School Year 2010-2011, Second Semester Corporation Law: Professor Jose B. !

imson Prepared "#: $ars de %orres , Starr &ei'and and (icca S!lit

Section 41. Power to acquire own shares. 1) *llowed for le'itimate corporate p!rposes incl!din' "!t not limited to a) %o eliminate fractional shares arisin' o!t of stoc+ di,idend declaration ") %o p!rchase delin-!ent shares arisin' from delin-!enc# of shares proceedin's, for e.ample, to collect or compromise inde"tedness "eca!se of !npaid deli-!ent s!"scriptions c) %o pa# dissentin' stoc+holders !nder ri'ht of appraisal i) Section 81, instances of appraisal rights /1) 0n case an# amendment to the articles of incorporation has the effect of chan'in' or restrictin' the ri'hts of an# stoc+holder or class of shares, or of a!thori1in' preferences in an# respect s!perior to those of o!tstandin' shares of an# class, or of e.tendin' or shortenin' the term of corporate e.istence /2) 0n case of sale, lease, e.chan'e, transfer, mort'a'e, pled'e, or other disposition of all or s!"stantiall# all of the corporate propert# and assets as pro,ided in this Code /2) 0n case of mer'er or consolidation 2) Provided corporation has !nrestricted earnin' to co,er stoc+s p!rchased or ac-!ired 2) %he Corporation Code does not specif# what are ille'itimate corporate p!rposes a) But the Sec!rities and (e'!lation Code has pro,isions on 3insider tradin'4, a prohi"ited act, for e.ample, a corporation "!#s its

own shares on info !n+nown to the p!"lic, that prices will 'o !p Steinberg vs. Velasco, 5 Phil. !5" #1! !$ Section 4 . Power to invest corporate funds in another corporation or business or for an% other purposes other than the corporation&s pri'ar% purpose. 1) 5eeds ,ote of a) $a6orit# of Board, in a meetin' ") 272 of o!tstandin' stoc+ or mem"ers, in a meetin' i) Stoc+holders87mem"ers8 appro,al not needed if in,estment in stoc+ of other corporations is reasona"l# necessar# to accomplish primar# p!rpose, for e.ample, a holdin' compan# in,estin' shares of its s!"sidiaries ii) (owever, the meetin' for this p!rpose needs written notice of /1) Proposed in,estment /2) %ime and place of meetin' 2) 9issentin' stoc+holders ha,e appraisal ri'hts a) Section 81 on appraisal rights i) 0n case an# amendment to the articles of incorporation has the effect of chan'in' or restrictin' the ri'hts of an# stoc+holder or class of shares, or of a!thori1in' preferences in an# respect s!perior to those of o!tstandin' shares of an# class, or of e.tendin' or shortenin' the term of corporate e.istence ii) 0n case of sale, lease, e.chan'e, transfer, mort'a'e, pled'e, or other disposition of all or s!"stantiall# all of the corporate propert# and assets as pro,ided in this Code iii) 0n case of mer'er or consolidation )ela *a'a vs. +a,-o Sugar .entral, /

S.*- 4/ #1!0!$ Facts: A derivative suit was filed in the CFI by 4 minority stockholders against Ma-Ao Sugar Central and 4 of its directors, including ! Araneta, for the dissolution of Ma-Ao Sugar Central and for receivershi"! #he com"laint stated $ causes of action all of which are based on illegal and ultra vires acts of the cor"oration consisting of self-dealing, irregular loans and unauthori%ed investments, resulting in mismanagement! It was stated that ! Araneta and the other directors took out the funds of Ma-Ao, without the a""roval of its &oard of 'irectors, and delivered them to the various affiliate com"anies as loans and investments therein! #he lower court also found that there were untrue entries made in the books of the Central, which could not have been innocent errors! #hus, the CFI ordered ! Araneta to "ay the Sugar Central (4),*+,!,, with -. interest, but dismissed the com"laint for dissolution! It ordered the Sugar Central to refrain from making investments to a mining com"any, a "rinting com"any and other com"anies whose "ur"ose is not connected with the Sugar Central/s business! #he directors were made to "ay the costs of the suit! #he "etitioners filed the "resent a""eal, as to the 0udgment of the CFI regarding an investment of the Central/s funds in (hili""ine Fiber! #he CFI held as regards to that investment that it was "erfectly legitimate for the Central to invest in said com"any as it was engaged in the manufacture of sugar bags, logically connected with the sugar milling business! #he only re1uirement necessary to make the said investment valid was that it be ratified by the &oard of 'irectors in a 2esolution, which re1uirement was com"lied with in the "resent case! Issue: 345 the lower court erred in holding that the investment of the cor"orate funds of the Sugar Central in (hili""ine Fiber was not a violation of the Cor"oration Code!

Held: 5o! According to Sul"icio S! 6uevarra, 7( (rofessor, 8A "rivate cor"oration, in order to accom"lish its "ur"ose as stated in its articles of incor"oration, and sub0ect to the limitations im"osed by the Cor"oration 9aw, has the "ower to ac1uire, hold, mortgage, "ledge or dis"ose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign cor"oration! Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary.: When the investment is necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not necessary! Since in this case the investment was made in a com"any making bags for sugar, it was necessary for the Sugar Central to make the said investment! ;owever, the lower court/s order for the Sugar Central <to refrain from making investments in = any other com"any whose "ur"ose is not connected with the sugar central business!< #his "ortion of the decision should be reversed because, Sec! >+-? of the Cor"oration 9aw allows a cor"oration to <invest its fund in any other cor"oration or business, or for any "ur"ose other than the main "ur"ose for which it was organi%ed,< "rovided that its board of directors has been so authori%ed by the affirmative vote of stockholders holding shares entitling them to e@ercise at least two-thirds of the voting "ower:! 1o2ongwei vs. S3., 8! S.*- ""0 #1!/!$ 4acts5 Petitioner, stoc+holder of San $i'!el Corp. filed a petition with the S:C for the declaration of n!llit# of the "#-laws

School Year 2010-2011, Second Semester Corporation Law: Professor Jose B. !imson Prepared "#: $ars de %orres , Starr &ei'and and (icca S!lit

etc. a'ainst the ma6orit# mem"ers of the B;9 and San $i'!el. 0t is stated in the "#-laws that the amendment or modification of the "#-laws ma# onl# "e dele'ated to the B;9s !pon an affirmati,e ,ote of stoc+holders representin' not less than 272 of the s!"scri"ed and paid !o capital stoc+ of the corporation, which 272 co!ld ha,e "een comp!ted on the "asis of the capitali1ation at the time of the amendment. Petitioner contends that the amendment was "ased on the 1<=1 a!thori1ation, the Board acted witho!t a!thorit# and in !s!rpation of the power f the stoc+holders n amendin' the "#-laws in 1<>=. ?e also contends that the 1<=1 a!thori1ation was alread# !sed in 1<=2 and 1<=2. ?e also contends that the amendment depri,ed him of his ri'ht to ,ote and "e ,oted !pon as a stoc+holder /"eca!se it dis-!alified competitors from nomination and election in the B;9 of S$C), th!s the amended "#-laws were n!ll and ,oid. &hile this was pendin', the corporation called for a stoc+holder8s meetin' for the ratification of the amendment to the "#-laws. %his prompted petitioner to see+ for s!mmar# 6!d'ment. %his was denied "# the S:C. 0n another case filed "# petitioner, he alle'ed that the corporation had "een !sin' corporate f!nds in other corps and "!sinesses o!tside the primar# p!rpose cla!se of the corporation in ,iolation of the Corporation Code. 6ssue5 *re amendments ,alid@ (eld5 %he ,alidit# and reasona"leness of a "#-law is p!rel# a -!estion of law. &hether the "#-law is in conflict with the law of the land, or with thw charter of the corporation or is in le'al sense !nreasona"le and therefore !nlawf!l is a -!estion of law. ?owe,er, this is limited where the reasona"leness of a "#-law is a mere matter of 6!d'ement, and !one !pon which reasona"le minds m!st necessaril# differ, a co!rt wo!ld not "e warranted in s!"stit!tin' its 6!d'ment instead of the

6!d'ment of those who are a!thori1ed to ma+e "#-laws and who ha,e e.ercised a!thorit#. %he Co!rt held that a corporation has a!thorit# prescri"ed "# law to prescri"e the -!alifications of directors. 0t has the inherent power to adopt "#-laws for its internal 'o,ernment, and to re'!late the cond!ct and prescri"e the ri'hts and d!ties of its mem"ers towards itself and amon' themsel,es in reference to the mana'ement of its affairs. * corporation, !nder the Corporation law, ma# prescri"e in its "#-laws the -!alifications, d!ties and compensation of directors, officers, and emplo#ees. *n# person who "!#s stoc+ in a corporation does so with the +nowled'e that its affairs are dominated "# a ma6orit# of the stoc+holders and he impliedl# contracts that the will of the ma6orit# shall 'o,ern in all matters within the limits of the acts of incorporation and lawf!ll# enacted "#laws and not for"idden "# law. *n# corporation ma# amend its "#-laws "# the owners of the ma6orit# of the s!"scri"ed stoc+. 0t cannot th!s "e said that petitioners has the ,ested ri'ht, as a stoc+ holder, to "e elected director, in the face of the fact that the law at the time s!ch stoc+holder hAri'ht was ac-!ired contained the prescription that the corporate charter and the "#-laws shall "e s!"6ect to amendment, alteration and modification. * 9irector stands in a fid!ciar# relation to the corporation and its shareholders, which is characteri1ed as a tr!st relationship. *n amendment to the corporate "#-laws which renders a stoc+holder ineli'i"le to "e director, if he "e also director in a corporation whose "!siness is in competition with that of the other corporation, has "een s!stained as ,alid. %his is "ased !pon the principle that where the director is emplo#ed in the ser,ice of a ri,al compan#, he cannot ser,e "oth, "!t m!st "etra# one or the other. 7he a'end'ent in this case serves to advance the benefit of the corporation and is good. .orporate officers are also not per'itted to use

their position of trust and confidence to further their private needs, and the act done in furtherance of private needs is dee'ed to be for the benefit of the corporation. 7his is called the doctrine of corporate opportunit%.

1o2ongwei vs. S3., !/ S.*- /8 #1!88$ 4acts5 this in,ol,es a petition for re,iew to n!llif# the resol!tion en "anc of the S:C s!stainin' the findin's of the S$C Bs B;9s that the petitioner is en'a'ed in a "!siness competiti,e with or anta'onistic to that of the S$C, and therefore, is inelli'i"le for election as director !nder its amended "#-laws /see pre,io!s case). 6ssue5 Sho!ld the $( "e 'ranted@ (eld5 0t is well-settled that findin's of fact of administrati,e "odies will not "e interfered with "# the co!rts in the a"sence of 'ra,e a"!se of discretion on the part of said a'encies, or !nless the aforementioned findin's are not s!pported "# s!"stantial e,idence. 7he validit% of the a'ended b%,laws was alread% litigated b% the .ourt in the previous case. Section 4". Power to declare dividends in cash, propert% or stoc2. 1) ;nl# Board action needed a) 39cept stoc+ di,idends where stoc+holder action is needed ") Cash di,idends d!e delin-!ent stoc+ sho!ld first "e applied to !npaid "alance pl!s cost and e.penses c) Stoc+ di,idends shall "e withheld from delin-!ent stoc+holders !ntil !npaid s!"scription is f!ll# paid 2) Stoc+ di,idends need 272 ,ote of o!tstandin' stoc+ 2) 9i,idends pa#a"le o!t of !nrestricted retained earnin's C) Stoc+ corporations cannot retain

s!rpl!s profits more than 100D of paid-in capital stoc+ !nless a) 5eeded for corporate e.pansion pro6ects "# the Board ") ;r prohi"ited "# loan a'reement which prohi"its declaration of di,idends witho!t financial instit!tion8s consent c) ;r needed !nder special circ!mstances, li+e a special reser,e for contin'encies :ielson and .o. vs. ;epanto .onsolidated, 0 S.*- 548 #1!08$ Facts: A management contract was entered into between 5ielson and 9e"anto, whereby 9e"anto will "ay 5ielson (*,$,,!,, "er month and >,. of the net "rofits from the o"eration of the business, for o"erating and managing the mining business of 9e"anto! #he said contract was the basis of the SC ruling in a "revious case between the "arties, declaring that 5ielson would receive >,. of any dividends declared and "aid by 9e"anto, when and as "aid, 5ielson should be "aid >,. of the stock dividends declared by 9e"anto during the "eriod of e@tension of the contract! 9e"anto filed a motion for reconsideration of the said decision, contending that the court erred in such order because it is a violation of the Cor"oration 9aw, Section >), and that it was not, and it could not be, the intention of 9e"anto and 5ielson A as contracting "arties A that the services of 5ielson should be "aid in shares of stock taken out of stock dividends declared by 9e"anto! Issue: 345 a cor"oration may issue to a non-stockholder stock dividends in "ayment for services rendered by the latter! Held: 5o! 5ielson is not entitled to a share in the stock dividends since he is not a stockholder! ;owever, it must still be "aid his >,. fee using as the basis for com"utation the cash value of the stock dividends declared! As stated in the Cor"oration Code, the consideration for which shares of stock may be issued areB

School Year 2010-2011, Second Semester Corporation Law: Professor Jose B. !imson Prepared "#: $ars de %orres , Starr &ei'and and (icca S!lit

C>D cashE C*D "ro"ertyE and CFD undistributed "rofits! Shares of stock are given the s"ecial name <stock dividends< only if they are issued in lieu of undistributed "rofits! If shares of stocks are issued in e@change of cash or "ro"erty then those shares do not fall under the category of <stock dividends<! A cor"oration may legally issue shares of stock in consideration of services rendered to it by a "erson not a stockholder, or in "ayment of its indebtedness! A share of stock issued to "ay for services rendered is e1uivalent to a stock issued in e@change of "ro"erty, because services is e1uivalent to "ro"erty! 9ikewise a share of stock issued in "ayment of indebtedness is e1uivalent to issuing a stock in e@change for cash! &ut a share of stock thus issued should be "art of the original ca"ital stock of the cor"oration u"on its organi%ation, or "art of the stocks issued when the increase of the ca"itali%ation of a cor"oration is "ro"erly authori%ed! In other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. #hose shares of stock may be issued to a "erson who is not a stockholder, or to a "erson already a stockholder in e@change for services rendered or for cash or "ro"erty! ut a share of stock coming from stock dividends declared cannot be issued to one !ho is not a stockholder of a corporation. If a stockholder is de"rived of his stock dividends - and this ha""ens if the shares of stock forming "art of the stock dividends are issued to a nonstockholder A then the "ro"ortion of the stockholderGs interest changes radically! Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits! Section 44. Power to enter into

'anage'ent contract. 1) +anage'ent contract < where one corporation !nderta+es to mana'e all or s!"stantiall# all of the "!siness of another corporation, whether the contract is called 3ser,ice contracts4 or 3operatin' a'reements4 or otherwise 2) Contracts ma# not e.ceed E #ears per term a) 39cept those relatin' to e.ploration, de,elopment, e.ploitation or !tili1ation of nat!ral reso!rces where pertinent laws or re'!lations will 'o,ern. 2) %his needs appro,al of a) Board of 9irectors of "oth mana'in' and mana'ed corporations ") $a6orit# of o!tstandin' shares or mem"ers of "oth mana'in' and mana'ed corporations c) But 272 ,ote of o!tstandin' stoc+7mem"ers of mana'ed corporation necessar# in the followin' cases i) &here stoc+holders of "oth mana'in' and mana'ed corporation, the common stoc+holders own or control more than 172 of o!tstandin' stoc+ of mana'in' corporation, or ii) &here ma6orit# of directors sin "oth corporations are the same Section 45. corporations. =ltra vires acts of

1) =ltra vires acts < acts that a corporation cannot perform "eca!se the# are o!tside its e.press, implied or incidental powers a) *s conferred "# the Corporation Code ") ;r as stated in *rticles 2) Fltra ,ires acts are merel# ,oida"le G the# can "e enforced a) By performance b) By ratification by stockholders

c) By estoppel grounds

on

equitable

Pirovano vs. dela *a'a, !0 Phil ""5 #1!54$ Short Facts: Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and judicial guardian Estefania ! Pirovano! "hey seek to enforce certain resolutions adopted by the Board of #irectors and stockholders of the defendant company giving to said minor children of the proceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano $ith the company as beneficiary! #efendant%s main defense is: that said resolutions and the contract e&ecuted pursuant thereto are ultra vires' and' if valid' the obligation to pay the amount given is not yet due and demandable!es virtual la$ library FACTS: #efendant is a corporation duly organi(ed in accordance $ith la$! Enrico Pirovano became the president of the defendant company and under his management the company gre$ and progressed until it became a multi) million corporation by the time Pirovano $as e&ecuted by the *apanese during the occupation! +nder Pirovano%s management' the assets of the company gre$ and increased from an original paid up capital of around P,-.'... to P/0!01! 2n the meantime' #on Esteban de la ama' $ho practically o$ned and controlled the stock of the defendant corporation' distributed his shareholding among his five daughters! 3 resolution granting to the Pirovano children the proceeds of the insurance policies taken on his life by

the defendant company $as adopted by the Board of #irectors! 2t appears that' although #on Esteban and the 1embers of his family $ere agreeable to giving to the Pirovano children the amount of P-..'... out of the proceeds of the insurance policies taken on the life of Enrico Pirovano' they did not reali(e that $hen they provided in the above referred t$o resolutions that said 3mount should be paid in the form of shares of stock' they $ould be actually giving to the Pirovano children more than $hat they intended to give! Board of #irectors of the #e la ama 4ompany adopted a resolution changing the form of the donation to the Pirovano children from a donation of -'... shares of stock as originally planned into a renunciation in favor of the children of all the company%s 5right' title' and interest as beneficiary in and to the proceeds of the abovementioned life insurance policies5' subject to the e&press condition that said proceeds should be retained by the company as a loan dra$ing interest at the rate of 0 per cent per annum and payable to the Pirovano children after the company 5shall have first settled in full the balance of its present remaining bonded indebtedness "he above resolution $as carried out by the company and 1rs! Estefania ! Pirovano' the latter acting as guardian of her children' by e&ecuting a 1emorandum 3greement respectively' stating therein that the #e la ama Steamship 4o!' 2nc!' shall enter in its books as a loan the proceeds of the life insurance policies taken on the life of Pirovano totalling S6,/'0..' $hich loan $ould earn interest at the rate of 0 per cent per annum! 1rs! Pirovano' in e&ecuting the agreement' acted $ith the e&press authority granted to her by the court! Board of #irectors approved a resolution providing therein that

School Year 2010-2011, Second Semester Corporation Law: Professor Jose B. !imson Prepared "#: $ars de %orres , Starr &ei'and and (icca S!lit

instead of the interest on the loan being payable' together $ith the principal' only after the company shall have first settled in full its bonded indebtedness' said interest may be paid to the Pirovano children 5$henever the company is in a position to met said obligation5 and' 1rs! Pirovano e&ecuted a public document in $hich she formally accepted the donation! "$o years and 6 months after the donation had been approved in the various resolutions herein above mentioned' the stockholders of the #e la ama company formally ratified the donation' $ith certain clarifying modifications' including the resolution approving the transfer of the #em$ood property to the Pirovano children! President of the corporation' Sergio 7sme8a' *r!' addressed an inquiry to the Securities and E&change 4ommission asking for opinion regarding the validity of the donation of the proceeds of the insurance policies to the Pirovano children! "hat office rendered its opinion that the donation $as void because the corporation could not dispose of its assets by gift and therefore the corporation acted beyond the scope of its corporate po$ers! "he board' at a stockholders% meeting convened the majority of the stockholders% voted to revoke the resolution approving the donation to the Pirovano children! 2n vie$ of the resolution declaring that the corporation failed to comply $ith the condition set for the effectivity of the donation and revoking at the same time the approval given to it by the corporation' and considering that the corporation can no longer set aside said donation because it had no longer set aside said donation because it had long been perfected and consummated' the minor children of the late Enrico Pirovano' represented

by their mother and guardian' Estefania ! de Pirovano' demanded the payment of the credit due them as of #ecember 6/' /90/' amounting to P0:-;' and this payment having been refused' they instituted the present action in the 4ourt of First 2nstance! ISSUE: <7= defendant corporation can give by $ay of donation the proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the la$ or its articles of corporation' or is that donation an ultra vires act> HELD: "he corporation $as given broad and almost unlimited po$ers to carry out the purposes for $hich it $as organi(ed among them' ?/) 5"o invest and deal $ith the moneys of the company not immediately required' in such manner as from time to time may be determined5 and' ?,) 5to aid in any other manner any person' association' or corporation of $hich any obligation or in $hich any interest is held by this corporation or in the affairs or prosperity of $hich this corporation has a la$ful interest!5 "he $orld deal is broad enough to include any manner of disposition' and refers to moneys not immediately required by the corporation' and such disposition may be made in such manner as from time to time may be determined by the corporations! @ranting arguendo that the donation given by Pirovano children is outside the scope of the po$ers of the defendant corporation' or the scope of the po$ers that it may e&ercise under the la$' or it is an ultra vires act' still it may said that the same can not be invalidated' or declared legally ineffective for the reason alone' it appearing that the donation represents not only the act of the Board of #irectors but of the stockholders themselves as sho$n by the fact that the same has been

e&pressly ratified in a resolution duly approved by the latter! By this ratification' the infirmity of the corporate act' it may has been obliterated thereby making the cat perfectly valid and enforceable! "his is specially so if the donation is not merely e&ecutory but e&ecuted and consummated and no creditors are prejudice' or if there are creditors affected' the latter has e&pressly given their confirmity!cs virtual la$ library 3 little digression needs be made on this matter to sho$ the different legal effect that may result consequent upon the performance of a particular ultra vires act on the part of the corporation! may authorities may be cited interpreting or defining' e&tent' and scope of an ultra vires act' but all of them are uniform and unanimous that the same may be either an act performed merely outside the scope of the po$ers granted to it by it articles of incorporation' or one $hich is contrary to la$ or violative of any principle $hich $ill void any contract $hether done individually or collectively! 2n other $ords' a distinction should be made bet$een corporate acts or contracts $hich are illegal and those $hich are merely ultra vires! "he former contemplates the doing of an act $hich is contrary to la$' morals' or public policy or public duty' and are' like similar transactions bet$een the individuals void! "hey cannot serve as basis of a court action' nor require validity ultra vires acts on the other hand' or those $hich are not illegal and void ab initio' but are merely $ithin are not illegal and void ab initio' but are not merely $ithin the scope of the articles of incorporation' are merely voidable and may become binding and enforceable $hen ratified by the stockholders! Since it is not contended that the

donation under consideration is illegal' or contrary to any of the e&press provision of the articles of incorporation' nor prejudicial to the creditors of the defendant corporation' $e cannot but logically conclude' on the strength of the authorities $e have quoted above' that said donation' even if ultra vires in the supposition $e have adverted to' is not void' and if voidable its infirmity has been cured by ratification and subsequent acts of the defendant corporation! "he defendant corporation' therefore' is no$ prevented or estopped from contesting the validity of the donation! "his is specially so in this case $hen the very directors $ho conceived the idea of granting said donation are practically the stockholders themselves' $ith fe$ nominal e&ception! "his applies to the ne$ stockholder *ose 4ojuangco $ho acquired his interest after the donation has been made because of the rule that a 5purchaser of shares of stock cannot avoid ultra vires acts of the corporation authori(ed by its vendor' e&cept those done after the purchase5 2ndeed' ho$ can the stockholders no$ pretend to revoke the donation $hich has been partly consummated> Ao$ can the corporation no$ set at naught the transfer made to 1rs! Pirovano of the property in =e$ Bork' +!S!3!' the price of $hich $as paid by her but of the proceeds of the insurance policies given as donation! "o allo$ the corporation to undo $hat it has done $ould only be most unfair but $ould contravene the $ell)settled doctrine that the defense of ultra vires cannot be set up or availed of in completed transactions

*epublic vs. -co>e +ining, / S.*- "0 #1!0"$

School Year 2010-2011, Second Semester Corporation Law: Professor Jose B. !imson Prepared "#: $ars de %orres , Starr &ei'and and (icca S!lit

FACTS: 3coje 1ining 4ompany' 2nc! $rote the #irector of Posts requesting the opening of a post' telegraph and money order offices at its mining camp at Sta! 4ru(' Cambales' to service its employees and their families that $ere living in said camp! #irector of Posts replied that if aside from free quarters the company $ould provide for all essential equipment and assign a responsible employee to perform the duties of a postmaster $ithout compensation from his office until such time as funds therefor may be available he $ould agree to put up the offices requested! "he company signified its $illingness to comply $ith all the requirements! #irector of Posts again $rote a letter to the company stating that 52n cases $here a post office $ill be opened under circumstances similar to the present' it is the policy of this office to have the company assume direct responsibility for $hatever pecuniary loss may be suffered by the Bureau of Posts by reason of any act of dishonesty' carelessness or negligence on the part of the employee of the company $ho is assigned to take charge of the post office'5 thereby suggesting that a resolution be adopted by the board of directors of the company e&pressing conformity to the above condition relative to the responsibility to be assumed buy it in the event a post office branch is opened as requested! 3 resolution $as passed stating that the requirement of the Bureau of Posts that the 4ompany should accept full responsibility for all cash received by the Postmaster be complied $ith! "he post office branch $as opened at the camp $ith Sanche( as postmaster! Ae is an employee of the company! Ae $ent on a three)day leave but never returned! "he company immediately informed the officials of the 1anila Post 7ffice and the provincial auditor of Cambales of Sanche(%

disappearance $ith the result that the accounts of the postmaster $ere checked and a shortage $as found in the amount of P/6'D:E!,-! "he several demands made upon the company for the payment of the shortage in line $ith the liability it has assumed having failed' the government commenced the present action seeking to recover the amount of Pl6'D:E!,-! "he company in its ans$er denied liability for said amount contending that the resolution of the board of directors $herein it assumed responsibility for the act of the postmaster is ultra vires' and in any event its liability under said resolution is only that of a guarantor $ho ans$ers only after the e&haustion of the properties of the principal' aside from the fact that the loss claimed by the plaintiff is not supported by the office record!

ISSUE: <7= the resolution adopted by the company is ultra vires in the sense that it has no authority to act on a matter $hich may render the company liable as a guarantor has no factual or legal basis> =7!

HELD: "he claim that the resolution adopted by the board of directors of appellant company is an ultra vires act cannot also be entertained it appearing that the same covers a subject $hich concerns the benefit' convenience and $elfare of its employees and their families! <hile as a rule an ultra vires act is one committed outside the object for $hich a corporation is created as defined by the la$ of its organi(ation and therefore beyond the po$ers conferred upon it by la$' there are ho$ever certain corporate acts that may be performed outside of the scope of the po$ers e&pressly

conferred if they are necessary to promote the interest or $elfare of the corporation! "hus' it has been held that 5although not e&pressly authori(ed to do so a corporation may become a surety $here the particular transaction is reasonably necessary or proper to the conduct of its business'5 / and here it is undisputed that the establishment of the local post office is a reasonable and proper adjunct to the conduct of the business of appellant company! 2ndeed' such post office is a vital improvement in the living condition of its employees and laborers $ho came to settle in its mining camp $hich is far removed from the postal facilities or means of communication accorded to people living in a city or municipality! Even assuming arguendo that the resolution in question constitutes an ultra vires act' the same ho$ever is not void for it $as approved not in contravention of la$' customs' public order or public policy! "he term ultra vires should be distinguished from an illegal act for the former is merely voidable $hich may be enforced by performance' ratification' or estoppel' $hile the latter is void and cannot be validated!, 2t being merely voidable' an ultra vires act can be enforced or validated if there are equitable grounds for taking such action! Aere it is fair that the resolution be upheld at least on the ground of estoppel! Japanese War Notes vs. SEC, 101 Ph ! "#0 $1%"&' FACTS: Securities and E&change 4ommissioner issued an order requiring petitioner and its President' 1r! 3lfredo 3bcede' to sho$ cause $hy it should not be proceeded against for making misrepresentations to the public about the need of registering and depositing *apanese $ar notes' $ith a vie$ to their probable

redemption as contemplated in Senate Bill =o! /:6 and in Senate 4oncurrent esolution =o! /-' for other$ise they $ould be valueless! Petitioner tried to sho$ that there $ere no misrepresentations made by them in their publications and that the mistake made by them ?that President 1agsaysay $ould soon make representations to the +nited States @overnment to have the $ar notes redeemed) $as made in good faith as it $as later retracted and rectified! "hey also stated that they longed and hoped that the $ar notes $ould be redeemedF that they are sincere and honest in their activitiesF and that they are entitled to their beliefs! "he 4ommissioner found that according to its articles the petitioner has the privilege to $ork for the redemption of the $ar notes of its members alone' but that it can not offer its services to the public for a valuable consideration' because there is nothing definite and tangible about the redemption of the $ar notes and its success is speculativeF that any authority given to offer services can easily degenerate into a racketF that under its articles of incorporation the petitioner is a civic and non)stock corporation and should not engage in business for profitF that it has received $ar notes for deposit' upon payment of fees' $ithout authority in its articles to do soF that it had previously been ordered to desist from collecting fees for those registering the $ar notes' but not$ithstanding this prohibition it has' done so in the guise of service fees!

ISSUES: <7= petitioner should stop the registration of *apanese $ar notes' receiving same for deposit and charging fees> BES! <7= petitioner should desist

School Year 2010-2011, Second Semester Corporation Law: Professor Jose B. !imson Prepared "#: $ars de %orres , Starr &ei'and and (icca S!lit

from accepting and collecting fees for reparation claims for civilian casualties and injuries> BES

HELD: <hile it may be true that the issue $hich started the investigation has been the misrepresentations made to the public by the petitioner herein' the order is based on the findings of fact made in the course of the investigation and the prohibition stated in the order aims at the eradication of the source of the evil of misrepresentation that $as the subject of the investigation! 2t can not be said that the resultant order is not germane or related to the subject)matter of the investigation!

due representations $ith the +nited States and *apanese @overnments' for the redemption and' or' for the future payments of the *apanese <ar =otes ?mickey mouse money)F ?-) "o instill the ties of comradeship through this and noble gesture of good$ill bet$een our people and country $ith the people and countries of the +nited States and *apanF ?0) "o do any and all acts and things $hich are naturally incidental on arising out of the purpose or any others!

"he registration of $ar notes and the collection of fees therefor is not prohibited by the corporation la$ and the authority of the petitioner to engage therein is implied from its articles of incorporation' the purposes of $hich are:

?/) "o consecrate and sanctify in a strong and militant organi(ation in the furtherance of the financial conditions of its members' to$ard the attainment of their claimsF ?,) "o take a position $hich is only secondary and complimentary to that of our constituted government in campaigning for the $elfare of our people' especially $hen it is to demand redemption of currency from foreign countryF ?6) "o $ork for' and to make

"he articles authori(e collection of fees from membersF but they do not authori(e the corporation to engage in the business of registering and accepting $ar notes for deposit and collecting fees from such services! "he association has no authority to accept and collect fees for reparation claims for civilian casualties and other injuries! "his is beyond any of the po$ers of the association as embodied in its articles and have absolutely no relation to the avo$ed purpose of the association to $ork for the redemption of $ar notes!