CORPORATE POWERS

General Powers of Corporation (Sec. 36)

To sue and be sued in its corporate name;

Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
To adopt and use a corporate seal
To amend its articles of incorporation in accordance with the provisions of this Code;
To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;
In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a
non-stock corporation;
To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and necessarily require,
subject to the limitations prescribed by law and the Constitution;

(NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold properties:

(1) that the property must be reasonable and necessarily required by the transaction of its lawful
business, and
(2) that the power shall be subject to the limitations prescribed by other special laws and the
Constitution.)

To adopt any plan of merger or consolidation as provided in this Code;

To make reasonable donations, including those for the public welfare of for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided that: no corporation, domestic or
foreign, shall give donations in aid of any political party or candidate or for purposes of partisan
political activity;
To establish pension, retirement and other plans for the benefit of its directors, trustees, officers
and employees; and
To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation.

Specific Powers of Corporation

Extension or shortening of the corporate term (Sec. 37)

Increase or decrease of the capital stock (Sec. 38)
Incur, create or increase bonded indebtedness (Sec. 38)
Denial of the pre-emptive right (Sec. 39)

Sale or other disposition of substantially all its assets. (Sec. 40)

A sale is deemed to substantially cover all the corporate property and assets if such sale renders the
corporation incapable of continuing the business or accomplishing the purpose for which it was
incorporated.

Acquisition of its own shares. (Sec. 41)

Investment in another corporation or business. (Sec. 42)
Declaration of dividends. (Sec. 43)
Entering into management contracts. (Sec. 44)

Increase of capital stock

After the authorized capital stock has been fully subscribed and the corporation needs to increase
its capital, it will have to amend its articles to increase its capital stock. A corporation does not
have the implied power to increase capital stock; such a power can only be granted by law.
The power to increase or decrease capital stock must be exercised in accordance with the
provisions of Sec. 38 of the Code.

Reduction of capital stock

Reduction of capital stock is not allowed if it will prejudice the rights of corporate
creditors.

It is established doctrine that subscriptions to the capital of a corporation constitute a fund to

which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
for the payment of its debts.

A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in the manner and under the
conditions prescribed by the statute or charter or the articles of incorporation.

Change in corporate term

The Code allows a corporation not only to extend but also to shorten its term of
existence. As in the case of increase/decrease of capital stock, change must be
approved at a members/stockholders meeting by 2/3 of the members/outstanding
capital stock.

Borrowings
Borrowings are usually represented by promissory notes, bonds or debentures.
Oftentimes, a financial institution will be willing to lend large amounts to private

corporations
only on the condition that such institution will have some representation on the Board of

Directors. The role of such representative is to see to it that his institution's investment is
protected from mismanagement or unfavorable corporate policies.

Bonds and Debentures

BONDS:

* secured by a mortgage or pledge of corporate property

* must be registered with the SEC, as provided by Sec. 38 of the Corporation

Code
DEBENTURES: * issued on the general credit of the corporation
*not secured by any collateral; THEREFORE, are not bonded indebtedness in the true
sense, and stockholder approval is NOT required (although it would generally be a good idea to
obtain it)

WHAT IS THE PRE-EMPTIVE RIGHT?

It is the option privilege of an existing stockholder to subscribe to a proportionate part of
shares subsequently issued by the corporation, before the same can be disposed of in favor
others.
WHY A PRE-EMPTIVE RIGHT?
To protect existing stockholder equity. If the right is not recognized, the SHs interest in
the corporation will be diluted by the subsequent issuance of shares.

Basis of Right; Common Law Rule

Under the prevailing view in common law, the preemptive right is limited to shares issued in pursuance of
an increase in the authorized capital stock and does not apply to additional issues of originally authorized shares
which form part of the existing capital stock.
This common law principle which was generally understood to be applicable in this jurisdiction has now to
give way to the express provisions of the Corporation Code on the matter.

Extent and Limitations of Preemptive Right under the Code

WHAT IS THE EXTENT OF THE PRE-EMPTIVE RIGHT?
All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to
all issues or dispositions of shares of any class, in proportion to their respective
shareholdings.
Exception: When such right is denied by the AOI or an amendment thereto.
LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39)
1)

Initial Public Offerings (IPOs);

2)

Issuance of shares in exchange for property needed for corporate purposes,

including cases wherein an absorbing corporation issues new stocks to the SHs in
pursuance to the merger agreement (Sec. 39)
Why?
cash;

(a) Because it is beneficial for the corporation to save its

(b) A swap is more expedient than determining the monetary
equivalent of the property.

3)

Issuance of shares in payment of a previously contracted debt (Sec. 39)

Why?

(a) The obligation is extinguished outright;

(b) Corporation does not have to shell out money to fulfill its
obligations;
(c) Money that would have otherwise been used for interest
payments
can
be
channelled
to
more
corporate activities.

productive

Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or
2/3 of total members.

In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including re-issuance of
treasury shares, EXCEPT if provided otherwise by the AOI. (Sec. 102). Note that the limitations in Sec. 39 do not
apply.

Waiver of Preemptive Right

The waiver of the preemptive right must appear in the Articles of Incorporation or an amendment thereto in
order to be binding on ALL stockholders, particularly future stockholders. (Sec. 39)
If it appears merely in a waiver agreement and NOT in the AOI, and was unanimously agreed to by all
existing stockholders:
The existing stockholders cannot later complain since they are all bound to their
private agreement.
However, future stockholders will NOT be bound to such an agreement.
Any stockholder who has not exercised his preemptive right within a reasonable time will be deemed to
have waived it.

When the issue is in breach of trust

The issue of shares may still be objectionable if the Directors have acted in breach of trust and their
primary purpose is to perpetuate or shift control of the corporation, or to freeze out the minority interest.

Remedies when right violated/denied

WHAT ARE THE REMEDIES WHEN THE PRE-EMPTIVE RIGHT IS UNLAWFULLY

DENIED?
(1) Injunction;
(2) Mandamus;
(3) Cancellation of the shares (NOTE: but only if no innocent 3rd parties are
prejudiced)
(4) In certain cases, a derivative suit

Implied Powers
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied
powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra
vires.
A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond
its authority; it will, in the absence of proof to the contrary, be presumed valid.

The Ultra Vires Doctrine

Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its charter
or laws of state of incorporation. The term has a broad application and includes not only acts prohibited
by the charter, but acts which are in excess of powers granted and not prohibited, and generally applied
either when a corporation has no power whatever to do an act, or when the corporation has the power but
exercises it irregularly.

Q: What are the consequences of ultra vires acts?

The corporation may be dissolved under a quo warrranto proceeding.

The Certificate of Registration may be suspended or revoked by the SEC.
Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on
both sides. Neither party can ask for specific performance, if the contract is executory on both
sides. The contract, provided that it is not illegal, will be enforced, where one party has
performed his part, and the other has not with the latter having benefited from the formers
performance.
Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or
contract. If the act or contract has already been performed, a derivative suit for damages against
the directors maybe filed, but their liability will depend on whether they acted in good faith and
with reasonable diligence in entering into the contracts. When the suit against the injured party
who had no knowledge that the corporation was engaging in an act not included expressly or
impliedly in its purposes clause.

Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties
are prejudiced thereby, or unless the acts are illegal.

*** While as a rule an ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the powers conferred upon it by
law, there are however certain corporate acts that may be performed outside of the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare of the corporation.

Management contracts (sec. 44)

Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid
down by the board of the managed corporation.

BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act as
a governing body by giving absolute power to officers or others, by way of a management contract or
otherwise. It must retain its control over such officers so that it may recall the delegation of power
whenever the interests of the corporation are seriously prejudiced thereby.