should be revoked because it illegally maintains excessivereserve funds and because it pursues a policy, allegedly unlawful, of paying a straightannual dividend of 10% regardless of losses suffered and profits made by thecorporation and in violation of the requirement s of the corpo code.H: It is insisted in the brief of the Attorney-General that the maintenance of reservefunds is unnecessary in the case of building and loan associations, and at any rate the

keeping of reserves is inconsistent with section 188 of the Corporation Law. Upon carefulconsideration of the questions involved we find no reason to doubt the right of therespondent to maintain these reserves. It is true that the corporation law does notexpressly grant this power, but we think it is to be implied. It 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 subject to vicissitudes. Fluctuations in the dividend rate arehighly detrimental to any fiscal institutions, while uniformity in the payments ofdividends, continued over long periods, supplies the surest foundations of publicconfidence.

Moreover, it is said that the practice of the association in declaring regularly a 10 percent dividend is in effect a guaranty by the association of a fixed dividend which iscontrary to the intention of the statute. The government insists upon an interpretation ofsection 188 of the Corporation Law that is altogether too strict and literal. From the factthat the statute provides that profits and losses shall be annually apportioned among theshareholders it is argued that all earnings should be distributed without carrying anythingto 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 shallexercise 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. Ourconclusion is that the respondent has the power to maintain the reserves criticized in the

eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that thereserves referred to have become excessive, the remedy is in the hands of theLegislature. It 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 withoutmerit.

W/n el Hogar illegally departed from its charter because it has made loans which wereintended to be used by the borrowers for other purposes than the building of homes.


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There is no statute here expressly declaring that loans may be made by theseassociations solely for the purpose of building homes. On the contrary, the building ofhomes is mentioned in section 171 of the Corporation Law as only one among severalends which building and loan associations are designed to promote. Furthermore, section181 of the Corporation Law expressly authorities the Board of directors of the associationfrom time to time to fix the premium to be charged. In the brief of the plaintiff a number

of excerpts from textbooks and decisions have been collated in which the idea isdeveloped that the primary design of building and loan associations should be to helppoor people to procure homes of their own. This beneficent end is undoubtedly servedby these associations, and it is not to be denied that they have been generally fosteredwith this end in view. But in this jurisdiction at least the lawmaker has taken care not tolimit the activities of building and loan associations in an exclusive manner, and theexercise of the broader powers must in the end approve itself to the businesscommunity.

W/n the el Hogar 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 juridical entities became

shareholders merely for the purpose of qualifying themselves to take loans from theassociation.H: the Corporation Law declares that "any person" may become a stockholder in buildingand loan associations. The word "person" appears to be here used in its general sense,and there is nothing in the context to indicate that the expression is used in therestricted sense of both natural and artificial persons, as indicated in section 2 of theAdministrative Code. We would not say that the word "person" or persons," is to betaken in this broad sense in every part of the Corporation Law. For instance, it wouldseem reasonable to say that the incorporators of a corporation ought to be naturalpersons, although in section 6 it is said that five or more "persons", although in section 6it is said that five or more "persons," not exceeding fifteen, may form a privatecorporation. But the context there, as well as the common sense of the situation,

suggests that natural persons are meant. When it is said, however, in section 173, that"any person" may become a stockholder in a building and loan association, no reason isseen why the phrase may not be taken in its proper broad sense of either a natural orartificial person. At any rate the question whether these loans and the attendantsubscriptions were properly made involves a consideration of the power of thesubscribing corporations and partnerships to own the stock and take the loans; and it isnot alleged in the complaint that they were without power in the premises. Of course themere motive with which subscriptions are made, whether to qualify the stockholders totake a loan or for some other reason, is of no moment in determining whether thesubscribers were competent to make the contracts. The result is that we find nothing inthe allegations of the sixteenth cause of action, or in the facts developed in connectiontherewith, that would justify us in granting the relief.

W/n el Hogar, in disposing of real estate purchased in the collection of defaultedloans, on credit at first and then sold and mortgaged to el Hogar to secure payment ofthe purchase price, had incurred several outstanding loans, and that that the personsand entities to which said properties are sold under the condition charged are notmembers or shareholders nor are they made members or shareholders of the defendant.H: This part of the complaint is based upon a mere technicality of bookkeeping. Thecentral idea involved in the discussion is the provision of the Corporation Law requiringloans to be stockholders only and on the security of real estate and shares in thecorporation, or of shares alone. It seems to be supposed that, when the respondent sells


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property acquired 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 requiring the respondent to sell real estate which it acquires in connection with thecollection 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. Such sales can of course be made upon terms and

conditions 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. Nor 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 Government under this head is untenable.

GR: all acts other than those specified in Sec 36-44 and in other special provisions would be ultravires

: those which are: necessary or to the so conferred (45), or essential or to carry out its or as stated in the AOI.

(38)

Presumption 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.

Sec 36(11): corporations have the power and capacity to exercise such other powersas may be essential or necessary to carry out its purpose(s) as provided for in theAOIo Restated: the management of a corporation has discretionary authority, in the

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

Sec 2: powers, attributes, and properties expressly authorized by law or

Incidental powers: those that attach to a corporation at the moment of itscreation without regard to its express powers or particular primary purpose, andis inherent in it as a legal entity

Examples:i. To sue and be suedii. To grant and receive in the corporate nameiii. To purchase hold and convey real and personal property for its purposesiv. To have a corporate sealv. To adopt and amend by-laws for its governmentvi. To disenfranchise or remove members

Powers that go into the very nature and extent of a corporations juridical entitycannot be presumed to be incidental or inherent powers


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(1) board of directors or trustees= formulate the corporate policies(2) corporate officers= execute the policies(3) stockholders or members= have residual powers over fundamental corporate changes

one of the advantageous features of the corporationacting through centralizedmanagement the congruence of authority and responsibility in the same person, committee, or board

always promote efficiency

1. (for stock corporations) or (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 GF, and not in defraud of creditors or abusive of the

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

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

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

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

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

from the control and guidance of corporate affairs and property and hence the propertyinterest of the SHs

(Section 23)

The board of directors or trustees are responsible for corporate policies and generalmanagement of the business affairs of the corporation

Unless otherwise provided in the Corporation Code, the Board of Directors controland exercise:o the corporate powers of corporationo all business conducted,o all property of such corporation


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The board exercises almost all corporate powers, lays down all business policies andis responsible for the efficiency of management. The stockholders have no right tointerfere with the boards exercise of its powers and functions except where the lawexpressly gives them the final say, like in cases of removal of a director, amendmentof articles of incorporation, and other major changes. Their resolutions on matters

other than the exceptions are legally not effective nor binding and may be treated asmerely advisory or may be totally disregarded. Unless Otherwise Provided may pertain to instances where a management

contract is entered hence corporate posers are exercised by the managing companyand not the board

The directors or trustees shall not act individually nor separately but as a body in alawful meeting. Contracts entered into without a formal board resolution does notbind the corporation except when majority of the board has knowledge of thecontract and the contract benefited the corporation.

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

Orientalist Co engaged in the theater business, desired to be the exclusive agent of Ramirez, whois based in Paris, for two film outfitsclair Films and Milano films. Through the activeinvolvement and negotiations of Ramon El Presidente Fernandez, a director of Orientalist andalso its treasurer, with Ramirez, Orientalist was able to secure an offer, the terms of which wereacceptable to the Board as well as to the stockholders. It appears that this acceptance of theterms of the offer was decided during an informal meeting of the board, and conveyed toRamirez in two letters signed only by Fernandez, both in his individual and his capacity astreasurer of Orientalist. It turns out that the company was not financially capable to comply withthe obligations set forth in the agency contract, and about this time films had already been

delivered to the company. Two stockholders meetings were organized, the first adopted aresolution approving the action of the board on the offer, the second raising the contingency ofthe lack of funds and the proviso that the four officers involved, including Fernandez wouldcontinue importing the films using their own funds. Ramirez sues Orientalist and Fernandez forwhat is due on the contract. TC ruled Oriental as the principal debtor while Fernandez issubsidiarily liable.

H: (1) it was incumbent upon the corporation if it desired to question the authority of Fernandezto bind it, to deny the due execution of the contract made by him. In pleading lack of authority ofan officer of a corporation to bind the latter through a contract executed by the former is aspecial 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 ingeneral terms is insufficient, even though under oath. In dealing with corporations the public atlarge is bound to rely to a large extent upon outward appearances. If a man is found acting for acorporation with the external indicia of authority, any person not having notice of want ofauthority, may usually rely upon those appearances, and if it be found that the directors hadpermitted the agent to exercise that authority and thereby held him out as a competent personto bind the corporation, or had acquiesced in a contract and retained the benefit supposed tohave conferred by it, the corporation will be bound, notwithstanding the actual authority may


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never have been granted. The public is not supposed nor required to know the transactionswhich happen around the table where the corporate board of directors or the stockholders arefrom time to time convoked. It is therefore reasonable, in a case where an officer of acorporation has made a contract in its name, that the corporation should be required, is it denieshis authority, to state such defense in his answer. This failure of Orientalist to make any issue in

its answer with regard to the authority of Ramon Fernandez to bind it and its failure to denyspecifically under oath the genuineness of the due execution of the contracts sued upon, havethe effect of eliminating the question of his authority from the case.

(2) Fernandez had no authority to bind the corporation. Corporate powers is exercised by theboard of directors, and is recognized in the bylaws of Orientalist. The fact that the power to makecontracts is thus vested in the borad does not always signify that a formal vote of the board mustalways be taken before contractual liability can be fixed; the board can create liability, like anindividual, by other means than by formal expression of its will. It may be established withoutreference to official records of the proceedings of the board, by proof of the usage to which thecompany had permitted to grow up in the business, and of the acquiescence of the board

charged with the duty of supervising and controlling the companys business. Fernandez was themost active in the effort to secure the films. The negotiations were conducted by him with theknowledge and consent of the other members of the board. The board, before the financialinability of the corporation was revealed, had already recognized the contracts as being inexistence and had proceeded to take the steps necessary to utilize the films, particularly thepublication of announcements in the papers. In light of this, the contracts in question were thusinferentially approved by the board and that the company is bound unless the subsequent failureof the stockholders to approve the same had the effect of abrogating the liability created.

(3) the action of the stockholders, whatever its character, must be ignored. Stockholders ormembers resolutions dealing with matters other than the exceptions are not legally effective nor

binding on the board, and may be treated as merely advisory or may even be completelydisregarded. The functions of the stockholders of a corporation are, of a limited nature. Thetheory is that the stockholders may have all the profits but shall turn over the completemanagement of the enterprise to their representatives or agents, called the directors, making by-laws, and exercising special powers defined by law. Thus contracts between a corporation andthird persons must be made by the directors and not by the stockholders. The corporation isrepresented by the directors and not the stockholders. Third persons can have little or noinformation as to what occurs in corporate meetings, and must necessarily rely on externalmanifestations of corporate consent. The integrity of commercial transactions can only bemaintained by holding the corporation strictly to the liability fixed upon in by its agents inaccordance with law. If 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 aspossessing the power to do these acts, the corporation will be estopped from denying suchauthority as against anyone who has dealt with the corporation in GF.

F: Korean Airlines, through Atty. Aguinaldo, filed a Complaint against Expertravel with the RTCfor the collection of the principal amount of P260,150.00, plus attorneys fees and exemplarydamages. The verification and certification against forum shopping was signed by Atty.


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Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL andhad caused the preparation of the complaint. Expertravel filed a motion to dismiss the complainton the ground that Atty. Aguinaldo was not authorized to execute the verification and certificateof non-forum shopping as required by the Rules of Court. KAL opposed the motion, contendingthat Atty. Aguinaldo was its resident agent and was registered as such with the Securities andExchange Commission (SEC) as required by the CorpoCode, and was further alleged that Atty.

Aguinaldo was also the corporate secretary of KAL. Atty. Aguinaldo also claimed that he had beenauthorized to file the complaint through a resolution of the KAL Board of Directors approvedduring a special meeting held on June 25, 1999, wherein the board of directors conducted aspecial teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was alsoaverred that in that same teleconference, the board of directors approved a resolutionauthorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file thecomplaint. Suk Kyoo Kim also alleged, however, that the corporation had no written copy of theaforesaid resolution. TC denies MTD, CA affirms.

H: It is settled that the requirement to file a certificate of non-forum shopping is mandatory andthat the failure to comply with this requirement cannot be excused. 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 of

action. Hence, 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. Hence, the requisite certificationexecuted by the plaintiffs counsel will not suffice.

In a case where the plaintiff is a private corporation, the certification may be signed, for and onbehalf of the said corporation, by a specifically authorized person, including its retained counsel,who has personal knowledge of the facts required to be established by the documents. Thecorporation, such as the petitioner, has no powers except those expressly conferred on it by theCorporation Code and those that are implied by or are incidental to its existence. In turn, acorporation exercises said powers through its board of directors and/or its duly-authorizedofficers and agents. Physical acts, like the signing of documents, can be performed only bynatural persons duly-authorized for the purpose by corporate by-laws or by specific act of theboard of directors.

The respondents allegation that its board of directors conducted a teleconference on June 25,1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is incredible, giventhe additional fact that no such allegation was made in the complaint. If the resolution hadindeed been approved on June 25, 1999, long before the complaint was filed, the respondentshould have incorporated it in its complaint, or at least appended a copy thereof. The respondentfailed to do so. It was only on January 28, 2000 that the respondent claimed, for the first time,that there was such a meeting of the Board of Directors held on June 25, 1999; it evenrepresented to the Court that a copy of its resolution was with its main office in Korea, only toallege later that no written copy existed. It was only on March 6, 2000 that the respondentalleged, for the first time, that the meeting of the Board of Directors where the resolution was

approved was held viateleconference.Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed aSecretarys/Resident Agents Certificate alleging that the board of directors held a teleconferenceon June 25, 1999. No such certificate was appended to the complaint, which was filed onSeptember 6, 1999. More importantly, the respondent did not explain why the said certificatewas signed by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one year later(on January 10, 2000); it also did not explain its failure to append the said certificate to thecomplaint, as well as to its Compliance dated March 6, 2000. It was only on January 26, 2001when the respondent filed its comment in the CA that it submitted the Secretarys/Resident


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Agents Certificate[30] dated January 10, 2000.

The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999never took place, and that the resolution allegedly approved by the respondents Board ofDirectors during the said teleconference was a mere concoction purposefully foisted on the RTC,the CA and this Court, to avert the dismissal of its complaint against the petitioner.

.Velez 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 thesame time assuring the bank officer that his personal checks were fully funded. Having alreadygained the trust and confidence of the officers of the bank because of his past transactions, thebank's officer would always accommodate his request. After his requests are granted which isdone by way of the bank officer affixing his signature on the personal checks, private respondentCresencio Velez 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 petitionerbank's manager's check. Private respondent would then deposit petitioner bank's manager'scheck to his various current accounts in other commercial banks to cover his previously deposited

unfunded personal checks with petitioner bank. Naturally, petitioner bank and its officers neverdiscovered that his personal check deposits were unfunded. On the contrary, it gave thepetitioner bank the false impression that private respondent's 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 September 4, 1985 up to March 11, 1986.The amounts that he was depositing and withdrawing during this period (September 4, 1985 toMarch 11, 1986) progressively became bigger. It started at P46,000.00 on September 4, 1985and on March 11, 1986 the amount of deposit and withdrawal already reached overP3,000,000.00. At this point in time (March 11, 1986), the private respondent Cresencio Velezpresumably already feeling that sooner or later he would be caught and that he already wantedto cash in on his evil scheme, decided to run away with petitioner's money. On March 11, 1986,he deposited various unfunded personal checks totaling P3,095,000.00 and requested a bankofficer that the same be credited as cash and after securing the approval of said bank officer,

deposited his various personal checks in the amount of P3,095,000.00 with his current accountand at the same time withdrew the sum of P3,244,000.00 in the form of petitioner's manager'scheck. Instead of using the proceeds of his withdrawals to cover his unfunded personal checks,he ran away with petitioner bank's money. Thus, private respondent Cresencio Velez's personalchecks deposited with petitioner bank on March 11, 1986 in the total aggregate amount ofP3,095,000.00 bounced. The checks bounced after said personal checks were made thesubstantial basis of his withdrawing the sum of P3,244,000.00 from his current account withpetitioner bank. Citibank sues on the grounds of violation of BP 22. Before pre-trial conference,and in pursuance of the authority granted to him by petitioner bank's by-laws, its ExecutingOfficer appointed William W. Ferguson, a resident alien, as its Attorney-in-Fact empowering thelatter, among other things, to represent Citibank in court cases such as the present case. In turn,William W. Ferguson executed a power of attorney in favor of J.P. Garcia & Associates (petitionerbank's counsel) to represent petitioner bank in the pre-trial conference before the lower court.I: There are thus two issues in this case. First, 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.H: In the corporate hierarchy, there are three levels of control: (1) the board of directors, whichis responsible for corporate policies and the general management of the business affairs of thecorporation; (2) the officers, who in theory execute the policies laid down by the board, but inpractice often have wide latitude in determining the course of business operations; and (3) thestockholders who have the residual power over fundamental corporate changes, likeamendments of the articles of incorporation. However, just as a natural person may authorize
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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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.

It 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. In addition, an officer who is not a director may also appoint other agents when so

authorized by the by-laws or by the board of directors. Such are referred to as express powers.There are also powers incidental to express powers conferred. It is a fundamental principle in thelaw of agency that every delegation of authority, whether general or special, carries with it,unless the contrary be express, implied authority to do all of those acts, naturally and ordinarilydone in such cases, which are reasonably necessary and proper to be done in order to carry intoeffect the main authority conferred.

Since the by-laws are a source of authority for corporate officers and agents of the corporation, aresolution of the Board of Directors of Citibank 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 Executing Officer and the Secretary Pro-Tem, to execute a power ofattorney to a designated bank officer, William W. Ferguson in this case, clothing him withauthority to direct and manage corporate affairs.

Since paragraph XXI (of the by-laws) specifically allows Ferguson to delegate his powers in wholeor in part, there can be no doubt that the special power of attorney in favor, first, of J.P. Garcia &Associates and later, of the bank's employees, constitutes a valid delegation of Ferguson'sexpress power (under paragraph XVII above) to represent petitioner bank in the pre-trialconference in the lower court.

I: The second issue is whether the by-laws of the petitioner foreign corporation which haspreviously been granted a license to do business in the Philippines, are effective in thisjurisdiction. If the by-laws are valid and a board resolution is not necessary as petitioner bankclaims, then the declaration of default would have no basis.

H: A careful reading of the Sec 46 of Corpo Code 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 SEC. When the third paragraph of the above provisionmentions "in all cases", it can only refer to these two options; i.e., whether adopted prior toincorporation or within one month after incorporation, the by-laws shall be effective only uponthe approval of the SEC. But even more important, said provision starts with the phrase "Everycorporation formed under this Code", which can only refer to corporations incorporated in thePhilippines. Hence, Section 46, in so far as it refers to the effectivity of corporate by-laws, appliesonly to domestic corporations and not to foreign corporations. On the other hand, Section 125 ofthe same Code requires that a foreign corporation applying for a license to transact business inthe Philippines must submit, among other documents, to the SEC, a copy of its articles ofincorporation and by-laws, certified in accordance with law. Unless these documents aresubmitted, the application cannot be acted upon by the SEC. Since under Sec 126 of Corpo Codethe SEC will grant a license only when the foreign corporation has complied with all therequirements of law, it follows that when it decides to issue such license, it is satisfied that theapplicant's by-laws, among the other documents, meet the legal requirements. This, in effect, isan approval of the foreign corporation's by-laws. It may not have been made in express terms,still it is clearly an approval. Therefore, petitioner bank's by-laws, though originating from aforeign jurisdiction, are valid and effective in the Philippines.


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corporation review

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