SECTION 31.
Liability of Directors, Trustees or
Officers
Three-fold duties:
(O)bedience, (L)oyalty, (D)iligence
Directors of the corporation are its agents. They
are under obligations of trust and confidence to the
corporation and its stock holders and must act in good
faith and for the interest of the corporation or its
stockholders with due care and diligence and within the
scope of their authority.
In the absence of malice, bad faith or specific
provision of law, a director or officer of a corporation
cannot be made personally liable for corporate liabilities.
*Cases when directors / trustees or officers are liable for
damages (SOLIDARILY LIABLE in PERSONAL
CAPACITY):
a) He willfully and knowingly votes or assents to
patently unlawful acts of the corporation;
b) He is guilty of gross negligence or bad faith in
directing the affairs of the corporation;
But they are not liable for business losses incurred
because of honest bad judgment alone not amounting
to bad faith or gross negligence.
c) He acquires any personal or pecuniary interest
in conflict with his duty as such director or
trustee.
He shall be held accountable for the profits (as trustee)
which otherwise would have accrued to the corporation.
*Other cases where PERSONAL LIABLITY may attach:
a) When he consents to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his
written objection thereto;
b) When he is made, by a specific provision of law,
to personally answer for his corporate action;
c) When he agrees to hold himself personally and
solidarily liable with the corporation.
SECTION 32. Dealings of directors, trustees or
officers with the corporation.
Contracts with self-dealing Directors / Trustees /
Officers generally void. Injury to the corporation is not
necessary.
A contract of the corporation with one or more of its
directors (or trustees, officers) is voidable at the option of
the corporation, unless:
a) That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
b) That the vote of such director or trustee was not
necessary for the approval of the contract;
c) That the contract is fair and reasonable under
the circumstances; and,
If only the 3rd condition is present, the contract should
be ratified by 2/3 votes of the SH of OCS, and, full
disclosure of the adverse interest of the directors or
trustees involved is made.
It is silent W/N the vote of the self-dealing director shall
be counted during the meeting for ratification.
d) That in the case of an officer, the contract has
been previously authorized by the board of
directors
BOD may elect not to question the validity of the
contract without prejudice to the liability of the
consenting directors or trustees for damages under
Section 31.
SECTION 33. Contracts between corporations with
interlocking directors.
Interlocking Director a director in one corporation who is
also a director in another.
Contracts with interlocking directors are valid so long
as there is no fraud and the contract is fair and
reasonable.
If the interest of the interlocking director in
Corporation A is substantial and, on Corporation B only
nominal, the Section 32 shall apply insofar as the latter
corporation is concerned.
Substantial interest - SH exceed 20%
Nominal interest SH do not exceed 20%
Section 32 applies on transactions between
corporations with interlocking directors resulting in the
prejudice to one of the corporations. It does not apply
where the corporation allegedly prejudiced is a third
party (not one with interlocking director).
Gokongwei, Jr. vs SEC Doctrine by-laws may provide that
a director of a corporation may be disqualified as a director
of a competing corporation. (valid limitation on interlocking
directors)
SECTION 34. Disloyalty of a director.
Doctrine of Corporate Opportunity a director is
guilty of disloyalty when by the virtue of his
office, he acquires for himself a business
opportunity which should belong to the
corporation, thereby obtaining profits to the
prejudice of such corporation.
The director must account to the corporation all
profits (by refund) notwithstanding that he risk his
own funds in the venture.
Profits obtained must prejudice the corporation.
Section 34 applies to directors. Disloyalty of
officers is governed by Section 31.
When doctrine is not applicable:
a) Enterprise engaged in is distinct from
corporation business
Director may engage in the same general class of
business with the corporation so long as he acts in
good faith.
b) Opportunity no in conflict with corporations
business
not essential to the corporations business;
company resources are not exploited;
no direct competition with the corporation
c) Opportunity ceases to be a corporate
opportunity
It ceases to be a corporate opportunity and
becomes a personal opportunity when the
corporation is definitely no longer able to avail
itself of the opportunity (e.g. insolvency, legal
restrictions, any other factor which prevents it from
acting upon the opportunity for its own advantage).
A guilty director will only be exempt from his
liability if his disloyal act is ratified by at least 2/3 vote of
the SH of the OCS. Section 34 is silent W/N the disloyal
director shall be allowed to vote herein.
Section 34 applies only where a business
opportunity belongs to the corporation and the director
takes advantage of that business opportunity for his
own.

SECTION 35. Executive Committee
Created by: By-laws
Composition: At least 3 members of BOD;
non-BOD members may be added
Source of By-laws, majority vote of BOD
power:
Purpose: To assure prompt and speedy
action and solution to important
matters without the need for a
board meeting.
Powers: By majority votes of its members,
act on specific matters within its
competence.
As practiced in the business, the
EC may reduce the Directors to
little more than a supervising and
ratifying body.
Exceptions: (1) Approval of any action for
which SHs approval is also
required;
(2) The filing of vacancies in the
board;
(3) The amendment or repeal of
by-laws or the adoption of new by-
laws;
(4) the amendment or repeal of
any resolution of the board which
by its express terms is not so
amenable or repealable;
(5) A distribution of cash dividends
to the shareholders; and,
(6) Other matters as may be
provided by the board.
Quorum: Majority of all (regardless of being
a BOD member)
Voting: Majority of all
Alien member: Allowed
Foreigners are disqualified as a Corporate
Officer but is allowed as a member of BOD or other
governing bodies as provided in the Anti-Dummy Law. In
the latters case, there can be no intervention in the
management, operation, administration, and control of
the corporation by the members thereof in their
individual capacity.
SECTION 36. Corporate powers and capacity.
1. To sue and be sued in its corporate name;
Incidental power
Corporations de facto may sue or be sued.
A corporation which has been dissolved after the expiration
of the three (3)-year winding-up period ceases to exist de
jure or de facto.
A corporation not duly registered in accordance with law has
no legal capacity to sue as such.
Foreign corporations which transact business in the
Philippines without the necessary license from SEC sue in
the Philippine courts.
A corporation may be awarded with moral damages based
on its good reputation or business standing when it is
besmirched or debased.
The right and power of a corporation to sue in any court
must be brought by the BOD.
Shareholders in their personal capacity has no right to
intervene in an action for or against a corporation.
2. Of 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;
Seal is a device (e.g. emblem, symbol, or
word) used to identify or replace the signature of
an individual or organization written matter
purportedly emanating from such individual or
organization. It may refer also to the impression
of such a device on documents like certificates
of stocks.
A seal is not required for the validity of any corporate act.
ADVANTAGE: presence of such establishes, prima facie,
that the instrument to which it is affixed is the act of the
corporation.
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 treasury stocks in accordance
with the provisions of this Code; and to admit members
to the corporation if it be a non-stock corporation;
A corporation has no power to purchase or hold
stock in another corporation unless it is one of
the activities permitted by its articles of
incorporation.
When a corporation subscribes to the capital
stock of another corporation, it is required, as a
rule, to pay its subscription in full. This is based
upon the fact that while a corporation has an
unlimited capacity to contract obligations, it has
only a limited capacity to pay.
A corporation may purchase its own stock,
however, only when it has "unrestricted retained
earnings" to cover the shares to be purchased or
acquired.
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and
bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution;
In selling securities to the public, the corporation
must be registered with SEC thru a registration
statement (as per R 8799).
8. To enter into with other corporations merger or
consolidation as provided in this Code;
9. To make reasonable donations, including those for the
public welfare or 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;
 LIMITATIONS: (a) the amount thereof must be
reasonable; and (b) the donations must not be in
aid of any political party or candidate or for
purposes of partisan political activity.
The limitation that the donations must be
"reasonable" provides a check against scheming
directors and officers who may use the authority
as a screen to appropriate corporate funds for
personal ends.
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 its purpose or purposes as
stated in its articles of incorporation. (13a)
DISTINGUISH:
Powers of a corporation corporation's capacity
or right under its charter and laws to do certain
things.
Primary Franchise corporation's capacity or
right under its charter and laws to do certain
things.
Secondary Franchise the right granted to an
existing corporation to use public property for a
public use, but with private profit.
Doctrine of Limited Capacity the right granted to
an existing corporation to use public property for a
public use, but with private profit. A corporation
owes its existence to the State and, therefore, it
has only such powers as are expressly and
impliedly granted by law. A corporation, as an
artificial person, created by or under authority of
law, is without natural rights.
Classification of Corporate Power:
a) Those expressly granted or authorized by law,
Corporation Code and AOI;
b) Those that are necessary to the exercise of the
express or incidental powers; and,
c) Those incidental to its existence.
Acts or contracts of a corporation outside the scope
of its express, implied, and incidental powers are ultra
vires.
In determining W/N the corporation has a power to
do an act:
a) first, refer to its special charter or its AOI to see
whether it is within the express, implied, or
incidental powers conferred;
b) then, to examine the statutes relating to
corporations to see if the act is prohibited; and,
c) in some cases, to consult the general statutes to
see if the act is illegal even in case of natural
persons.
It is illegal for a corporation to apply either its capital
or profits to business for purposes not contemplated by
its charter. The corporation's intended purposes must be
stated with sufficient clarity in the articles of
incorporation so as to define with certainty the scope of
its business.
Expressed Powers powers conferred by the
Corporation Code, the special law creating the
corporation, the General Incorporation Code and AOI.
a) Section 36.
Unless otherwise provided by the Code, to be
exercised by BOD.
may be exercised even not mentioned in the by-
laws or AOI;
b) Sections 37 44.
Implied Powers powers which are reasonably
necessary to execute the express powers and to
accomplish or carry out the purposes for which the
corporation was formed.
Powers merely convenient or useful are not
implied if they are not essential, having in view the
purposes or objects of the corporation.
The purpose or purposes of the corporation, its
AOI, scope of corporate business or enterprise, delimits
its implied powers.
Classification of Implied Powers:
1. Acts in the usual course of business.
Example/s: borrowing money; making ordinary
contracts; executing promissory notes, checks
or bills of exchange; taking notes or other
securities; acquiring personal property for use in
connection with the business; acquiring lands
and buildings to be used as places of business
or in connection therewith; and selling, leasing,
mortgaging or other transfers of property of the
corporation in connection with the manning of
the business.
These acts, under ordinary circumstances, are
necessary in order to run a business.
2. Acts to protect debts owing to a corporation.
Example/s: a corporation may purchase
property, act as a guarantor or sometimes even
run a business temporarily to collect a debt,
where otherwise it would have no power to do
so.
3. Embarking in different business.
Example/s: This is especially true with respect to
those particular kinds of corporate activities
which are governed by special laws. Thus, a
corporation not organized for that purpose
cannot go into the banking or insurance
business but it may do any isolated act of
banking or insurance in connection with some
express power. So, it is generally held that a
corporation may temporarily conduct an outside
business to collect a debt out of its profits
4. Acts in part or wholly to protect or aid
employees.
While the cases are divided, the better view favors
such acts as building homes, places of
amusement, hospitals, etc. for employees, as
within the corporate powers.
5. Acts to increase business.
Example/s: contests or sponsor radio or
television programs, or promote fairs and other
gatherings to advertise and increase its
business.
EXPRESS POWERS IMPLIED POWERS
 the means and b) By board of directors (or trustees). Similarly, a
Determined by Deals with
The main business, transaction, if within the powers of a corporation,
methods of attaining
objects and purposes may be consented to, ratified, or acquiesced in
those objects and
of the Corporation. by the board of directors (or trustees) if it could
purposes
be authorized by them. If it is consented to or
May change ratified with full knowledge of the facts, it is
according to time, finally and absolutely binding, and neither the
its charter and the
place and corporation nor individual stockholders (or
applicable laws
surrounding members) nor strangers can afterwards sue to
circumstances set it aside or otherwise attack its validity.
W/N they are fairly
incidental to the EP Omnis ratihabitio retrotrahitur ratification by a
W/N it is found in the
Test

and reasonably corporation of an unauthorized act or contract by

charter or law
necessary to carry
them out in the
Incidental or inherent powers powers which a
corporation can exercise by the mere fact of its being a
corporation or powers which are necessary to corporate
existence and are, therefore, impliedly granted. They
exist independently of the express powers.
Example/s: the power of succession; to sue and be
sued; to have a corporate name; to purchase and hold
real and personal property; to adopt and use a corporate
seal; to contract; to make by-laws; to establish branch
offices here or abroad, etc.
Construction of Powers
(1) They are to be construed strictly; any ambiguity in the
terms of the corporate charter must operate against the
corporation and in favor of the public.
its officers or others relates back to the time of
the act or contract ratified, and is equivalent to
original authority.
Except as to intervening rights of strangers
Mode of exercising powers
(1) If the charter of a corporation prescribes no particular
mode for the exercise of its powers, they may be
exercised in any mode, provided it is not contrary to law,
which the stockholders or officers may deem best.
(2) If the charter requires its powers to be exercised in
any particular way by officers or agents, they cannot be
properly exercised in any other way. In ultra vires
transactions, the fact that a corporation exercises a
power in a mode different from that prescribed by its
charter will not necessarily prevent it from acquiring
rights or incurring liabilities by reason thereof.

(2) The whole instrument is to be taken together,
including provisos as expressing the final intention and
purposes of the parties.
(3) Corporate franchises should be so construed as not
to defeat the purpose of their creation.
The intention of the legislature should always
control.
(4) Charters are also to be construed in view of the
circumstances, usages, and practices existing at the
time they were granted.
It is not the province of the court to enlarge the
powers of a corporation beyond its charter
limitations because circumstances have changed.
(5) If the charter is susceptible of two meanings, the one
restricting and the other extending the powers of the
corporation, that construction is to be adopted which
works the least harm to the State.
(6) The provisions of a general incorporation law may
apply to corporations operating under special statutes
with respect to the conduct or government of such
corporations as to which no specific provision has been
made.
(3) Where a corporation is organized under a special
law, the rules governing corporations organized under
the general law have no application where the special
statutes provide methods for the regulation and control
of said corporation.
Power to act as guarantor
*GR: no corporation has the power, by any form of
contract or endorsement, to become a guarantor or
surety or otherwise lend its credit to another person or
corporation. A corporation is without implied power to
guarantee for accommodation the contract of its
customers with third persons on the ground that it may
thus stimulate its own business. Such use of its credit is
clearly beyond the power of an ordinary business
corporation.
*EXCEPTION: Implied authorization, where the
guarantee "tends directly to promote the business
authorized by its AOI" or "is an appropriate means by
which it may reasonably be expected that the business
in which the corporation is engaged will be advanced."
Parent corporations may guaranty the debts of a
subsidiary company.

Ratification of corporate acts Section 37. Power to extend or shorten corporate

a) By stockholders (or members). They may
ratify and render valid acts done or authorized
by the board of directors (or trustees) but which
were beyond the powers of the directors, or acts
done or authorized by the directors at an illegal
meeting, or unauthorized acts of others than the
directors, provided the acts done are such as
may be done or authorized by the stockholders.
term.
*Requirements for extension or shortening of corporate
term: an amendment of the articles of incorporation
approved by the majority vote of the board of directors or
trustees and ratified at a meeting of the stockholders
representing at least 2 / 3 of the outstanding capital
stock or by at least 2 /3 of the members in case of non-
stock corporations.
APPRAISAL RIGHT of dissenting SH (Stock Corp only).
It is the right to withdraw SOS; appraisal to the
current FMV.
Extension Section 37
Shortening Section 81
Unlike in Section 16 which governs the amendment
in general of articles of incorporation, the amendment
under Section 37 must be taken at a meeting of the
stockholders or members and upon a vote. "Mere written
assent" would not be sufficient. However, the formal
requirements in the second paragraph of Section 16
must be complied with.
The provision on the taking effect of the amendment
in the third paragraph of Section 16 upon its approval by
the Securities and Exchange Commission is not
applicable because the date of approval by the
Commission may be before the effectivity date of the
extension or reduction of the corporate term. The
effectivity of the amendment relates back to the date of
its filing with the Commission in case the latter fails to
act within six (6) months from such date for a cause not
attributable to the corporation.
A voluntary dissolution of a corporation may be
effected by amending the articles of incorporation to
shorten the corporate term. (Sec. 120.)
Section 38. Power to increase or decrease capital
stock; incur, create or increase
bonded indebtedness.
Express Power
An increase or reduction in the capital stock of
the corporation is a fundamental change in the
corporation.
Increase / Decrease of CS needs the approval
of SEC.
Limitations
(1) A corporation cannot lawfully decrease its capital
stock if such decrease will have the effect of relieving
existing subscribers from the obligation of paying for
their unpaid subscriptions without a valuable
consideration for such release, as such an act of the
corporation constitutes an attempted withdrawal of so
much capital upon which corporate creditors are entitled
to rely. The corporation must submit proof to the SEC
that such decrease will not prejudice the rights of
creditors.
(2) A corporation cannot issue stock in excess of the
amount limited by its articles of incorporation; such issue
is ultra vires and the stock so issued is void even in the
hands of a bona fide purchaser for value; and
(3) A reduction or increase of the capital stock can take
place only in the manner and under the conditions
prescribed by law.